Tuesday, June 9, 2015

Wealth Projector: Holistic Financial Education

Young Australians looking to map their financial future face a serious gap in financial education. To illustrate, consider the following scenario:

"Tim is renting a unit with girlfriend Jane. They are looking to buy their first home, and start a family. Can they afford it?"

Answering this question is surprisingly difficult. Consider the factors involved:

  1. Once Tim and Jane decide the value of home they wish to buy, they can calculate their mortgage repayments. But this is not simply an additional expense, since they are already renting and can stop rental payments once they move. It is important for Tim and Jane to know, given their current rent, what their equivalent mortgage already is.
  2. Not all property expenses can be borrowed. Tim and Jane will need an upfront deposit, as well as stamp duty costs.
  3. Tim and Jane are at the start of a long financial journey. They can expect many new costs ahead of them: child care, schooling, renovations, and more. All these expenses will come during the life of the mortgage they are about to take on.
  4. Redirecting savings from cash into a home has implications for their pension, since the family home is not considered part of the Asset Test. Given this, how much pension will Tim and Jane receive?

Factor number 3 is particularly important, since by the time Tim and Jane are in their most expensive years, it will be too late to change their mind if they find they cannot keep up with expenses. They need to know now, before they buy their new home, how things may look in 15 or 20 years time.

Unfortunately, existing education tools are not sufficient to help. Existing financial tools are separate, not holistic. It is unrealistic to expect Tim and Jane to combine tools to calculate equivalent mortgage, tools to project how many years to repayment, and tools to estimate pension income, in order to build a meaningful picture for themselves. As Steven Ciobo, Parliamentary Secretary to the Treasurer, observes in the ASIC National Financial Literacy Strategy 2014-17:

"Being able to confidently navigate the financial landscape and make good decisions about money are core life skills every Australian needs. Improved financial literacy can benefit anyone, regardless of age or income. Being able to make the most of your money, manage financial risks and avoid financial pitfalls can have a positive impact on the financial wellbeing of individuals, families and communities."

Australians need holistic financial education that can project their whole wealth picture over the course of their life. Only then can we expect to improve the financial literacy of everyday Australians.