“I think the compounding formula will be the most useful formula that my kids ever learn.”
That’s what Sharesies general manager of business Susannah Batley shared in a recent episode of the Shared Lunch podcast in explaining the difficulties people have in wrapping their heads around compounding growth, and its long-term benefits for investors.
“For most people, and I say this for myself, compounding is not intuitive. If someone said to me what’s seven plus seven plus seven plus seven, I’d give them the answer; if they said what’s seven times seven times seven times seven, I’d just say that’s a really big number.”
And it seems the government is coming to the party on that front, with plans to embed financial education as a core part of the school curriculum right from the get-go.
The government is updating the social services curriculum for years 1 through 10 to cover key financial skills such as identifying how a need differs from a want, having a bank account, earning, spending and saving, while older students will get exposed to more complex ideas around budgeting, investment, interest, taxes, and insurance. And hopefully for Suse, compound interest.
New Zealand’s first national strategy for financial literacy was released in 2008 and got a hurry up as policymakers grappled with overhauling the 30-year-old securities law amid the wreckage of the finance sector’s collapse and the broader global financial crisis, while KiwiSaver was still in its early years and facing regular raiding to top up the Crown accounts.
Kids are different today
In 2012, Massey University and Westpac launched a 20-year longitudinal study to track the financial knowledge, attitudes and behaviour of young New Zealanders. The baseline found more than two-thirds of the then-18-to-22 year olds had relatively low levels of financial knowledge, and didn’t see the point in planning for more than four years ahead.
Fast-forward 10 years and 232 of the original 350 youngsters surveyed – then aged 28 to 32 – found they were showing generally positive behaviour, with 95% having some form of insurance and 92% in KiwiSaver.
About half of them could pull together $3,000 in a week for an emergency, and 40% said they could live off their savings for six months or more.
Their parents were still an important source of financial knowledge, but less so given their time in life, and 43% of them owned shares.
Through that decade, KiwiSaver balances were growing – economist Cameron Bagrie used to say people will become more interested in those vehicles once there’s enough in them to buy a second-hand car – and investment platforms such as Sharesies emerged to open up a broader array of financial products with a lower entry price.
What a drag it is getting old
The 2022 study found the group started thinking about retirement, but were largely pessimistic about getting the universal pension, with most saying they didn’t think it would be enough and they also expected some kind of means testing or change in the age of eligibility.
And the participants almost all said they believed home ownership would help their retirement, although some still expected to have a mortgage by the time they left the workforce.
As the study’s gone on, academic thinking about financial literacy has expanded to capture financial capability, wellbeing and, more recently, resilience as researchers realised that financially literate people didn’t necessarily make good decisions.
“We know that New Zealand parents have long called for financial education to be a priority,” education minister Erica Stanford said in a statement. “This curriculum update answers those calls, ensuring students are equipped with the knowledge to thrive in both personal and financial aspects of their lives.”
The Ministry of Education and Retirement Commission will work with financial organisations, banks and charities to develop tools and resources to support the new curriculum with a draft version ready for schools to use next year before it’s compulsory from 2027.
And the 2022 study had some good news for Suse. In the question testing their understanding of compound interest, 83% got it right in the latest survey, up from 78% in 2017 and 56% in the 2012 baseline.
As with everything in the financial world, it’s never too late to learn… or too early.
Reporting by Paul McBeth. Image from Tim Mossholder on Unsplash.
Disclosure: Paul McBeth was a guest on the Shared Lunch podcast referred to in the story.
