Shekel money bills.
(photo credit: REUTERS)
Today is the day that New Year’s resolutions are still in force. While many will resolve to lose weight, give charity or be a better husband, one resolution that many of us need to make is to become a bit more financially savvy. I have written about this before, but a post on an Israeli financial Facebook group set off a firestorm, so it’s important to revisit. One disclaimer: I am not a male chauvinist, and if you read the data from the report, men don’t fare much better.
Writing for NETSPAR, the Network For Studies on Pensions, Aging and Retirement, in a paper titled, “How financially literate are women? Some new perspectives on the gender gap,” Tabea Bucher-Koenen and others do extensive research pointing to a lack of financial literacy among the general population and an exaggerated low level among women. Now, of course there are plenty of women who manage finances better than men. But this study is the latest in a long line that statistically show a serious lack of financial awareness.
They ask three questions. In a previous article I actually used the exact same three questions and added two others.
Here are the questions (answers below): 1. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2% per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in the account?
2. Do you think that the following statement is true or false: “Buying a single-company stock usually provides a safer return than a stock mutual fund.”
3. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, or less than $102? Results of the test How did you do? Respondents to the survey did not do well: “Overall, financial literacy is rather low in the United States,” the report said. “A large fraction of Americans do not correctly answer simple questions that measure basic financial knowledge. For example, only about half of the sample correctly answered the risk-diversification question, and only one-third was correct on all three questions.
“Most importantly, women are much less likely to correctly answer the financial-literacy questions than men; for each question, the proportion of correct answers was lower among women than men. For example, while 55% of men correctly answered the questions about interest rates and inflation, only 38% of women were able to do so. Moreover, while 38% of men correctly answered all three questions, only 22% of women did so.” The results were similar in other countries that were tested.
Take control It’s no secret that global retirement saving levels are sorely lacking. While some of that has to do with a sluggish global economy, I think the real reason is because people don’t think about long-term consequences regarding their money. What makes this even more worrisome for women is that more and more they are the major breadwinners and they live longer, so lack of financial literacy is even more problematic.
What should you do? Take some time and get educated. There are plenty of books and websites that have great personal-finance content.
Keep track of your spending over a month or two. Attempt to leave your fixed expenses at 50% to 60% of your income.
This achieves two goals. First of all, if some kind of sudden, large expenditure arises, you will have the money to pay for it. Many personal-finance experts believe you should keep four to six months’ of monthly expenses in an emergency fund. Second, this gives you the chance to start saving.
Make sure you are contributing to your Kupat Gemmel and Keren Hishtalmut funds. If you can manage to save even a couple of hundred shekels per salary, do it. This will only improve your financial situation; as your earning power increases, you will be able to save more.
If you are starting to save, or even if you have already been in the savings mode for years, or if you suddenly came into some funds, it’s important to save and invest your money correctly. As stated in one of the aforementioned questions, simply putting your money into the bank means that in the long run it possibly may be worth less than its current value due to inflation. If you don’t know how to “invest correctly,” then it may pay to speak with a financial professional to make sure that your money works for you and not against you.
(Answers: 1. Less than today; 2. False; 3. More than $102.) Do yourself a favor and make this the one New Year’s resolution that you don’t break.The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
[email protected] Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts.He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.