By Elizabeth Davies
When I turned 18 I received an unwanted gift in the mail.
My bank had sent me my very first credit card.
Overnight it seems I had transformed. The bank no longer thought of me as a child under my parents’ wing. I was a customer, legally old enough to make my own financial decisions but young enough to not really know how to make them.
At such a young age I knew very little about finance and I’ll be the first to admit that I’m still learning now. However, I knew enough even then to know that a credit card in the hands of a teenager feels like a loaded gun; powerful, but incredibly dangerous.
You wouldn’t throw your kids into the ocean in order to teach them to swim. Why is it then that the older generation seem perfectly happy to allow the younger generation to take control of their own finances without providing them any formal education in the area?
It’s assumed that a financial education should come from parents. It’s their responsibility to instil a sense of financial awareness in their kids. However, given the number of parents that are in significant debt, and are at times making poor financial decisions, would it not be better to also provide this kind of education in schools?
I sincerely wish that my high school teacher had sat our class down and taught us about budgeting, interest rates, credit cards and savings plans. Students who took economics or business studies were surely better off in this area, but what about those that aren’t trying to make a career out of it, those who are just trying to keep themselves out of debt on a daily basis?
With shaking hands I gave that credit card a new home. I didn’t put it in my wallet, I put it in the bin.
I’ve never had a credit card and never taken out a personal loan. I firmly believe that if I can’t hold the cash in my hands then I can’t afford to spend it. I do everything in my power to avoid unnecessary debt but sometimes it feels like the world is betting on me to fail.
A couple of weeks ago, after a particularly bad day, I decided to go on a late night chocolate run. I’d just paid rent and bills and my pay wasn’t due for another couple of days. As I swiped my card I was far from hopeful, I was mentally prepared to be declined. I was therefore more than slightly surprised when the transaction was successful.
After a quick check of my balance I discovered the bank had given me another unwanted gift. Without my request or permission I’d been given an overdraft. I felt like there were vultures circling, willing me to fall into this subtly devised financial trap.
A week or two ago my partner Mike received a letter from his bank. The letter congratulated him and informed him they were extending his credit. Mike has been studying for the last three years and has not had a regular income. He laughed, the irony wasn’t lost on him.
At my age I know a number of people who have massive overdrafts, maxed out credit cards and personal loans. In other words, I know a lot of people who have made a lot of bad financial decisions.
I’m not denying personal responsibility in any way, shape or form. However I am suggesting that young people are targeted and to a certain extent taken advantage of because they lack the education required to make informed choices.
It often feels like my peers and I have been thrown in the deep end and told to swim. Eventually we all learn to tread water, but just think how well we could do with a couple of lessons.
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*Elizabeth Davies is a 23 year old post graduate journalism student at Auckland University of Technology. She lives with her partner in Epsom and spends her free time refurbishing vintage furniture and attempting to bake while fighting a daily battle against her bank balance. She writes a weekly article for interest.co.nz on money matters and financial struggles from a young person's perspective.
42 Comments
Why is it then that the older generation seem perfectly happy to allow the younger generation to take control of their own finances without providing them any formal education in the area?
It would help if the older generation were eductated about finance as well. Mostly people are clueless about things like fractional reserve banking, that money is freely created as debt when people take out a loan and of the destructive and compounding effects of interest that redistributes wealth. Simple maths can demostrate the latter point but even some supposedly educated people on these forums are incapable of grasping the concept.
Ngakonui gold - me too, must say something about our respective credit worthiness :-)
I throughly agree about the financial literacy of the public being a major concern. I guess you can never say too late completely, but for many of the older generation it probably is, but there's no excuse for us not ensuring that the younger generation aren't better equipped - strangely, with John key having a finance background I'm surprised it hasn't been a hobby horse of his, but I guess you can only have so many priorities, hopefully this one's coming.
I think the main problem is, based upon my observation of teachers, some being friends, their financial literacy is often very poor as well and it wouldn't be an easy thing to educate all of them first. Perhaps the answer is a team of specialists that conduct financial literacy classes once a week/month or bi-monthly in all schools around the country ? The upside for this country would be massive and come very quickly I suspect.
