A recent survey has shown that a large percentage of us think we are financial know it alls! 70% of respondents to a poll of 1000 adults, say they are either good or excellent at managing their finances. This is strange when compared to the global benchmark of 30% of people who are financially literate.
The survey asked specific financial questions and the results show that people overestimate how good they are with money. The acid test is how they answered some of the following basic questions:-
Question: Do you think pensions are more risky now than when the financial crisis started in 2008?
Result: 75% responded that pensions were either riskier or as risky. This belies the fact that pension funds have de-risked their exposure significantly and have posted significant growth in the last few years, with a positive outlook over the medium term.
Question: Do you understand the new mortgage rules announced by the Central Bank recently?
Result: This is a fairly straight forward question but just 10% of those polled said they had a comprehensive understanding of the new rules, while 27% admitted they had little or no clue of what the changes meant.
Question: Do you have savings of more than €10,000 on deposit.
Result: A third of people said they had, which belies the fact that interest rates are at historic lows and that keeping funds on deposit is the worst place to achieve any form of reasonable return.
Question: Do you have a pension plan in place?
Result: A shocking 50% of respondents said they had no pension provision which once again contradicts the notion that we have of ourselves in financial matters. One only has to ask the question– if 70% of the Irish population think they are financially astute, then why is it that only 50% of them have any pension in place?
I believe that having an over-inflated view of your own financial ability can be dangerous. It can lead to ill informed decisions which can have long term consequences. Below are some examples of what I am talking about –
- Despite the horrendous experience that property investors have had over the last 10 years it seems that our love affair with property is making us “blind” once again. I constantly encounter new investors who still consider property a risk free investment and have also not taken into consideration that the net return on rental income has diminished considerably due to increased taxation, property tax, water charges etc. They also do not factor in issues like potential tenant/maintenance issues and flat or slow growth in capital values. Property continues to be a (7 year) risk investment which cannot be dismissed, because it is “bricks and mortar” you are buying.
- Fear can lead to disastrous investment decisions. If we are that financially savvy, why is it that throughout the downturn some people made disastrous decisions out of fear, thinking that they were protecting themselves? For example, encashing investments that had fallen dramatically in value rather than taking the educated advice from most quarters, which was to ride out the ‘storm’. For these people, a snap decision has resulted in disastrous long term loss of capital.
- “The bar stool economist”. Sometimes, as a nation, we tend to think we know it all. The boom years saw the rise of the “bar stool property expert”, who thought he knew it all about that market and influenced many to follow his lead. When the downturn hit, our same friend became an “economist” and a financial expert on all matters from Greece to the IMF etc. Once again he influenced those around him to become experts!!! resulting very often in unwise and ill informed financial decisions.
I have always argued that financial education is extremely important. But like with anything else, “thinking you know something and actually knowing it” are two different things. We need to remember the need for taking proper financial advice, in the same way as if it was a health issue.
So are we financial know it alls? I believe the above disproves this notion we have of ourselves and reaffirms that we are no more savvy than any other country.