It's official: the Irish are not the most financially savvy in the world. Yes, it may not come as a surprise for a nation which spent €54 million on electronic polling machines which had to be scrapped, had a banking system which almost collapsed and still carries one of the largest debt per capita burdens in the world.
But, according to the Standard & Poor’s Global Financial Literacy Survey, about one in two Irish people (55 per cent) are deemed to be “financially literate” – which of course also means that almost one in two aren’t.
The survey shows that the Nordic countries are streets ahead, with nearly three out of every four adults (71 per cent) deemed to be financially literate in Norway, Denmark and Sweden, ahead of the next-best, Canada (68 per cent).
The survey also exposes a gender gap: in the EU as a whole, 56 per cent of men are financially literate, compared to 48 per cent of women.
But how do you rate? Are you top of the class or do you need a little extra tutoring?
Well, by taking our quiz you might discover just how financially savvy you are – and where you might need some extra lessons.
Compounding
Compounding is a concept which often causes confusion, despite it being one of the greatest tools a saver has in their toolbox (albeit it’s not as powerful today due to low interest rates). With your initial sum, plus any interest earned on it, growing at a certain rate each year, it can help your savings grow much quicker – but it’s something not enough of us appreciate.
Consider question 10. A penny doubled every day for 31 days will total an astonishing €10.4 million at the end of the month.
"That is the power of compounding. If only we could find a bank that pays 100 per cent per day," says Frank Conway, who is used to imparting the power of financial knowledge to children, in his role as founder of MoneyWhizz.org, a financial literacy initiative which offers a range of free financial education programmes in primary and secondary schools across Ireland.
But understanding the power of compounding is also important when it comes to debt.
The logic behind credit cards is something which can escape even the best of us. Many are blinded by the ability to repay a tiny amount on our debt each month, without realising how the balance builds up into a hefty bill. Consider question 4. While the outcome can vary depending on the rate of interest levied on the card (typically about 20 per cent today), and the minimum payment calculations set by your credit card provider, the outcome is clear: it’s both expensive and time-consuming to repay.
“It takes a long time to repay a credit card debt as the interest is always compounding,” says Conway.
Investment awareness
General investment awareness is also an issue. David Quinn, managing director of Investwise, notes that Irish people typically believe that property gives a better return over the long term than other assets such as the stock market (question 9). But is their assumption correct?
Investment fees are also an issue, with not enough of us aware of how they can eat away at our returns. Just last week, the doyen of investing, Warren Buffet, took aim at fund managers when he lambasted them for hurting investors with high fees. “Fees never sleep,” he wrote in his annual letter to Berkshire Hathaway shareholders.
Conway suggests investors look for an absolute measure of how much fees they are being charged, rather than just considering the annual management fee. This is called the ongoing charges figure (OCF), and it’s worth taking some time to consider how it can cut your returns.
Question 3 asks, if annual total fees on a fund are reduced from 3.5 per cent to 1.5 per cent, by how much would this increase the total investment. The answer, which might surprise given its scale, is C – the pension could grow by a staggering €186,000 if the investor got their fees reduced.
Significant savings
Getting savvy when it comes to our mortgage is also a good move. If you can cut your term at all, you will make significant savings in terms of the interest owed – after all, the longer the term, the more you will pay your bank for the money.
If, like the person in question 7, you could cut your term from 30 to 15 years, it would actually have the same savings for you as getting the interest rate on your mortgage cut by a hefty 1.75 per cent. “A massive deal,” as Conway notes, adding that the borrower with the 3.5 per cent interest rate would pay €184,944 in interest charges alone over 30 years, whereas the borrower paying over 15 years would pay just €86,037.
“So, while banks may not be for moving on cutting the cost of their rates of interest, homeowners may not realise that they still have the power, through the term of their loan, to still pay the banks a lot less in interest. It’s the power of mortgage maths.”
Quiz: How financially literate are you?
1: Numeracy
You need to borrow €100 from your local credit union to help finance your summer holiday, and are offered two different sums to pay back over a year. But which is the lower amount?
a) €105
b) €100 plus 3 per cent
2: Markets
If interest rates rise, what will typically happen to bond prices?
a) Rise
b) Fall
c) No impact
d) Stay the same
3: Investment / pension fees
A 30-year old, earning €35,000 a year, makes monthly contributions into his pension, half of which are matched by his employer. But our saver isn’t really aware of how fees are impacting how much he will have in retirement. If he could cut the annual total fees on his fund from 3.5 per cent to 1.5 per cent, by how much would this increase his total investment?*
a) €40,000
b) Between €40,000 and €100,000
c) Greater than €100,000
*Based on 6 per cent stock market growth, 3 per cent wage growth, 1 per cent inflation, and retiring at age 68.
4: Credit cards and cost of minimum payment
If you purchase a smartphone for €500 using a credit card with a rate of interest of 18 per cent, making the minimum payment (normally calculated at 2.5 per cent) thereafter,
1) How long would it take you to pay off that phone?
a) 1-2 years
b) 2-4 years
c) More than 5 years
2) And how much would the smartphone cost?
a) €500
b) Between €500 and €650
c) Greater than €650
5: Compound interest
Suppose you put money in the bank for two years and the bank agrees to add 15 per cent per year to your account. Will the bank add more money to your account in the second year than it did the first year, or will it add the same amount of money both years?
a) More
b) The same
6: Your mortgage
You’ve been offered a mortgage over a 20- or 30-year term, but are unsure which is the best option. The lower term has higher monthly payments, but will the total interest paid over the life of the loan be greater on the 20-year or 30-year mortgage (ie will it be more expensive to you)?
a) 20-year mortgage
b) 30-year mortgage
7: Another one on your mortgage
By reducing your mortgage term from 30 years to 15 years (assuming a rate of interest of 3.5 per cent and a mortgage of €300,000), this would be the same as reducing the rate of interest by what?
a) 0.5 per cent
b) 0.5 per cent-1 per cent
c) greater than 1 per cent
8: Inheritance tax
What’s the inheritance tax threshold for a child inheriting from a parent for 2017?
a) €280,000
b) €310,000
c) €365,000
9: Investment
Which asset class has produced the best returns over the past 10-20 years?
a) Stock market
b) Bonds
c) Property
10: The power of compounding
Imagine a world where you could earn 100 per cent interest per day. On January 1st, if you put 1 cent on deposit in a bank or credit union paying 100 per cent per day, how much would your money be worth at the end of January? Would it be:
a) Less than €30
b) Somewhere between €30 - €1,000
c) More than €1,000
Answers:
1: b
2: b
3: c
4.1: c – it would take more than 10 years to pay off the phone.
4.2: c – answer is €957
5: a)
6: b
7: c) the answer is 1.75 per cent
8: b)
9: a)
10: c)
