One of the Best Investments is Educating our Younger Generations

Findings like this, coupled with the positive response from participating schools, will encourage the Office of the Retirement Commissioner to put more resources into the continuing development of the Financial Literacy Programme.

However, there are a few of the barriers to teaching financial literacy.

Firstly there is a tendency, when dealing with issues like budgeting and saving, to assume that people from certain socioeconomic groups or of certain levels of academic achievement need the education more than others.

From my observations over the last 5 years in this role and from experience gained from 40 years as a public accountant I am convinced that financial management ability does not have a particularly close relationship to income, educational qualifications or occupations.

In fact I would say that some of the worst money managers are highly successful professionals in fields such as law, medicine and even accountancy and some of the best are lower income people who have to work hard to balance the family budget and provide for future requirements.

There is no doubt that income levels are a significant factor in determining the average level of savings. In addition there is evidence that children often pick up the habits of parents in this area. But many other factors can influence the quality of financial decision making by people from all categories.

My proposition is that education in this area can only be positive for people from all walks of life.

I want to demonstrate the danger of categorising people according to income levels and the like.

Again I need to refer to research conducted by the National Bureau of Economic Research.

Source: U.S. National Bureau of Labour Statistics

The results summarised on this chart show the significant extent to which individuals move between income earning levels over a period of time. This study tracked the position of the same people over the period 1975 to 1991.

Look at that first quintile line – that is the lowest income group. The numbers across the page add up to 100% and show the position in 1991 of those who were in the lowest income group in 1975.

Observe how only 5.1 % of those in the lowest income group at the start were still there at the end. Twenty nine percent of them had actually moved to the top quintile.

People often say to me you are wasting money trying to educate some people on savings issues –they will never be able to save. My response is that at any point in time there will be people who have no capacity to save. But in a year or two, the composition of that group can change dramatically.

Another important point is that financial management is not just about saving. It is also about all of those other issues I mentioned earlier – using borrowings wisely, budgeting etc.

Another interesting piece of research from the same organisation compares individual’s savings levels on retirement with their lifetime income.

Here is a graphic example of the findings.

Source: Choice, Chance & Wealth Dispersion at Retirement, National Bureau of Economic Research, February 2000

This demonstrates the huge range in wealth accumulated by people who have enjoyed similar lifetime income levels. We are looking at the group with lifetime income (in current dollars) of around $740,000. I guess that to be an annual average of around $20,000.

The high savers in the group accumulated assets worth $440,000. Low savers saved only $12,000. Of course some had saved nothing.

This research showed that at all income levels there were significant differences between the high and low savers. A surprising percentage of top income earners saved nothing or very little. I have seen this myself in successful business and professional people- "I’m making good money, I’m indestructible and do not need to save – that is for poor people."

Abnormal features such as inheritance and good luck did not have a significant influence on the results. By far the most important factor was the simple decision to start saving or accumulating assets early in life and maintaining a pattern of regular saving.

The choice of savings vehicle had some impact but that was also relatively minor.

The messages I take out of this research are:

• educate people on this issue early in life;
• do not try and select who needs the education and guidance. You will probably be wrong.