Thieves of their own wallet
Few people will walk past a dollar lying on the sidewalk, but when opportunities present themselves more subtly, we often ignore them at immense cost to ourselves
© Mark Wagner
The Dutch have a phrase for imprudent behavior that can hurt your own financial well-being: dief van je eigen portemonnee . Found in commercials and recently used by the tax authority to encourage refund collection, it translates as ‘thief of your own wallet.’
The Netherlands is far from the only country where such ‘theft’ is widespread. A majority of US households with credit card debt have liquid assets that could be – but are not – used for debt repayment (view SCF report titled Household Need for Liquidity and the Credit Card Debt Puzzle ). A third of those households have liquid assets exceeding the average credit card debt by roughly $2,000. Yet, they seem comfortable with paying up to 14% interest while earning only approximately 1% return on that money.
In another example, a study, aptly titled $100 Bills on the Sidewalk Vermögenswirksame Leistungen ), but only 14 million participate.
And this self-cheating phenomenon is not limited to the Western world. In, more than half of the 1.5 trillion yen ($14 billion) owned by Japanese households were stashed away in bank accounts that brought next to nothing in returns.
INFLICTING FINANCIAL SELF-HARM
According to the Organisation for Economic Co-operation and Development (OECD), financial literacy is an understanding of financial products and concepts, as well as the skill and confidence necessary to assess financial risks and opportunities. If such abilities are necessary for a person to make informed choices and take action to improve their financial well-being, it is surprising how few of us are equipped for modern life.
Only a small segment of the population in countries around the world has an understanding of interest rates, inflation and diversification, as research by Annamaria Lusardi and Olivia S. Mitchell has demonstrated. Surveys conducted by the OECD largely confirm these findings. “Low levels of financial literacy are not specific to a given country or stage of economic development; they are found everywhere,” Lusardi told PROJECT M.
For individuals, the cost of such financial illiteracy is high. They tend to borrow more, accumulate less and pay more in fees relating to financial products. Many overspend, use cash advances and are less likely to know the terms of their mortgages and other loans. Taken over a lifetime, such behavior results in serious financial self-harm and several studies indicate debt has a significant mental and physical health cost as well.
Concerns about widespread old-age poverty is one of the catalysts for the current push on financial literacy. With governments and corporations passing increasing responsibility on to individuals to secure their own retirement income, a population inadequately prepared to make critical financial decisions is a recipe for a social disaster. If people neither save nor invest adequately throughout their lifetime, they will have little means to support themselves in old age.
To help people take effective action to avoid this, Messy says governments, regulators and educators should support education so individuals can acquire the necessary financial understanding. “To change behaviors, we have to promote financial skills at early ages, particularly in schools.” Adults should be educated in cooperation with employers, trade unions and the financial industry, she argues.
Lusardi, Professor of Economics and Accountancy at The George Washington University, agrees. “There is no doubt that financial education can and will make a substantial difference to individuals’ wealth,” she writes in this edition of PROJECT M.
But does financial education really work? Read what its critics have to say in part two of “Thieves of their own wallet”.
