Finance company failures exposed our own financial illiteracy
The widespread collapse of New Zealand finance companies between 2006 and 2008 not only exposed the appalling business practices of certain financiers, but their demise also highlighted the financial illiteracy of many New Zealanders. Although recent court cases have brought to public attention the greed and incompetency of many directors, these behaviours were not isolated to the financiers. Ironically, it was also greed and incompetency of some investors which contributed to them losing their entire life savings. Proper financial education could have saved these investors from financial ruin.
When finance companies began collapsing, many everyday New Zealanders were burnt. Even though these companies were only paying a percent or two more than a bank deposit, many investors were seduced by slick marketing and their own greed into investing in highly risky products which they knew little about. This lack of knowledge stemmed from both investor naivety and the dearth of easily digestible information about the investment products.
In retrospect, it was a bad decision to invest in any of these finance companies. However, one poor investment decision should not cause the financial ruin of an investor. If an investor had properly diversified their portfolio across different asset classes and sectors, the collapse of the finance company sector would have been nothing more to them than a temporary blow, rather than a king hit.
Although a lot of media attention has been placed on the fraudulent behaviour of some finance company directors, the broader issue which this situation has exposed is the financial illiteracy of New Zealanders.
Financial illiteracy is a failing of the New Zealand education system. Despite managing your own finances being one of the biggest responsibilities you will face in life, the New Zealand Curriculum (a statement of official policy related to teaching in New Zealand schools) places little emphasis on financial education. The only mention of financial education in the New Zealand Curriculum is a suggestion, rather than a requirement, that schools may explore financial topics in order highlight links between learning areas.
Unfortunately, few schools implement this suggestion seriously. Many schools do offer optional commerce subjects, but this is no substitute for mandatory teaching on personal financial management. A notable exception is Orewa College in Auckland, which in 2009 brought in a compulsory financial literacy course for all Year 9 students.
Teaching financial literacy is extremely important, not only at an individual level, but for broader society. At an individual level an understanding of personal finance can help us manage our money to achieve our own financial goals, while learning to minimise the impact of inevitable bumps along the way. Enhancing the financial literacy of individuals can also affect broader society through the aggregate effects which sensible investment strategies and use of credit have on the capital stock and debt profile of New Zealand.
I believe that learning to reach wise financial decisions is so important that the Government should make the teaching of financial literacy compulsory in all schools from Year 9 to Year 11. Furthermore, to ensure that there is a uniform financial literacy benchmark which students are expected to reach, the passing of a financial literacy achievement standard should be mandatory in order to gain NCEA Level 1.
Financial literacy education could begin in Year 9 with students learning about the basics of earning an income, budgeting their money, and the decision to save or borrow. In Years 10 and 11, students could be taught more specific applications of each of these concepts, with a specific focus placed on using maths to solve financial problems. For example, sub-topics regarding saving could include understanding compounding interest, types of investments, and the relationship between risk and return.
However, the real crux of implementing financial literacy is not determining what kinds of things need to be taught, it is more about deciding how the subject could be implemented into the secondary school system without soaking up extra resources or complicating timetabling. The easiest way to do this would be to teach financial literacy as a topic within an existing subject.
In Year 9, the basic foundations of financial literacy could be introduced as a topic within social studies class. Social studies would be an appropriate setting for the topic at this level as students would only be taught basic concepts regarding why particular parts of finance are important for individuals and society.
In Year 10 and Year 11, it would make sense to teach financial literacy as a topic during maths. This is because maths teachers are the most analytically equipped to teach it, and for most students, money will be one of the only practical applications of maths they use during their life. Let’s face it, learning about the analytics of the time value of money will be of more use to the majority of students than learning how to use Pythagoras’ theorem to calculate angles within right-angled triangles.