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The ABCs of being financially savvy

28 April 2022 Allan Gray

Understand the language of finance to help you better achieve your financial outcomes

Financial literacy is a door that you can open to help you boost your investment outcomes, at any stage of your investing journey. 

This is according to Nomi Bodlani, head of strategic markets at Allan Gray, who says that knowledge is power when it comes to your investments.  

“In its basic form, financial literacy is the understanding of concepts; but taking it a step further, it is  the cornerstone of being financially savvy and being able to understand what you can do to make financially responsible decisions and take control of your future,” she explains.  

“Along with other essential life skills, developing financial acumen is important preparation for a successful relationship with money,” says Bodlani, adding that financial empowerment is about being in control of your money versus your money being in control of you.  

And yet, there are many investors who are not familiar with money terms and issues, which can put them on the back foot when it comes to achieving their desired financial outcomes during important life stages, such as retirement.   

Research in South Africa shows that while financial literacy varies by income and geographical location, on average South Africans have middle-of-the-range performance when it comes to financial literacy. For example, the results from the South African Social Attitudes Survey (2017) showed that while 87% of the 3 0000 respondents (drawn from a representative sample of adults) could answer basic arithmetic questions and calculate simple interest (65%), few were able to correctly answer questions related to their understanding of inflation (16%) and compound interest (35%).  

But financial literacy issues are not unique to South Africa: A study in the UK recently revealed that 80% of British individuals were not financially literate when it came to issues concerning retirement; this was true even among respondents aged 55+ approaching retirement age. Of the 2000 respondents, 48% could not answer basic questions about personal finance. For example, they could not say what the difference is between fixed rates and variable rates.   

Bodlani explains that knowing the right lingo and applying that knowledge can help you to manage your finances and protect your money from unforeseen risks. Below are her top tips to empower yourself:   

Tip 1: Do some research  

“The most empowering thing you can do when it comes to money is to educate yourself. You don’t know what you don’t know,” says Bodlani.   

“You can’t make the best decisions for yourself until you understand what those are.”  

Look up topics such as living within your means, using debt responsibly and how to invest for long-term goals, such as retirement. Also consider reading up on broader subjects, such as behavioural biases, which will attune you to some of the psychological factors that prevent people from achieving their financial goals.   

“There is no shortage of information – from books, podcasts, videos and blogs to live webinars and seminars.”  

Bodlani admits that it is easy to get overwhelmed by the sheer volume of information available, but suggests starting with familiar, credible sources.   

“Consult your investment manager’s website – they typically have content written by experts to help you understand what is happening with your investment. They may also share strategies to help you succeed in your investing journey.”  

Tip 2: Speak to your employer 
In addition to offering retirement planning tools and resources, an increasing number of companies offer financial wellness programmes. This is especially relevant if you are saving as part of a pension scheme or umbrella fund offered by your employer. Some employers and their financial service providers will allow you access to financial coaches, mentors or advisers.   

Tip 3: Seek the help of qualified financial experts   

It is advisable to speak to an independent financial adviser, who will not only help you put an actionable plan in place, but will also coach you on the important terms you need to know, help you understand the material provided by financial services providers and answer your questions – whether you’re seeking information on day-to-day money management issues, or advice on complex issues involving your business or personal finances and investments. 

Tip 4: Take action 

Being financially literate doesn’t help you if you don’t also apply what you know – you must also “walk the walk”. 

Armed with credible information and expert financial advice (if you choose to seek it), you can take actions that help you move closer to achieving your desired outcomes.  

“Becoming money smart doesn’t happen overnight. Financial literacy is a lifelong pursuit which, over time and through experience, will give you the confidence you need to make the right decisions for your unique circumstances,” concludes Bodlani.  

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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