Why is it that some surveys report that the Irish declare themselves to be among the happiest people in the world, yet we also come at the bottom in relation to our ability to handle money appropriately?
Being financially illiterate, most people would agree, can be a big cause of unhappiness, particularly when it results in years of unrelenting debt.
The obvious simplistic answer perhaps is that money really doesn’t equate with happiness and that many of us really to regard it as a necessary evil.
Many people, the victims of rapacious governments, incompetent politicians and bureaucrats, of heartless landlords, employers, banks and playground bullies, (“your lunch money or your life”) would certainly agree.
Nevertheless, there’s nothing bucolic about a subsistence existence; just ask someone who lives hand to mouth or from pay cheque to pay cheque.
The recent Cambridge University/UCL literacy survey that was highlighted last week by the MoneyWhizz adviser Frank Conway, a long-time advocate of personal finance education in Irish schools, found that Ireland came bottom of the 31 participating countries when it came to working out how much change we might be due in a shop, the unit cost of an item, in calculating discounts on items like a season ticket to a sporting event or even in our ability to read a basic performance graph on a personal investment report, like a pension.
The probable reason (as opposed to a visceral dislike of ‘money’) is that most people never learn how to do these things as children or young people. Schools don’t have money modules as part of the junior and senior cycle curriculum/exams, and there is less emphasis on numeric skills.
We all rely more on calculators and digital cash registers than brainpower to work out what things cost and how much change we’re due. The relentless drive towards a cashless society isn’t helping: debit cards and smartphone apps that effortlessly tap for items worth less than €30 (soon to be €50) means that our acknowledgment of the value we put on what we buy and how much they cost is disappearing.
Sub-consciously, tap-to-pay also affirms the retail culture of instant gratification and conspicuous consumption. The lack of control of discretionary spending, say financial advisers, is not just a huge impediment to your day-to-day financial health, but to the long term wealth creation.
If you think this is an exaggeration, keep track of all those thoughtless, small tapped payments every day for a month and see what piece of essential spending they add up to. Is it your broadband bill, monthly car insurance, grocery bill… the rent?
And will you have to dig out the credit card (at 20% annual interest) a couple of days before payday to fill up the tank on your hire purchase car? Learning how much change you’re due in a shop, or the unit pricing of an item is a pretty basic math skill. If you have children you can get a refresher course from their maths books.
But true financial literacy is also about having a clear understanding of more subtle features, like how much money you actually need, as opposed to how much you want. It certainly helps to understand the power of compound interest, the magical or destructive effect that time has on money.
The child who automatically saves or invests a percentage of their money/earnings right from the beginning, that provides a decent return above inflation can amass considerable wealth by middle age. The reverse lesson is just as informative: the interest paid on money borrowed to buy liabilities with no asset value will turn them into a debt slave in no time at all.
The parent that introduces their child to a good deposit account and eventually to low cost investment vehicles, but mostly through their own good spending and borrowing habits, will give them with a more valuable gift than any expensive toy or ‘lifestyle’ funded by other people’s money.
Being financially literate isn’t difficult once you know the rules. Earn your money before you spend it. Live within your means. Live below your means during tough times. Be a regular saver, the unofficial motto of the credit union movement, join one.
Do a budget. On one page list your essential spending, on the other, your discretionary spending. Keep the entries on the second page as small as possible. Understand compound interest.
A large variable rate mortgage payable from a small, variable income is a weapon of mass destruction. Avoid convenient, expensive credit. Finally, assume the worst of your government whose aim is to extract at least 50% of everything you earn in taxes and levies.
The smaller your debts the easier it will be cope with their extra, periodic claims on your income and wealth.