EDITORIAL – What you don’t know can hurt your pocketbook

Public sector officials often attract criticism when the government overspends, spends foolishly or fails to plan for future expense.

That’s fair comment, of course. The money being spent is the public’s money.

In the greater context, however, ignorance (or “ignoring”) of financial principles is pervasive, even as it relates to people’s own personal money.

Around the globe, an astonishing number of people lack basic understanding about savings and investments. This collective ignorance is not without consequence:

Consider the continuing fallout from the U.K.’s reform of the state pension. Surely people would pay attention to such a “pocketbook issue.” Yet the Financial Times reported recently that 72 percent of respondents to a recent Pensions Management Institute survey did not know about planned increases to pension contributions under that country’s auto-enrollment scheme. In another article, the paper reports that misinformation also abounds on the distribution side, as fewer than half the people seeking professional advice about whether to cash in their company-backed pensions are receiving good counsel.

According to the paper, the U.K. Financial Conduct Authority is concerned that some consumers who are cashing in pensions early are at risk of losing money, or of sinking pension savings into “inappropriate” or “scam investments.”

As Standard & Poor’s reminds us, financial knowledge is especially important as financial instruments become increasingly complex.

A few years ago, S&P’s Ratings Services conducted a Global Financial Literacy Survey to measure people’s understanding of risk diversification, inflation, interest and compound interest – four basic concepts that are key to making smart financial decisions. A short survey was administered to more than 150,000 adults in 144 countries. Only one-third of respondents could be considered “financially literate” – correctly answering questions on three of the four topics.

Cayman was not included in the S&P survey – but you can test your knowledge right now:

  1. Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
    A. One business or investment
    B. Multiple businesses or investments
    C. Don’t know; refused to answer
  2. Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy ?today
    A. Less
    B. The same
    C. More
    D. Don’t know; refused to answer
  3. Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back:
    A. 105 US dollars
    B. 100 US dollars plus three percent
    C. Don’t know; refused to answer
  4. Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?
    A. More
    B. The same
    C. Don’t know; refused to answer
  5. Suppose you had 100 US dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account?
    A. more than 150 dollars
    B. exactly 150 dollars
    C. less than 150 dollars
    D. don’t know; refused to answer

(Answers: 1-B; 2-B; 3-B; 4-A; 5-A)

How did you do?