financial literacy

Editor: Justin Healey
ISBN 978 1 921507 12 0
Year 2010

Price: $20.95

  

Financial Literacy
Volume 302, Issues in Society

Financial literacy can be defined as the ability to make informed decisions about how to use and manage your money. Young Australians are particularly active consumers, so it is important from an early age that they understand their rights and responsibilities when it comes to managing money. This book is an excellent aid for young people to better understand their finances and features the following topics: saving, banking, budgeting, smart shopping tips, understanding types of loans and credit and how to manage debt, investing and financial planning, choosing suitable mobile phone plans, avoiding scams and rip-offs, and explains the basics about insurance and superannuation. Get on top of your finances while you are young and establish healthy financial habits!

Glossary; Fast Facts; Web Links; Index



fast facts
FAST FACTS from this volume
  • Financial literacy is strongly associated with a person’s age, gender, education and socio-economic characteristics.
  • In the realm of personal finances, people are often presented with choices that they would prefer not to make, or prefer someone else to make on their behalf.
  • Imagine you invested some money and earned 10% interest on it each year, compounding. In around 7 years that money would double. If you kept all the money in the account for another 7 years, you’d have twice as much money earning interest. In other words, it would be like earning 10% p.a. interest on your original savings. It gets better. By the 15th year you’ll be earning the equivalent of 20% p.a. interest a year on your original savings! And so on, and so on.
  • Given time, compound interest can build even small amounts into huge sums. Which is why it helps to start saving and investing as soon as you can, when you have time on your side.
  • It’s important to understand how even a small difference in interest rates can make a big difference to the return on your investments.
  • When you look at an investment try to make sure that the return is more than the inflation rate.
  • When planning your long term savings, remember that the cost of living will have gone up by the time you reach your goal. This is also sometimes described as inflation ‘eating into’ your savings.
  • To help make sure inflation does not eat into your savings, you could increase any amounts you regularly put away by a percentage that at least matches the inflation rate. When they’re added to the total sum, compound interest will further contribute its earning magic.
  • Don’t be afraid or embarrassed to ask questions. Sometimes it can be awkward, but a good salesperson should give you enough time and information so that you can understand the product. You can also ask to take the documents away, so that you have time to read them and get advice.
  • Don’t be pressured into signing something that you don’t understand. You could regret it later.
  • The best tool for finding extra money is a budget. Look at the things you need – the essentials, such as housing and food – and those you simply like to have, or want. When you need to trim the budget, cut back on the ‘wants’ first – things that aren’t essential for everyday life. Don’t cut out all the wants, because if your budget’s too tight, it’s not going to work.
  • Before you invest, read more in personal finance columns and investment magazines, and in books by licensed Australian advisers or do a course run by a reputable organisation.
  • For a general idea, compare any investment with what’s happening in the overall market. Returns vary considerably from year to year, so look at performance over as long a period as possible. Over 5-7 years, it may be realistic to expect returns that average about 7% to 9% a year from growth assets such as property and shares. Income investments may keep pace or do very slightly better than inflation, say about 4-6% a year, depending on the risk involved.
  • If you are offered returns even 1-2% above current market rates, you are likely to be taking a much higher risk in investing. Anything above 15% would be very high risk indeed, possibly even a scam.
  • Smart shopping is all about being cautious. Compare prices for the best deal. Take your time, don’t buy on impulse. Inspect what you are buying. Ask for a docket or receipt and keep these in case you want to return what you bought. Be wary of traders who make certain claims or promises.
  • Before you buy anything online, satisfy yourself that the trader you are dealing with is legitimate. Reputable traders generally provide contact details, such as a physical address (including the country where it based) phone and fax numbers. This information will also help you contact the business if something goes wrong. In the case of an Australian business, also look for an Australian Business Number (ABN). You can also check a local business’ details by looking them up in the phone book and contacting them directly.
  • Satisfy yourself that the goods described or pictured on the website are exactly what you want, or you might end up with something different! If there is any doubt, confirm the details with the business before you pay.
  • The privacy of your personal information is an important consideration when shopping online. If you understand how a business will use your details, it could reduce your chances of ending up on ‘spam’ mailing lists, or other unwanted breaches of your privacy.
  • It can be tempting to shop now and pay later but the reality is that borrowing money can be risky. If you take on too much debt, you may not be able to keep up the repayments if you get sick or lose your job. If you get into trouble with credit cards when you are young, you could have problems later in life if you want to borrow money to buy a house.
  • Credit can be good. It can help you achieve your goals. But it pays to be careful. Understand when and how to borrow money and avoid the pitfalls.
  • Not being able to pay your loans, credit cards and bills can be embarrassing and stressful. Sometimes it feels easier to bury your head in the sand than confront the problem. And the longer you leave it, the harder it will get. Interest will keep getting added on and if a loan is secured against your car (or in the case of a mortgage, your home), the goods can be repossessed and sold.
  • Be careful not to take shortcuts when you get insurance. Read everything you can about your policies before you sign the contracts. It’s as important to make sure you have enough cover as it is to get a good price. You can lose a lot of money if you find your insurance doesn’t cover what you thought it did.
  • Even if retirement is some years away, it pays to know as much as you can about your superannuation.
  • It pays to think about whether you will have enough superannuation to live on when you retire. If you are concerned about how much you will have, you may need to think about making extra contributions. It may pay to talk to a financial expert about your situation and likely future needs.