According to some, Australia has an (under-supplied) housing crisis and an affordability crisis. I don’t subscribe to either claim. I agree we have a crisis. A very big one. But it’s got nothing to do with undersupply or affordability. Our crisis is a financial literacy one.
Let’s get this clear: there is a big difference between general intelligence and financial intelligence. A respectable occupation, a university degree, business ownership and a six-figure salary may imply a person has above average intelligence. But these are simply the byproducts of that person using general intelligence to generate income. We all have skills, and we use them to make money. Financial intelligence, on the other hand, is more a measure of what we do with the money we make. And it’s staggering how few people truly have financial intelligence. They don’t understand the basics, such as the power of compounding and leveraging, good debt versus bad debt, and how negative gearing works. And most shocking of all: it’s because, as a nation, we don’t teach people these fundamental financial principles.
Every day, as a property investment advisor, I see the consequences of Australia failing to invest in its financial intelligence. For example, when planning and strategising an investor’s investment choices, there is a huge advantage in looking at different combinations of the best use of their available capital and cashflow. But a lot of people don’t see that a tweak to the amount of capital one way will have a very different effect on their cashflow than would a tweak to the amount of capital another way. An investor who can afford one property can afford multiple. Most property investors do little more than select a property and get a loan approved to pay for it. With greater financial literacy, they could make their money work so much harder.
The statistics are damning
According to the Australian Bureau of Statistics, only 4% of Australians aged 65 years and over are self-funded retirees. The other 96% of people rely on a taxpayer-funded pension, remain in the workforce, or are dead. These shocking statistics unequivocally confirm that Australians in general are financially illiterate.
Ask yourself these questions (and be honest):
• Were your parents in a financial position to exit the workforce when they wanted and continue living their desired lifestyle? Have they passed these skills on to you?
• At high school, did you study a subject about managing money, budgeting, the power of compounding and leveraging, and the importance of saving?
• On entering the workforce, did someone explain to you basics such as how interest rates are set, the difference between good debt and bad debt, and how negative gearing works?
• Has anyone ever sat you down and explained that your superannuation will be nowhere near enough money to comfortably retire on?
• Do you have any idea how big your investment portfolio needs to be if you wish to live your desired lifestyle without having to work?
I’m tipping that you answered “no” to most, if not all, of these questions, and the reason is simply that there’s a yawning gap in your knowledge. You’re not alone.
Australians have above average education, are hard-working, enjoy low unemployment and earn above average incomes. So why is the self-funded retiree portion of the population barely a drop in the bucket? Because too few people understand what it takes to get there. They aren’t financially literate. And this includes many of the white-collar professionals often revered in the community. (They answered “no” to most of these questions too!)
Those who choose to invest in assets such as property because they understand and want to avoid the consequences of relying on pensions and superannuation will, generally speaking, achieve more financially than those who don’t. But we still shouldn’t kid ourselves that we are adequately educated in financial matters.