Achieving financial independence is a lifelong goal for most of us. Once achieved, and maintained, it allows for a better quality of life; however, the road to financial independence is complex, and if you are not armed with the right tools, it could be a painful learning experience.
Being financially literate goes a long way to help you structure your finances to give you the best chances of success. Developments in recent years have provided both challenges and opportunities to help us learn better the tools we need to equip ourselves with.
The pandemic has certainly brought home one of the key components to long-term financial independence – saving for a rainy day.
Malta generally has a high savings rate, yet the prospect of losing your job or having minimal income for a protracted period of time is not something we normally plan or budget for. But whether it is at a corporate or a personal level, it is key to providing you an extra level of stability, leaving you better equipped to cope with stressful periods when the unexpected happens.
Even when you do save, things may not turn out as you expect them. One clear example is the general level of interest rates. Speak to any pensioner today and you will quickly understand the struggles they are faced with.
Zero or low returns on their hard-earned pension savings, combined with the cost of living forever on the increase and a virtually meaningless government pension have created a form of financial repression that is forcing this segment of society into taking risks, at a time when they ought to be reducing such risks, not the opposite.
And these are the problems faced by those who planned their savings throughout their working life. There are those who do not have the luxury of their own pension and are today struggling to make ends meet.
At the other end of the age group are young teenagers who are today edging closer to joining the working world. Are they well equipped to be financially savvy?
Certainly not from school. My eldest child has barely had a single lesson on financial matters. When I pressed her, she admitted to having been taught about the principle of barter. I think the world has moved on from this, though it is still a fundamental principle.
My eldest child has barely had a single lesson on financial matters
Social media today is a fantastic source of information for this section of society. And with the popularity of cryptocurrencies and the wide availability of online trading platforms, teenagers are now able to be more financially literate than at any time previously.
It is now possible for teenagers to invest their birthday or Christmas money if they so wish. Done in a structured way, this could be a positive development. Just imagine the power of compounding when starting 10 years earlier. Even at a three per cent rate of return, the difference can be as much as making four-and-a-half times your money versus three-and-a-half times your money if you start 10 years later.
Sure, these teenagers will make mistakes and care needs to be taken on the type and nature of social media financial advice given, but the likelihood is that they will learn from these mistakes and the cost of such mistakes will also be more limited. If nothing else, it will start to teach them the cardinal principle of risk spreading.
Being exposed to such an environment needs to have basic structure with it – structure that can be provided by way of a curriculum that aims to teach young people simple principles of managing your own money. Learning by doing is one way but when you are armed with basic knowledge, then you avoid many of the pitfalls that are around.
Technology provides this wonderful possibility for youngsters to be exposed to the opportunities out there, both good and bad. Many of them aspire to be millionaires by the age of 30. There is no harm in such dreams if they serve to act as a motivation to achieve one’s legitimate objective.
But financial literacy is not only this. It is much wider and deeper, covering many aspects of a person’s journey through their working life – subjects such as the affordability of debt, buy or rent, budgeting and pension planning. Education is the key to all of these, and having seen what my children are being exposed to, we are failing miserably.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.