Nuggets of Wisdom on FQ (Part 3 of Stories from the 2012 Citi-FT Financial Education Summit)

Nuggets of Wisdom on FQ (Part 3 of Stories from the 2012 Citi-FT Financial Education Summit)

In Events
Dec 19, 2012

This is the third and final installment of Stories From the Citi-FT Financial Education Summit. This time I’d like to discuss some valuable nuggets of wisdom mentioned during the summit, of course peppered with my own insights.

On Entrepreneurship:

During the Media Briefing Deputy Governor Nestor Espenilla said that entrepreneurship is not for everybody. Sometimes investing in start up business could be a cause for losing money. Statistics show that most start up businesses close shop within a year. And this is another reason why everyone should invest in passive income at a very young age. At the latest, when one starts working, part of his salary should already be devoted to investing in his passive income which will eventually be his retirement fund.

Behavioral Economics:

This is one of my favorite fields of study these days and I was happy to listen to Dean Karlan, a Yale professor and the president and founder of Innovations for Poverty Action, talk about it. He spoke about human behavioral biases that tend to prioritize present over future. He cited the studies made by Thaler, Benartzi and others. 

I read the Thaler Benartzi study a year ago and it talks about theSave More Tomorrow using Behavioral Economics to increase employee saving. It was a program designed to help employees who would like to save more but lack the willpower to act on this desire. The initial additional contribution to savings is programmed to commence with the increase in salary. (It’s hard to ask someone to decrease his existing take home pay because of the human aversion to “loss” and such a decline is felt like a loss). The contribution rate increases on each scheduled raise until the contribution rate reaches a preset maximum. The employee can opt out of the plan. (Knowledge of this option makes participants comfortable but because of the human propensity for inaction, chances are they won’t opt out).

The initial experience with this Save More Tomorrow program was successful. Those offered the plan elected to use it, majority of them didn’t opt out, and their savings rate almost quadrupled!

The key to the success of this plan, which is applicable to other aspects of our life, is to make things as simple as possible and to take note of our weaknesses or the beast in us. In the Yale professor’s words, “Let’s not fight the beast but accept the beast. Let’s use commitment devices to make things work as planned.”

Pay yourself first.

Ron Bevacqua, The Asia Regional Coordinator for Planet Finance flashed the famous line Pay Yourself First on the screen. Saving for the future is often perceived by most people as a form or sacrifice. Some feel that they’re depriving themselves of the good things in life by doing this. However, if you say I’m setting this money aside because I’m paying myself first. Then it offers a mindshift that instead of depriving yourself, you are actually “pampering” yourself for a better future.

Now here’s a friendly reminder to parents. There are savings for the use of your children like education, etc. However, there should be an end to the giving to our children and other dependents. We should always remember to set aside something for our own retirement. We don’t only make our children and other dependents more self-sufficient by doing this, but we also spare them from the burden of taking care of our financial needs when we are no longer earning.

“Money is not about money.”

Diana Castaneda, the Executive Director of Vision Solidaria in Peru started her talk with the classic short essay by Robert Fulghum entitled All I Really Need to Know I Learned in Kindergarten. Then she asked the question, Why is there no mention about money in the 16 lessons listed?” She went on to say that it’s because handling money is not really about money. It’s true. I believe that knowing how to handle our money is not so much the skills involved but more of our value system. It’s as deeply rooted as our childhood memories and experiences and as complex as our self-esteem and the need to fill up some personal voids.

Let’s teach our kids.

A lot of the speakers talked about financial literacy for the children. Audrey Tan, the very young co-founder of correctly pointed out that today’s kids are “Digital Natives.” Only 32% of American parents talk to their children about money and only 13% of Asian parents feel their children have adequate money skills. So using the aid of digital devices to educate children while they’re having fun is not a bad idea.

Other speakers also talked about how they incorporate Financial Education in the school curriculum in their respective countries. It turns out that practical training is more effective than formal training. Lessons should be experiential instead of just lectures. They reported successful savings rate, where not only the students but also teachers improved their savings rates dramatically. Now here’s the sad part. At the end of the school year when the students’ savings are handed to them, their parents took the money and ended up spending it, sometimes for necessities but other times for whimsy things and even vices such as alcohol.

Financial Education is everybody’s business.

The consensus is Financial Literacy is such a huge endeavor that it has to be a cooperative and coordinated effort among all the stakeholders – the private sector, the public sector, and for me the most important, the family – the basic unit of society.

It was good to hear Imelda Nicolas, Chairman of the Commission on Filipinos Overseas, report that we now give our OFWs (Overseas Filipino Workers) and their families seminars on money management before they are sent abroad. The Bangko Sentral ng Pilipinas (BSP) also reported that they now have Economic and Financial Centers in 22 regions reaching even the rural areas. The financial education curriculum has reached some 40 million students. They have also made bank products very affordable with as low as P100 opening balance.

But no matter what efforts your friendly bankers will do to educate you, if your family members are not with you in fulfilling your goals, it will be very difficult. No matter what government efforts are done in and out of school, if parents won’t support their children, it will be a futile effort on the part of the kids as we saw in the case above. Money matters are essentially family matters.

We really have to be all in this together. And let’s start as early as possible. When I’m asked the question, “When is the best time to start the financial literacy journey of our children?” I always I answer as soon as they’re born. But with the summit behind me, I have a new insight. I think we have to start even earlier than our children’s birth. Maybe we should make Financial Literacy a required seminar before a couple gets a Marriage License! This way we help ensure that the couple who will build a family, the basic unit of our society, will be equipped with Financial Literacy, an essential life skill in the 21st century.

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