How important is financial education?

Financial literacy is defined as having a set of skills, knowledge and behaviours that ensure an individual can make informed decisions about money.

It’s a term that’s often used interchangeably with financial education, which can be defined as an educational programme aimed at improving a person or population’s financial literacy.  

In a prebudget announcement, Minister for Education Erica Stanford revealed that financial education will soon be mandatory for children as young as five in the refreshed social studies curriculum.  

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Ms Stanford was joined for the announcement by Minister for Finance Nicola Willis and Minister for Commerce and Consumer Affairs, Scott Simpson. Mr Simpson oversees the Retirement Commission, which will work in partnership with the Ministry for Education to align financial education resources to the new curriculum.  

Ms Stanford said that many parents and whānau wanted financial education in schools. All three ministers stated that a financial literacy programme would not only improve individual outcomes, but the future economic outlook for the whole country.  

So how financially literate is New Zealand, as a nation, and will financial education really raise financial literacy and help the economy?  

How financially literate are we?

In 2020, the Commission for Financial Capability (CFC) released a report titled Financial knowledge of New Zealanders, which surveyed Kiwis using the OECD-INFE measure of financial knowledge.  

Around 66 percent of New Zealanders met the minimum score to be defined as a “financially knowledgeable person”. Young people were the least financially knowledgeable, with only half of 18-to-34 year olds meeting the minimum score. 

The report found that New Zealanders understood inflation, interest, risk and return but struggle to understand compound interest, risk diversification and the time value of money.  

Māori and Pacific people were less likely to understand compound interest compared to the general population.  

The report also found a correlation between understanding compound interest and saving on a regular basis. 

The need for financial education

The CFC report states that although financial literacy may not change financial behaviour, financial knowledge is crucial for financial capability. It showed that financial knowledge was correlated with financially capable behaviours, like saving and borrowing. Additionally, without financial knowledge, individuals are at higher risk of financial hardship, or exacerbating existing financial hardship. 

Neil Edmond, CEO of MoneyTime – an online financial literacy programme for 10-to-15 year olds in Australasia – agreed with the ministers that a financial literacy education was crucial for young people.  

“Life outcomes are largely determined by people’s decisions around money. Money affects every single person on the planet. Knowing how to make good financial decisions is a critical part of living a successful life.” 

Mr Edmond notes that a financial literacy education is particularly important now, in our challenging financial climate.  

In addition to things like earning, saving and budgeting, Mr Edmond thinks it’s important to introduce young people to property finance. He acknowledges that it is becoming more challenging to buy property, and it is increasingly difficult for young New Zealanders. But he says a financial education can help make home ownership a reality, such as teaching young people about co-owning.  

“It would be neglect on our behalf, as parents and as educators, not to be teaching kids [financial literacy] because the sooner they understand how important this is, the sooner they more likely to take positive action.” 

Teaching financial literacy may also be one way to improve economic outcomes of the future for all of New Zealand. Like many other OECD countries, New Zealand has an ageing population. This comes with several challenges, such as building a comfortable retirement. For most New Zealanders, superannuation will not be enough. Kiwisaver is one scheme designed to address this issue, and Mr Edmond notes that Kiwisaver is one of the best savings schemes available for Kiwis. However, it is widely agreed that Kiwisaver is underutilised.  

The Retirement Commission’s involvement with the new financial literacy curriculum hints that improving financial literacy may be one policy tool for tackling future fiscal issues associated with an aging population.  

Mr Edmond also believes that teaching financial literacy will lead to better outcomes for the wider economy in other ways.  

“It’s [financial education] around the effective and efficient use of money to create wealth. 

“More wealthy individuals tend to create more wealthy communities, and more wealthy communities tend to create more wealthy countries.”