Missing millions: how low financial literacy could impact your financial wellbeing, retirement and more
New Zealand is experiencing a concerning decline in financial literacy, leaving Kiwis vulnerable to overpaying for things, overwhelming debt, and working past retirement age to make ends meet.
Recent studies in New Zealand and around the world have sent a clear warning: a weak foundation in financial knowledge exposes individuals to costly mistakes as they navigate the path toward financial freedom and retirement.
Given that Kiwis are spending more of their income at the petrol pump, supermarket, and on everyday household bills than ever before, the importance of making astute financial decisions cannot be overstated. But what exactly is financial literacy?
Defining Financial Literacy: Beyond Balancing the Books
Financial literacy isn’t just about managing your budget or paying your bills on time. It's about understanding complex financial concepts, making astute investment choices, and planning for a financially secure future.
Essentially, it encompasses possessing the knowledge, skills, and insight into various financial concepts and principles that enable individuals to make well-informed and effective decisions concerning their personal finances. This includes managing money, budgeting, saving, investing, borrowing, and planning for future financial goals.
A financially literate person is equipped with an understanding of financial products, services, and the implications of economic decisions. This helps them navigate the complexities of the financial world and make sound choices.
Renowned American investor, Warren Buffet, often referred to as the “Oracle of Omaha”, says if you invest in learning daily your knowledge builds up like compound interest.
“One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future.”
The research revealed that only 44% of respondents considered themselves financially literate, down 6% since March 2020.
The researchers said there was “little doubt” that financial pressures were compounded by the cost of housing, wage stagnation, inflation, and interest rates.
“There remains considerable concern that around half of all Kiwis are experiencing financial issues affecting wellbeing, are reporting poor financial literacy, and low financial preparedness for rainy day funds and retirement,” the researchers said.
Respondents reported higher financial confidence, household investments, and job security. However, the researchers said, “The devil is in the details”.
“The majority, 86% in January 2022, ranged between reasonably to extremely confident, a growth of 8% over time. This trend is at odds with the decline in the financial literacy key indicator, in which the data showed a drop of 6%. This drives a concern that respondents’ views indicate potentially misplaced financial confidence.”
A lack of financial preparedness emerged as a concerning trend, with just under 30% of respondents who could last for a month or less without earning an income.
“This potential overconfidence is likely to be a reason behind New Zealanders generally low use of financial advice and other services to help financial decision making.”
Brewing a Perfect Storm
The study showed 86% of New Zealanders had investments, 9% more than in March 2020. There was a 12% growth in KiwiSaver investments, up from 66% in April 2021 to 78% in January 2022, with shares and managed funds also seeing a rise in the latest data.
“Turning to retirement, and on a similar theme, despite the data showing an increase, just 43% of respondents considered themselves very or reasonably prepared for retirement, leaving 35% not particularly prepared and 23% not prepared at all.”
Certain demographic groups, including women, displayed lower levels of retirement preparedness.
“Having enough savings to retire on is also worryingly low for retirees, where a third of respondents identified that they could only maintain their lifestyle for five or less years on their remaining retirement savings.”
Researchers signalled an impending perfect storm.
“There are clear warning signs that there is a perfect storm brewing due to financial overconfidence, insufficient rainy-day funds or retirement investments, and economic uncertainties such as rising interest rates and inflation,” the researchers observed.
“It is now more important than ever that the wider financial services community continues to educate New Zealanders in how to grow financial confidence and wellbeing.”
Positive Trends Among Young New Zealanders, But Gender Gap ‘A Matter of Concern’
A recently released study conducted by Massey University's Financial Education and Research Centre (Fin-Ed Centre) revealed a divergent trend among younger Kiwis, but women continued to fall behind their male counterparts.
Launched in 2012, the study surveyed the attitudes and behaviours of 350 New Zealanders who were aged 18-22. Five years later 232 of the original cohort participated in the latest phase of the study.
Encouragingly, the respondents achieved greater awareness of financial products such as KiwiSaver and insurance policies. They were also managing their money independently, with parental influence cut by half.
Fin-Ed Centre director Dr. Pushpa Wood said the results showed young Kiwis were enhancing their financial capabilities as they transition into a new life stage.
The women surveyed exhibited an overall improvement in their financial literacy of 17%, compared to men’s 6%, which narrowed the gender gap. However, gender disparities persisted.
“A fairly wide gender gap remained, with only 29% of females reporting their financial literacy as ‘Very Good’ or ‘Excellent’ compared to 44% of males.”
Westpac NZ General Manager of Consumer Banking and Wealth Mike Norfolk said the level of financial capability of women was “a matter of concern”, given their longer life expectancy and unique financial needs.