Not this teacher Grant :-)
I have introduced 5th formers this year to Financial literacy as part of their unit standards. It has raised many interesting discussions and their views are often influenced by their parents with regard to money, credit and self-worth.
I posed the question: "How much do you believe you will earn in 5 years time?" (assuming they are 20-21)
Most expected to earn approx 70k... one boy asked if his father earning 200k was a lot of money?!
The young of today are either surrounded by wealth or poor as church mice. Between the 15 boys in my class, one boy works part-time and contributes to his solo parents earnings and then the other extreme mentioned above.
We discussed debt, from mortgages, credit cards and overdrafts to "interest free" payment options.
Credit cards are our biggest threat.
At 26 having returned from overseas I requested an overdraft of $200 - I was denied.
4 months later the same bank offered me a Gold card $10,000 as i had been a loyal customer for 5 years...therein lies the problem. Ironically, i had never missed a minimum payment and rarely used my card even as the bank kept upping my credit limit.
As educators we should be insisting that financial literacy is taught in schools... perhaps then "Gen Y" won't bankrupt the country through high leveraged debt and spending beyond their means like their grandparents and parents have done!
Dobrydan - to be fair, the comment was always a gross exaggeration, and more just a statement that I don't think we'd have enough teachers currently with the required skills. If those informed discussions about money are not being had at home, it's got to be had in the classroom and I'm pleased to hear you're having them.
Teaching kids - indeed anyone - to live within their means is essential.
The problem with just limiting it to 'withing their fiscal means' is that 'fiscal' doesn't value things in a way that will keep things 'within their means'.
If it did, we wouldn't be chasing exponential growth in consumption.
Here's a piece for a 5th-Form class:
Kimy, you need to understand the students that I am teaching (low-level Maths students who are studying an alternative programme to gain NCEA level 1).
I am not teaching these boys the pros and cons of debt. This is far too complex for them. I understand from my own investment that debt is not a bad thing as long as it reduces over time! I simply explain how debt can spiral out of control or how it can be managed. ie. paying off a credit card before the 55 days expire.
In answer to your question regarding NZ's level of debt... it is growing and will continue to do so with current consumer habits and rising property prices. That 30% you roughly quoted will inevitably rise and once interest rates return to normal levels you will find that individuals, small businesses and financial institutions to name but a few will go bankrupt.
I'm not sure the lessons learnt in Europe have been well adhered to by us Kiwis.
Perhaps, NZ is, as you say, in a stable financial position in comparison to global trends. However, I don't feel that optimistic for the future generations who will have to carry that burden of national debt.
I showed a video clip of US national debt explained.
http://www.youtube.com/watch?v=jfEaUCm5etw
Like 15~20 years ago....I regularly get American Express offers and my existing CC bank regularly sends me options to double my CC amount (to a frightening amount). At least they have changed, at one stage they used to write to me telling me they had up'd it automatically and I'd have to ring in to get it put back down....which I did. SInce I always paid it off every month and the new amount was 20+ times that (incl what I ever had on it) I could never fathom why.
regards
Best keep them in the dark...if they learn too much they might opt out...and then where would you find the next gen of bank fodder..
Taking away the PO savings piggy banks all them years ago was a wise govt ploy..Rug Rats were learning how to save...didn't fit in with the govt drive to bury the country in debt.
Agreed. Having a credit card means I don't need to have thousands of dollars sitting in a bank account for "emergencies". I can invest it instead, with the credit card giving me a month or so leeway before needing to sell any shares.
However, it's just so easy to flash the plastic when you're out and about. Good idea to leave it locked away at home.
Big subject with solutions that span so many dimensions it would require a book to deal with them.
Here's just a few
1. Many years ago, in that dim dark age when your elders were young, many youngsters got weekly pocket money, and that was it, they had to learn to live with it, if they wanted more than that, and the parents were disciplined enough, the children had to go out and get a simple job like delivering newspapers, or groceries, or delivering milk on a milk run, or caddying at the local golf club, or hunting for golf balls to sell back to the players. So, if you wanted that dreamed of big-ticket item, and your parents were made of stiffer stuff, you did it yourself, and learned how to save for it, because you couldnt get hire purchase, or an overdraft, or credit, or a credit-card.
