Lessons That Make Cents

Newcastle Herald

Thursday July 27, 2006

Noel Whittaker

PEOPLE are always complaining about the way prices keep going up, and there is no doubt that interest-rate increases and the recent rises in the price of petrol have put pressure on household budgets.

However, the greatest enemy of all is something that is seldom in the headlines: financial illiteracy.

Unfortunately it's hard to count the cost of it because it can attack the unwary in such a wide range of areas. These include being caught in dodgy investments like Westpoint because they didn't understand that a higher return carries higher risk; continually putting off a retirement program because they don't know where to start; and being trapped by high interest rates or by a sea of debt because they simply don't comprehend the way financial maths work.

Think about a person who is having trouble making ends meet because they have over-borrowed. They have a home loan of $200,000 with repayments of $1331 a month, a furniture loan of $15,000 at $326 a month and an accumulation of credit card debts totalling $10,000 on which the payments are $500 a month. Total payments are $2157 a month.

They are attracted by advertisements for loans that will consolidate all their payments into the housing loan and give them $10,000 as well. It sounds brilliant their payments will drop by $594 a month and they are going to have $10,000 in their pocket as a buffer as well. The deal might sound good on the surface, but they're being lured into a situation where they're moving all their short-term loans to a 30-year term and becoming liable for a staggering $328,000 in interest.

A person who was financially literate would not have had the problem in the first place, but if they did, they would be aware that a much better option would be to chop up their credit cards, and focus all their energies on attacking the smallest debt. When that is paid off, they could have used the money no longer needed for its repayments to attack the next smallest debt.

This strategy would have had the credit card loans paid off in less than two years, and the furniture loan in one more year. Then they could have used all the money freed up to attack the home loan and paid it off in 11 years. Doing it this way would have saved them more than $200,000 in interest.

That's a great example of the cost of financial illiteracy; but I often hear: "That's fine for you, but they should teach this stuff in schools."

Help is at hand. Thanks to the sponsorship of companies like Collection House Limited and Bank of Queensland, a registered not-for-profit organisation called the Financial Basics Foundation has been established to help young Australians leaving the secondary education system become financially literate.

With the help of Australian educators, the foundation has produced comprehensive materials that include a 10-module teaching resource covering such topics as mobile phones, budgeting , insurance, borrowing, taxation, banking, saving and investing for the future. Additional modules planned in the coming months include scam awareness and entrepreneurship. The foundation is also developing an online e-learning game that will teach young people financial skills in a more interesting and engaging way.

The goal of the foundation is to have this in every high school in Australia and already more than 780 high schools, which represent almost 20 per cent of the total, have registered to receive a free copy. The material is available free of charge to schools all they have to do is complete registration details at financialbasics.org.au or call their office on 03 9610 4919.

There are many Chinese proverbs, but the one that springs to mind here is: "If you give a man a fish, he will eat for a day. If you teach a man to fish, he will eat for a lifetime. If you teach a child to fish, he may feed the world."

Now that's food for thought.

Noel Whittaker is Joint Managing Director of Whittaker Macnaught Pty Ltd, AFSL Number 246519. Email noelwhit@gil.com.au. This advice is general in nature and readers should seek their own expert advice before making financial decisions.

© 2006 Newcastle Herald

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