Life Goals and Preparedness
Edition #8: What's your Big Three financial literacy score?
In the last post, I briefly touched upon financial security as top-of-the-mind for the in-between generation. Some of you likely started your financial planning journey quite early, say at 25, and that is great. Some of you entered the game a bit later. Regardless, it is likely your goals today cover a wide spectrum of the basic (“saving every month”) to the advanced (“rebalancing the portfolio”).
You either graduated your saving habit with the humble piggy bank or left the habit once the piggy provided for enough pocket change for a school trip. The habits started somewhere then.
The 2018 Aegon survey on retirement preparedness in the 21st century provides some fascinating insights. It covered 16000 workers and retired persons in 15 countries, and has some broad takeaways about India.
India is one of two countries (other being China) where future retirees believe they will be better off than those currently in retirement. In short, the working population today is feeling more positive about their post-retirement state than our parents.
India tops the key index around retirement readiness, at 7.3 on a scale of 1 to 10. Two of the six questions to arrive at this index are level of awareness and financial understanding.
India as a country has a savings rate of 30%, that is, Indians on an average do not spend 30 rupees of every 100 rupees earned, and this becomes their savings. While the savings rate has dropped over the last decade, it is still quite high relative to global levels.
Private savings, and not government benefits, is the major contributing factor to individual retirement goals in India.
The higher savings rate is also likely because Indians need to meet all of their financial goals with their savings from income, and receive minimal support from the government (healthcare, education, retirement, etc).
This puts the individual at the center of his/her financial security.
Researchers Annamaria Lusardi and Olivia S. Mitchell designed a simple diagnostic test with simple (“Big Three”) questions to measure basic financial literacy – compounding interest, inflation and risk diversification.
This test, which is now part of the US Government’s consumer finances survey, is an easy way to predict for wealth inequality in retirement years. The authors believe a large part of this inequality can be accounted for by financial literacy and knowledge.
Spare a few seconds to
If you want a cursory view, here is a press article. If you are the academic type, you can read more about it here.
Regardless of the intensity of your goals, there are a few basic principles that help build a decent financial plan
“save more, spend less, invest wise”
The magical ‘power of compounding’ is something that financial advisors and wise investors harp on quite endlessly. If that doesn’t suit your palette, just remember the old adage – ‘a penny saved is a penny earned’.
Always, listen to the frog.