2. Listen to Wolly. He's a good educator on the matter of banks and their unfettered ability to flood the airwaves and the market place and your letterboxes with their pervasive marketing. It falls into the same category as smoking and cigarettes. The authorities were big enough to stand up to big-tobacco and ban them from advertising. But they appear to be un-willing to tackle the big-banks. The answer to your question is to learn from Wolly and use your vote at the next election wisely. It's got nothing to do with teaching in schools. I say that, because, today, ask around your lecturers and tutors at university and ask how many can explain to you the operation of Swaps and CDO's, and then ask your parents and your grandparents. And dont worry about learning about them because they will be tomorrows product and some new scam will take their place before you can blink
3. Information. Take a cruise through Gareth Vaughans article on exception charges on bank fees. No one is interested. This subject has been going on in Australia for the past 5+ years. The ACCC have been campaigning against the credit card operators for years, the Senate has had hearings into it and ASIC has got into the act. Based on that the ambulance chasers Slater and Gordon and Maurice Blackburn and the Funders IMF and a few others have got into the banks. This has been going on for years now, not that you would have known about it in New Zealand. A big ripe juicy plum waiting to be picked. And the nz operators have been oblivious, so much so the AU sharks have appeared on the horizon and said "whoopee", here we go. Now, if you investigate the matter, and how far back it goes, you end up asking yourself, how come our leaders havent been doing anything about this. It's the very same banks, and next how come our new-media have done the horatio-nelson trick with thei telescopes and blibk eyes, and how come our legal operators have not been interested. Everyone is either ignorant, or not interested, or dont want to know, or it's all to hard.
4. Then examine carefully the amount of interest in Gareth Vaughans article. http://www.interest.co.nz/opinion/65089/opinion-action-against-banks-over-exception-fees-will-be-victory-customers-even-if-ban
5. If you've followed the news, in response to Andrew Hookers case, the predominant response from the talking heads has been tut-tut "we dont want this litigious stuff going on in new zealand" and that's what people hear and learn from. As Wolly says, Keep them in the dark.
Iconoclast - if out agree with Wolly's "banks are bas@@@ds approach (I don't having previously worked for one - banks are just another organisation trying to seek you something, and taking the associated credit risk on you), then financial literacy is vital. It stops the average Kiwi needing to be protected from themselves.
No, I dont think Wolly thinks the banks are "bastards" but I am in his camp, that governments around the world are captive to the bankers. You watch the "exception fees case" and watch the banks drag it out and throw hundreds of millions of dollars at it, it will boil down to who has the deepest pockets. The banks will try and outspend the litigants. Why has new zealand done nothing to curb them while the australian authorities are gunning for them. Same banks
As you are an apologist for the banks, explain how you can justify the bank allowing the article writer to overspend on her card and automatically give her an overdraft facility that she didn't ask for, which in turn generates an exception fee. Ka-ching. Ka-ching.
I'm no apologist for banks (but you have to admit I'm more balanced/informed on it because many on here obviously haven't), but in this case I agree with you on that credit card and OD issue - but my point was, with financial literacy, the person would have a better idea if it was a good or bad idea for them. Problem is you're setting banking aside as something totally different to say a retailer pushing hire purchase, a finance company, or a whole lot of other inducements not necessarily good for you pushed by others who are trying to sell you something.
Go easy there with the swaps disappearance theory - just too lucrative for banks - they won't let them be consigned to the dustbin of history.
In fact, to appease regulators a new wheeze called "collateral transformation" is about to appear as a means of margining OTC swap products - nice - mainline press see it thus, while others foresee pitfalls. Either way the process is here to stay, so a small PDF introduction as a means to education is not at all unwarranted. Bound to be an occasion when the local banks will securitise those penalty credit card interest demands and proffer them as one leg of an asset swap.
Stephen Hulme: a rush of blood to the head on my part - I was thinking of CDS's and TRS's - but what gets my giddy-goat is while I don't have the same intimate knowledge of banking that you do - and I consider myself reasonably well informed on these matters - it doesn't matter how much I read up on swaps - I still have difficulty concepetualising what the heck they are and actually do - and I had never heard of any of them before 2005
Iconoclast - at their most simplest, theyre just a product that fixes the base rate on a bank bill base floating loan. Theyre what banks use to hedge their risk in providing fixed rate mortgages and fixed rate term loans. If used by a borrower directly, it provides them the ability to more flexibly manage their loan base rate risk.
