Financial literacy: The gift that keeps on giving

Our country is in the midst of a savings crisis. Most South Africans simply don’t have enough money to support themselves in retirement. The best – indeed, the only – chance of correcting the situation is for all of us to take responsibility for the nation’s financial education…

Whether you’re a school or university curriculum facilitator, a professional financial planner, or simply a money-savvy parent, now is the time to step up to the plate. The seemingly endless political upheaval in South Africa is doing real damage to economic growth. But we can’t blame politicians for everything. As South Africans we’re not doing nearly enough – professionally or personally –to ensure that our fellow citizens have sufficient capital to retire on.

The proof is in the pudding

The numbers are frightening. The first rule of retiring happily states that you should have enough capital to generate at least 75% of your final paycheck as income in retirement (escalating annually at the inflation rate). A recent Sanlam survey found that a mere 8% of South Africans achieve this goal. It also revealed that a third of retirees couldn’t even cover their medical expenses.

But this is just the beginning. A 2018 study by Old Mutual found that only half of South African millennials know what a unit trust is. Data from MyTreasury shines a light on some of the underlying reasons for the crisis: 62% of us don’t reinvest retirement savings if we’re retrenched or change jobs; and 90% of South Africans with pensions don’t monitor their investments after signing up.

The only way to change any of this is through financial literacy. A, B, C.

What is financial literacy and why does it matter?

Financial literacy entails having a set of skills and knowledge that allows you to make informed and effective financial decisions. The financially literate know how to budget and how to invest for retirement. They’re also capable of setting – and achieving – shorter-term personal goals such as investing for education, managing risk through insurance and keeping debt in check.

Current evidence shows that university-educated people with six-figure incomes can be just as ignorant about financial issues as less-educated, lower-income consumers. We’ve all heard the stories about doctors and lawyers losing their life’s earnings by not taking financial advice, by failing to manage debt, or by investing in overly risky ventures.

Financial literacy doesn’t just affect our financial well-being. It can also have a devastating impact on our physical and emotional health. Financial stress really does kill. And not just individuals, either…Poor financial literacy can cripple entire populations. Just look at the financial crisis of 2008 to see the havoc wreaked by a general misunderstanding of mortgage products.

A perfect storm

These four current trends are making financial literacy more important than it’s ever been.

1. We’re making more financial decisions: Most modern pension plans are structured so that the risk of performance is borne by the employee. What’s more, many small to medium size businesses opt for group RA schemes which require employees to decide how much to contribute.
2. We’re faced with myriad complex options: Like tourists in befuddling foreign restaurants, consumers are being asked to choose from a cornucopia of unfathomable investment, savings and credit products.
3. We’re living longer : Longer lifespans require greater retirement savings.
4. The world is changing: The current financial landscape is very dynamic, global and high-tech. This makes it harder to create, implement and follow a financial roadmap.

Financial literacy begins at home

As South Africans, we’re all responsible for creating a financially literate society. Forget the old- fashioned old rules of etiquette – we can no longer afford not to talk about money. Our children need to earn their pocket money and we need to teach them how to budget it and how to invest a portion of it. Monopoly is an incredibly valuable game, but no one plays board games anymore…We need many computer games which create financial literacy.

We need educators on board

Considering the impact that financial literacy has on broader society, financial education should be taught in schools as a core subject. This would give all kids an equal opportunity to learn about finances – regardless of their family’s financial background or experience. Financial literacy should also be incorporated into the syllabi of non-commercial degrees like law and medicine. Many of these graduates will run businesses where they will be responsible not only for their own financial wellbeing but also for that of their employees.

Through thick and thin

Politics can turn on a dime and the economy will move through many more cycles of peaks and troughs. Building a financially literate society that saves and invests through these cycles is the only hope for economic freedom in South Africa. And the only way to develop a culture of saving is through education and sharing knowledge. We need to act now before it’s too late.

Financial literacy is our only hope. Parents need to start talking about money at home, and schools and universities must incorporate financial literacy into their syllabi.