Wednesday, August 22, 2007

Financial 101: Learn before you Leap



Recent bad news about credit squeezes in the sub-prime lending arena overseas and the New Zealand equivalent of sub prime, finance companies, and collapses of them, have got me thinking.

What possesses people to put their money into these "investments" ?

Whether it be ignorance or stupidity I think that what we are talking about is financial education, that is, how much we know about investing, money, finance and economics and all that entails.

There are many ways of learning about the details surrounding financial matters, whether it be at home from parents, at school as a subject, learning from those around you and experiences as one goes through life.

Clearly learning from experience is a good thing but it can also be costly to an individuals back pocket and lifestyle if one doesn't have a basic grasp of the knowledge of how money works as a foundation to build your financial experience on.

Honestly it should be up to parents to teach children how to use money wisely, what saving means, and how compound interest works. The earlier the start the better. Sadly not all parents are created equal so it could be suggested that learning about things financial should be taught in school.

Far be it from me to suggest that state education is the answer to this problem, it usually gives rise to problems rather than fixes them but in the absence of anything better and from personal experience, I think teaching the minimum of basic finances at school in conjunction with teaching at home can give a child a good start in their financial life. This will keep them in good stead for the rest of their lives and help make their working and social lives all that much better.

Its true I tell ya!!

I learnt the basics of money, saving and investing from an early age, from a life crafted by the necessities of making money stretch and saving "for a rainy day" because I was born into a poor family. We cant all have the advantageous start to our financial education that I had though !

Primary school though taught us the basic Mathematics through rote times tables, therefore learning how to count and multiply figures and how basic interest was calculated.

At High School, in economics classes, we learnt supply and demand, the cost of money, the element of risk and the benefits of saving, entrepreneurial skills and the wonders of compounding interest: what compounding meant when you saved and borrowed. These things I remember to this day and I apply them nearly every day in all aspects of my life.

What I would like to know though is what has gone wrong?

Are people these days getting taught the basics and if they are why are some of them ignoring those basics?

Surely our old friend greed must come into play here. When an individual looks at a high interest rate, and doesn't look at the prospectus (not that these always tell the full story) it seems forces other than financial acumen are at play here.

Ignorance is not bliss when it comes to investing money but many of us choose to ignore the warning signs of a bad investment simply because they can only see the "big returns" promised in the little advert in the Business Herald pages. Reading the details of the investment and assessing the risk of high returns would have most of us use that advert to wipe our bottoms with.

Probably the most irritating part of these collapses in Finance Companies is that many of those investing in them are referred to them by so-called financial experts, who all get very handsome kick-backs for their advice too. Most of these people who advise could write their credentials on a pin head and it appears that many of them function in their positions because they have gregarious and outgoing personalities! A large franchised financial advisor of dubious quality, Money Managers, doesn't even require that its franchisees have a financial background. Excellent stuff !

The lack of basic financial acumen and basic business understanding from our business writers also leaves those that should be run out of Dodge with cutting columns a good escape from Coventry and Dodge. Save a handful of writers like Fran Wilde, Jenny Ruth and others we are left with dirge written by the likes of Rod Oram to line our chicken coups and toilet floors with.

I despair, yes dear readers, despair, the lack of financial education in this country. The lack of it leads to people that you read about in headlines that have lost life savings to these Finance Company collapses. Old women losing 50 years of retirement savings, families losing money saved for education of children. Then there are those that we may not hear about, those that found that losing a lifetimes hard earned savings has changed their lives irreparably and they meet an ultimate end by their own hands. It happens and probably has over the length that these 6 finance companies have gone to the wall.

I have been a little disturbed lately by those in important positions of Government and bureaucracy who should be setting examples with their financial knowledge saying and doing stupid things when it comes to things financial. New Zealand Labour Politicians removing the risk of borrowing money by giving interest free cash to students, the responsibility of saving for a house by gifting taxpayer money to "those in need", making it easier for folks to declare and get out of bankruptcy in order to avoid paying debt and much more financial stupidity too numerous to list here.

Global State banking institutions bailing out private and public companies who lent money to bad borrowers is surely madness and teaches us nothing. It appears nobody is responsible for the risks that they take with money anymore. Our Politically Correct times saves individuals and companies from learning that bad decisions have consequences and that others will bail them out financially when things get tough. Given this whacked out financial theory those that take the risk should clearly share the rewards as well. Yeah right!

Lacking a financial education can have serious effects not just on your back pocket but on your future and life.

It is "just money" that I am talking about but we do know that it makes the world go around. All the cliches are there. There is more to life than money but it takes hard work to earn that money and it doesn't make sense to throw it away because you don't have confidence in what you are doing because you were not taught how to handle your finances.

Being wise with your moola can give you a good lifestyle and help make your life easier and the other parts of life more rewarding. Knowing that your money is working harder (and safely!) for you than you worked earning it in the first place is one of the functions of being educated about the finer details of finances, saving, investing and business and learning this at school along with the basics from home is a bloody good start.


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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials) by Benjamin Graham
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