A tough world Stephen if someone advocates a world with no fixed rate mortgages or fixed rate term loans, which the disappearance of swaps would necessiate ? Yes not happening, But whilat I understand the danagers and logic of the suggested change, but I'm not sure how that margin requirement is going to play out as its a cost that will no doubt have to be passed onto us all ?
It's a sort of "paradox of regulation" it would appear - that by regulating for the known risks you make everyone think and act the same way and therefore everyone gets hurt by the first unknown or misjudged risk that comes along. The leaky building system seemed to have all the same ingredients. Things like lobbying and sponsorship of academia, and bureaucratic rubber stamping, and lots of rules that made it harder to make some mistakes but effectively legislated that other mistakes be made. There must be a better way, but I'm not sure what.
Stephen would this collateral transformation also be a transformation from the Shadow Banking system to the conventional banking system. Or perhaps a transfer of collateral in the same manner?
Thank you for your post btw. I had read that zerohedge article but your post gives context to what was otherwise noise to me. It has lifted the haze a little, emphasis on little.
The question that arises to me is who is the beneficiary of these financial instruments, and who benefits from the changes. Grant A also poses a similar question further down, but I think JMC8888 provides a good answer below that zerohedge article at 13:30. "The entire point about derivatives is to exploit others."
Oh brillant idea Kimy, how much capital do you think a bank's going to direct to its geography that regulates to restrict the dividends it pays it shareholders - brilliant. Remember mortgage lending isn't the only thing a bank does. I didn't say they can't legislate, I said it wasn't illegal to lend. When you actually start responding to what said, rather than what you want it to say, maybe you start being worth listening to Kimy ? I've certainly stopped responding to most of your posts, unfortunately not all. My bad.
The way to check that Kimy is to check what percentage of their P&L is paid out in dividends - if it's reasonably consistent, then that's a comfort, so then you look at the quality of their earnings and the quality of their lending books - the RBNZ rightfully oversees that, something that seemingly didn't happen with the likes of the US and Europe per-GFC.
Let's hope the RBNZ is not as tardy and easily swayed by grasping Australian bank management and their local regulator apparatchiks. Gareth's recent portrayal of events in Australia suggests an inevitable failure to impose regulatory restraint. Read more
The Australian Financial Review reports ANZ Banking Group, Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank and Westpac Banking Corporation, have written a joint letter to the the International Organisation of Securities Commissions (IOSCO) saying the Australian banking system would be “severely impacted” by a plan that aims to reduce systemic risk in the global financial system, which was proposed by the Group of 20 and is being implemented by IOSCO.
Australian banks would need to pay a margin of 6 per cent on about $350 billion of cross currency swaps.
The swaps are used to hedge foreign exchange and interest rate risk for offshore transactions.
KPMG partner Craig Davis said Australian banks were extremely large users of cross currency swaps due to their offshore funding dependence and the issues highlighted unintended consequences stemming from the wave of new global financial regulation being implemented in response to the global financial crisis.
“This would be a massive funding impost on the banks and potentially cost them hundreds of millions dollars in extra funding costs,” Mr Davis said.
But the question is Stephen, who will it cost if that cost is imposed, the banks or the customers that use their services ? It will just be another added cost to the cost at which banks raise money, a defacto tightening if it goes ahead ? No argument for the added comfort we would get from a OTC swaps market where everything is marked to market, and maybe a cost we're happy to bear to have that comfort ?
Elizabeth
Another thought provoking piece.
What lessons about financial matters did your parents teach you? You obviously appreciate the value of money and that 'excess' debt is "bad". Were you taught that some debt if used correctly can be a good thing?
Parents can teach their kids so much more about finance, debt and saving than any school can IMHO.
Also don't get trapped into thinking all debt laden families are in that situation through poor decisions - some families are just down right unlucky (car blows up, unexpected medical expenses, redundancy etc) and struggle to recover from that one situation.
Craig.
Well, there you go
Look at that. Unbelievable. All those words. All those comments.
The only person to mention the "key phrase", the foundation, the essence of it all, was Craig Simpson
Teaching "The Value of Money". It has to start at home. It has to start young.
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