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Wanted: a proper understanding of personal finance
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Wanted: a proper understanding of personal finance

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
9th June 2011

Sadly, it was no big surprise to read a recent article in The Wall Street Journal setting out in stark detail how poorly many Americans look after their personal finances.

The article - headed Most Americans Haven't Planned for Retirement and Other Areas of Concern - is based on the Americans' Financial Capacity report, published by the National Bureau of Economic Research.

And as Mary Pilon succinctly writes in The Wall Street Journal: the survey found that "not only is the household financial hole deep but people might not be able to dig themselves out of it as easily as they thought".

Surveys in Australia too have found low levels of financial literacy so the parallels with the United States cannot be overlooked.
Author of the US survey report, Professor Annamaria Lusardi of George Washington School of Business, set out to measure the respondents' financial capacity in regard to how well they make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions".

A large proportion of respondents:
  • Fail to plan for predictable events (such as education of children and retirement) and unpredictable events (such as emergencies).
  • Poorly manage their personal debts. Many incur large charges and interest on their loans. And one in five respondents had used alternative methods of finance such as payday loans during the past five years. (These loans involve payments automatically being deducted from salaries.)
  • Do not understand the terms of their mortgages or the interest payable on their loans.
  • Lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

The report truly underlines why financial literacy is so crucial to financial wellbeing.