Home' Trinidad and Tobago Guardian : July 13th 2017 Contents JULY 13 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCE | BG9
Importance of financial knowledge
It is said that money makes the world
In many countries---and T&T is no
exception---there is an intense focus
on education. The allocation for edu-
cation in the national budget is gener-
ally in the top two. Another area of importance
locally---especially with the current state of
oil and gas prices---is economic development.
The expectation is that a more educated
society will produce greater opportunities
for economic development and, effectively,
a rising tide will carry all towards becoming
a more prosperous nation.
Yet, at its core, both education and economic
development are about increasing access to
mainly financial resources for the population.
In simple terms, that is money.
Acquiring that resource (money) without
understanding how to manage and maintain
it means that prosperity can become fleeting
at best or just simply an exercise in futility.
Recall the other saying: "a fool and his money
are soon parted."
We can debate whether financial literacy
is a precursor to economic development and
becoming a developed country, or whether
economic development brings about a level of
financial literacy. Either way the point should
be clear that the two constructs goes hand in
hand and whether the relationship is causal or
coincidental is not, in my view, fundamental
to the discussion.
Need to improve
What is fundamental is that as a country
we need to strive towards greater levels of fi-
nancial literacy. There is sufficient anecdotal
evidence to suggest that we are nowhere close
to the levels that we should be. Our awareness
of the need to prepare for life in retirement,
the level of participation by locals in the T&T
stock market, how we handle debt, even our
understanding that inflation is cumulative and
so a fall in inflation does not mean that prices
are falling, are common financial issues where
we are often found wanting.
The top nations in terms of financial liter-
acy of its population are: Norway, Denmark,
Sweden, Israel and Canada, UK and Germany.
T&T would likely find themselves alongside
Costa Rica, Jamaica, Panama and other similar
nations which are trending towards the bot-
tom half of the scale. Clearly, we can see some
relationship between economic development
and financial literacy.
Counting the cost
There is, of course, a cost to financial illit-
eracy. For an ageing population such as T&T
those costs are higher and will come due quick-
er than we expect. Generally speaking, financial
ignorance leads to a person borrowing more
and saving less. As our population ages rapid-
ly, insufficient savings will mean more people
being dependent on the State when they retire.
People who lack a functional understanding
of finance end up with larger debts over time
and, because they eventually become more
risky borrowers, end up paying higher interest
rates. If this practice is persistent then they
end up living paycheck to paycheck. This is
not just about low-income individuals. There
are many with quite decent employment pros-
pects who find themselves unable to properly
manage their financial resources.
Very often we mistake those with assets
such as a big house and a fancy car, as being
wealthy. In fact, one could very well be asset
rich and cash poor. More so, if those assets
are funded by large amounts of debt the net
worth---which is the sum of the assets minus
the liabilities---could be quite small.
Many who live such a lifestyle are at risk if
their cash flows suddenly change. Once again,
the emphasis is on the fact that financial liter-
acy is not something that is only for the poor
Some people may have the knowledge to be
considered financially literate but how they
apply that knowledge is questionable. This is
because there are natural human behaviours
that go against sound financial judgment. This
is often why it is both prudent and practical
to engage the services of a qualified financial
Role of an adviser
A question that I often ask at financial plan-
ning seminars is as follows.
If I offer you $100 today or $101 next week---
and you are completely certain you will have
access to either option as promised---which
would you choose?
If you choose to take the $100 today then you
would be in the majority. The implication is
we turn our backs on a $1 return in one week,
which on an annualised basis represents a 52%
return. It is a natural human tendency to refuse
that incremental $1 simply because we don't
understand the value in terms of the return
on offer or the idea of "just getting a dollar"
is not worth waiting a week.
Yet, when you multiply and compound
these decisions daily, weekly, monthly, an-
nually and eventually over a lifetime the cost
to your financial well-being can prove to be
A few years ago Robert Shiller, professor of
Economics at Yale University and a Nobel Prize
winner, suggested that everyone should have
a financial adviser. We have mechanics, law-
yers, accountants, doctors but few can boast
of having a financial adviser on hand.
According to Shiller it was important for
low and middle-income families to get pro-
fessional advice going so far as to suggest the
need for financial advice is similar to the need
for medical advice and even suggested State
sponsored programmes where advisers who
help lower- and middle-income households
can gain compensation from the State in the
same way that legal aid and basic medial ser-
vices are provided.
The benefits to be derived from such a proac-
tive approach to financial literacy and financial
management, in general, are likely to outweigh
any costs and there are social implications as
well in terms of the role that money plays in
marital relationships, providing for health and
retirement services as well as just basic peace
of mind and comfort.
Traditionally, we leave these matters to fi-
nancial service providers. However, more of-
ten than not companies end up pushing their
products. In any event, there are limited checks
and balances to ensure "product pushing" does
not take place.
Ultimately, the middle-income end up be-
ing poorly advised and the lower income---who
can't avail of financial services to the extent
that it is profitable to the service provider---
remains with no support whatsoever.
As we try to move the society forward, to
make more of less and overall make better
financial decisions, I will end as I started: a
financially literate society and a developed
country go hand in hand.
Ian Narine is an investment adviser registered
with the SEC. You can contact him via email at
Links Archive July 12th 2017 July 14th 2017 Navigation Previous Page Next Page