“Women live longer than men on average and tend to have lower KiwiSaver balances and fewer other investments. It is therefore important that they make a long-term plan for handling their finances and review it regularly as their circumstances change,” he said.
Lower financial literacy among women can lead to lower savings, fewer investments, and reduced participation in financial decision-making, potentially perpetuating a cycle of financial vulnerability.
Put Your Financial Literacy to the Test
The issue of low financial literacy isn’t limited to New Zealand; Australians also struggle with it, as evident in their lackluster performance on a financial literacy test.
Can you answer the question below correctly?
“If a credit card offers an interest-free period of 55 days that generally means that you don’t pay interest on any purchases until 55 days after you buy the item. True or false?”
It’s a question almost three-quarters of those taking Canstar Australia’s new TestMyMoneyIQ quiz got wrong.
The correct response is false as it offers an interest-free period of up to 55 days. To enjoy the entire 55-day span without interest, you need to make the purchase on the first day of your statement period and you must have settled your previous statement's closing balance in its entirety.
“Only 19% of the first 1,000-odd Aussies to take the test actually got it right. It’s the top question that most people failed to answer correctly,” Effie Zahos, Canstar’s editor-at-large, said.
Fifty-four percent of Australians passed the test, and Zahos says the financial literacy gender gap was “especially concerning”.
While 66% of men passed the quiz, only 42% of women did. She said it was something she hoped would not exist, given the questions were about products and services that most Australians use every day.
“These results highlight that many Aussies have a long way to go when it comes to their money knowledge.”
“And given we’re in the midst of a cost-of-living crisis, there’s no better time than now to build on your financial literacy.
“Sure, financial education won’t reduce grocery and petrol prices or slash the rate on your mortgage in half, but it can go a long way to improving your bottom line. Understanding basic money principles and putting them into practice on things such as your everyday bills can be an easy way to claw back some much-needed savings.”
“Concerningly, this disparity starts early in adulthood and continues at all life stages. Some themes influencing women’s financial well-being have emerged such as employment and household living arrangements and looking after dependents.
“However, what is clear is at different stages in life there are differences – some stark, some subtle – in the factors which drive the financial wellbeing gap.”
Kiwis Make Cutbacks
Canstar’s second Consumer Pulse report, released in March 2023, delved into the financial concerns and aspirations of more than 20,000 New Zealanders over the past two years.
The cost of groceries was ranked as the biggest concern for Kiwis. In response to the high cost of living, a quarter of respondents were not saving a cent.
Over two-thirds of mortgage holders admitted to needing to cut back on their overall spending due to higher mortgage repayments. A significant number of prospective first-home buyers (FHBs) appeared to have withdrawn from the market.
“In 2021, nearly half (48%) of 30-somethings said they were potential FHBs. That figure is now 33%. Fewer people in their 40s also consider themselves potential FHBs, the percentage dropping from 38% in early 2021 to just over a quarter now,” the report said.
The percentage of people in their 30s and 40s investing in stocks and shares slumped to less than 30%, compared to over 40% in 2021. Additionally, over 60% of respondents reported living within theirs, in contrast to 40% in 2021.
“It is fascinating to see how we have emerged into this new, post-pandemic world, with its seemingly never-ending series of challenges,” Jose George, Canstar NZ General Manager, said.
“Our research shows that we’re very worried, but we’re finding ways to cope. We are pulling back on spending, quitting stocks, and giving up on dreams of property ownership.”
George said by making cutbacks Kiwis were feeling more confident about their ability “to get through what’s shaping up to be a brutal year”.
He told Radio New Zealand it was “probably an after-effect of Covid-19, and the cost of living crisis is really difficult to avoid, so you're sort of forced to be better with budgeting”.
"We've seen that the cost of so many basic expenses, petrol or food or mortgage repayments, they've all leaped up and as a side effect of that, you really need to become more smart with your financial management."
George said that historically, New Zealand has experienced low levels of financial literacy, emphasising the need for improvement in this area.
"But the problem we've got is that it's stress that is leading us to be better at budgeting, rather than the other way around."
The Bottom Line: Financial Literacy Offers Opportunity
The benefits of financial literacy are two-fold:
To seize financial opportunities
To de-risk. In the words of Warren Buffett: "Risk comes from not knowing what you're doing."
Just as learning about the intricacies of investments, savings, and planning can lead to more informed decisions, it also acts as a shield against unnecessary risks.
By taking the time to enhance our financial knowledge, we not only empower ourselves to make sound choices but also pave the way for a more secure and prosperous financial future.
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