Diana Crossan: Why it's vital to be money-smart

For many generations the "three Rs" have been considered a cornerstone of our children's education. The basics of reading, writing and arithmetic give people the tools for the demands of adult daily life, both inside and outside the workplace.

There is now a fourth tool fast emerging as essential for life's toolkit - financial literacy. I don't mean just adding and subtracting and the times tables, I mean the ability to make informed judgments on the management of money.

Funded by ANZ, the Retirement Commission with the support of the Ministry of Economic Development surveyed adult financial literacy to identify what people know about personal finance, and the gaps in knowledge, so we could concentrate on those areas. The overall finding was similar to that in other OECD countries - financial knowledge increases with socio-economic status. It also showed that most New Zealanders have a reasonable level of financial knowledge.

But many, including those with a higher education or income, didn't know what they should. Many people were not able to match definitions of terms or concepts associated with money management such as "equity" and "capital gains". While basic interest was pretty well understood, the concept of compound interest was tricky for some.

The survey results are a timely reminder that the more people understand about money concepts and terminology the better they will be able to manage their finances day-to-day and to plan for the longer term.

In New Zealand this is particularly relevant. Easy credit and student loans mean young people need to be equipped to make financial decisions early.

The financial market is relatively unregulated and encourages competition so consumers need to be able to compare products to make the best decisions.

In addition, New Zealand's retirement income framework means there is a voluntary approach to saving for retirement.

Many people will want and need to save from their own resources to top-up their New Zealand Superannuation, and this requires an understanding of savings, investments and basic money management.

Groups with lower levels of personal financial knowledge are more likely to be young (18-24) or older (75 years and over) with lower levels of education, income and net wealth, and tenants rather than homeowners.

The commission believes that everyone should be financially literate. Having an understanding of the gaps in knowledge is particularly useful given the forthcoming introduction of legislation to establish the workplace savings scheme, Kiwisaver.

The commission will be helping to address these gaps and tailoring the public education programme to help give people the information that they need.

Research has shown that workplace saving is one of the easiest ways to save because the money is put aside before people have access to it.

In addition to the workplace savings education programme, the commission will also review its website www.sorted.org.nz. We will look at the language we use in Sorted to ensure that the less understood terms are replaced or at least explained clearly and simply.

We are working with the Ministry of Education, NZQA, teachers and colleges of education to integrate financial education into the school curriculum by 2009. We are also extending a financial education programme with Te Runanga o Ngai Tahu running in bilingual primary schools.

Work is also being done with tertiary providers to include financial education in trade and other adult training. And of course we will continue to help provide a financial education programme in 100 schools in New Zealand through a partnership with the Enterprise NZ Trust.

The key goal of this programme is to teach senior secondary school students personal money management skills.

Our ultimate aim is for younger generations to have a firm grip on personal finance so in the future most adults have a high knowledge of money matters.

* Diana Crossan is the Retirement Commissioner.

www.retirement.org.nz