Now, more than ever, we need to know how to manage our money. Yet many of us are financially illiterate

As Covid-19 brings hardship, we need to cut spending, conserve our savings and assume things are going to get worse for many months before any kind of recovery
However, recent research suggests near-crisis levels of financial illiteracy, raising the prospect of greater suffering until the pandemic is under control

David Dodwell

Published: 6:45am, 12 Dec 2020

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As the Covid-19 pandemic continues to wreak havoc, with the prospect of a vaccine still distant, many families in Hong Kong and worldwide are beginning to prepare for the grimmest winter of a lifetime.

As people lose jobs and have their salaries cut while governments slash the job-support packages that have kept so many companies afloat in the past six months, millions of families are bracing for hardships they have not faced in decades and never in their wildest nightmares imagined might occur.

Now, more than at any point in most of our lifetimes, we need to cut spending, conserve our savings and work from an assumption that things are going to get worse for many months before any kind of recovery.

Never has it been more important to be financially literate and savvy about how we spend. Here is the problem. In the words of Annamaria Lusardi, who heads George Washington University School of Business’ Global Financial Literacy Excellence Centre, the world faces “near-crisis levels of financial illiteracy”.

Lusardi’s concerns were illustrated in the Organisation for Economic Cooperation and Development’s recent international survey of adult financial literacy. To measure the basic financial literacy of its 125,000 respondents spread across 26 economies, the OECD set a series of questions.

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For example: 1. If you have US$100 in a savings account with an interest rate of 2 per cent a year, how much would you have in the account after five years? $102? Less than $102? More than $102?

2. If interest on your savings account is 1 per cent a year and inflation is 2 per cent, then after a year how much would you be able to spend? More? Less? The same?

3. True or false? Buying a single company stock usually provides a safer return than a mutual fund or tracker fund.

The answers are more, less and false. Only 30 per cent of American respondents answered all three correctly, along with 25 per cent of Italians and 53 per cent of Germans. Three-quarters of those surveyed could not calculate simple and compound interest, and more than a third had spent more in the previous 12 months than they had earned.

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Hong Kong respondents were by far top of the class, with 98.9 per cent getting question 1 right, 94 per cent right on question 2 and 78 per cent on question 3.

“Large groups of citizens are lacking the necessary financial literacy and financial resilience to deal effectively with everyday financial management,” the OECD survey team concluded. How well equipped can they possibly be to face what might be the worst recession of our lifetimes?

The OECD survey showed the challenges were even more severe in “vulnerable” groups – women, the elderly and ethnic minorities. Not only are these groups less financially literate but, in the deepening pandemic recession, McKinsey says they are almost twice as likely to lose their jobs.

However, it might be the lack of financial resilience rather than literacy that generates the gravest and most immediate concern in coming months. More than a quarter of OECD respondents had a financial cushion of one week’s earnings or less.

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More than half had less than a month’s cushion. Less than one in five had funds to survive six months if they lost their job. Again, Hong Kong stood out – 55 per cent reported having a six-month cushion. By contrast, 48 per cent of Indonesian respondents had a cushion of just a week, living literally hand to mouth.

For Anne Richards at Fidelity International, such findings provide a sobering indictment of our education systems. She asks where on the curriculum even in our advanced economies is “real-world money maths” alongside the calculus, trigonometry and algebra that people like me juggled with at school but then never used again.

“Perhaps teaching children and young students the building blocks of how mortgages, credit cards, insurance and pensions work, through the basic tools of statistics, risk pooling, compound interest and the like might be more useful for the majority,” she says.

Where is the preparation to juggle whether or how to get a student loan to fund you through college or university? Or, for the likes of my daughter in London in Brexit-uncertain times, should she try to buy a home and what would the cost of the mortgage be?

It all reminds me of the 2016 book A 100-Year Life by Lynda Gratton and Andrew Scott at the London Business School. It should be compulsory reading for everyone preparing to join the working world and provides an essential primer on the importance of applying basic financial literacy to our everyday lives.

A Florida man vents his frustration at the state’s malfunctioning unemployment system during the coronavirus crisis in the US. Photo: Getty Images/TNS

“The simple truth is that if you live for longer, you need more money,” Gratton and Scott say. This leads to the “inescapable and disheartening” reality that we must save more or work longer – much more, and much longer. A life where you are going to live to 100 but still want to retire at 65 is financially out of reach for the majority, they conclude.

If it was out of reach even before the pandemic – and before we shifted a decade ago into an era of near-zero interest rates on our savings – then it is even more dramatically out of reach today. Our “near-crisis levels of financial illiteracy” leaves us ill-prepared.

Let us pray you keep your job through the pandemic crash and don’t have your savings too badly mauled. Even then, you are going to need all the financial planning savvy you can summon to see it through the coming challenging months.

All the more timely, then, is the Financial Times’ decision to set up its first charitable foundation, the Financial Literacy and Inclusion Campaign. We need more initiatives like it, not least in our schools. Meanwhile, let’s bid good riddance to 2020 and plan as best we can for a happy, socially distanced, pared-down holiday season.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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