Why financial literacy isn’t enough

Co-author: Michelle Norton 

You can lead a horse to water, but you can’t make it drink. It’s much the same with personal finance.

Research is emerging that suggests becoming financially successful involves far more than just financial literacy (AKA “understanding finances”).

The reality is that no matter how much you “teach” someone about money, it doesn’t always make them change their behaviour and become “financially capable”.  That applies to both rich and poor. Just the consequences are more serious if you’re poor.

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Why we need a shove

Star Rating Kiwisaver Statement

A paradigm shift in thinking is happening. Worldwide, the goal for governments is moving from the need for financial literacy (which is about what you know) to financial capability (what you can do).

The Commission for Financial Capability Commission website describes it like this:

“Financial capability goes deeper than what we know about money.

It’s [financial capabaility] feeling confident to make wise judgements about how we use and manage our money in ways that benefit us now and in the future, enable us to reach our goals, provide for our family and, ultimately reach retirement in good financial shape.”

And this is especially true when it comes to KiwiSaver. For many people, KiwiSaver may be their first experience with investing and the sheer number of choices can be overwhelming.

In recent years, the Financial Markets Authority (FMA)  has centred a lot of their education around various aspects of KiwiSaver, such as helping investors understand the fee structure – which has subsequently lead to a change in the way providers display their fees.

And they have created targeted education campaigns for young women in KiwiSaver who, according to FMA’s research, are less engaged with the investment scheme thann other demographics. As at 18 May 2018, there were 355,000 women between the ages of 18 and 30 who were in KiwiSaver “and this demographic have the most to gain from getting more involved with their retirement savings account.”

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Our brains are hardwired to sabotage

making goals measurable in 2018

Research by behavioural economists suggests that our brains are hardwired to sabotage our financial futures – or at least make illogical decisions. For example we:

  • Separate our money into mental accounts, based on illogical criteria. You may not be willing to spend $100 from your wallet on an unnecessary gizmo, but might “spoil” yourself with the same gizmo if the money came from Fly Buys or a tax refund. The reality is that the money is part of our overall budget, no matter where it comes from.
  • Set anchors.  If, for example, a salesperson tells us the RRP of an item is $100, but it’s on sale at $50, we think we’ve got a bargain. The reality is that the company probably never expected to sell that item at $100 and the anchor was used to fool us.
  • Fall for the “gambler’s fallacy”. This failing in our brains makes us buy investments when they are high and sell low instead of the other way round. We believe, for example, that the more the property market goes up, the more that is going to continue rising, so we buy. Yet, eventually, there will be a correction and some people will be forced to sell low.
  • Let our losses run thanks to “prospect theory”. This means that we will sit on losses hoping they will turn around whilst we will sell at a profit. Losses hurt far more than gains give pleasure.

How can we become more active learners with KiwiSaver

reasons to read kiwisaver statement

If you are already a member of a KiwiSaver fund, then this is a fantastic first step. But the work shouldn’t stop there. Here are some examples of you can keep up with your KiwiSaver education, to help you work out if your provider, scheme and fund are right for you:

  • Be aware of what you are paying in fees – but know there is more to KiwiSaver than that. Comparing fees is an important part of an investment but it isn’t the whole picture. For example, you would expect to pay more in fees for a fund that is actively managed – as the provider is doing more on your behalf. Basically, you need to make sure you are comparing apples with apples. We have written more on this, here.
  • Think aboout what you are using your KiwiSaver funds for – a first home deposit or purely as a retirement fund. Your own personal reason for having KiwiSaver – and the stage of life you are at – may influence on what type of fund you invest your KiwiSaver money in. Canstar has written about the different fund types – and who they might be suitable for – in this guide. However, don’t forget this information is a general guide, as we can’t give you personalised advice. So make sure you do some homework!
  • Get a good feel for what is happening in the market. Consider this like part of continuing education, or staying current in whatever industry you work in. Rates, providers and fees all change. By regularly keeping an eye on what is happening in the market, you’ll have a better shot at choosing a KiwiSaver fund that will work for you and your money goals. Canstar compares KiwiSaver providers and funds, to help investors stay on top of this.

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