The World’s Shocking Financial Ignorance

A post in my Facebook feed caught my “shocking” attention. The title read; “The World’s Shocking Financial Ignorance”. Several respondents around the world were asked three money related questions to test their level of knowledge regarding money issues. The shocking conclusion was that, roughly half the world couldn’t answer the questions correctly. Even worse, the author of the article, Cullen Roche asserted that 70% of Americans couldn’t answer all three questions correctly. As I read the article, I  wondered who the supposed respondents were. I found the questions to be very basic and anyone who knows elementary math should get them right.

So I posed the same questions that were asked the respondents to a few of my friends including some Whatsapp group members. Now let me state at this point that all of those I put these three questions to are all educated people. The results were astonishing. I was so wrong.

Most of those who attempted the 3 questions got at most one correct and only because I had to explain to them what the questions meant. However, some answered the questions without even blinking. Some also chose to simply stay away which is what i would have done if i had no idea. I’d rather hide my ignorance and keep my dignity. I would also want to believe that there are others who knew but for one reason or another didn’t answer.

But in the end, it was clear that Cullen Roche’s article is not far from right. Majority of us lack basic financial knowledge. I’m also very certain that, if a similar research was conducted here in Ghana amongst our educated folks, the results would be even more dramatic.

Now for you reading right now, here's your chance to measure your level of financial knowledge. Getting it right or wrong will determine which of the halves you belong. If you’re American, you’ll know if you’re in the 30% or the 70%.

Q1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?

A) more than $102;                          B) exactly $102;

C) less than $102;                           D) do not know; refuse to answer.

2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy

A) more than                                                 B) exactly the same as or

C) less than today with the money in this account?; D) do not know; refuse to answer.

Q3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

A) true;                       B) false;

C) do not know; refuse to answer

Check the bottom of the page for the answers. I hope you get them right.

You may be wondering what the fuss is all about. Well, here are some reasons why i think we all need basic financial knowledge.

Recently a number of microfinance companies have gone bust and people have lost their monies. Capitals, life-time savings, project funds etc. have all been lost due to this microfinance melt down of a sort. There was a glaring trend that was common to these microfinance companies before their eventual demise. They all offered unrealistic interest rates on fixed deposit investment. I remember at the time when the 91 Day treasury bill rate was as low as 11% per annum, a firm like Onward Investment Limited was offering not less than 25%. Basic finance will tell you that the higher the risk, the higher the return. Treasury bill is the safest investment you can ever have because the risk of default by the government is almost zero. So if the almost risk free rate is about 11%, then 25% means a higher risk. If most people knew this, they may have been saved from the debacle.

Wikipedia defines financial literacy as “the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others.”

If you don’t know how money works, attaining financial independence will be a monumental task. What you earn won’t make you rich. What you save won’t make you rich either especially in our part of the world where inflation easily spirals out of control. The sure path to financial freedom is investment. Knowledge is power. The more you know about money, the better your chances of getting more of it.

A quote from Robert Kiyosaki, the author of Rich Dad Poor Dad says “It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”

We were not taught financial literacy in school even though we all need it. Professionals such as lawyers, doctors, engineers, etc. have all fallen prey to Ponzi schemes simply because the lacked the skill to identify such scams. It will not be easy for any investor to tell if a company will go bust or not, but more often than not, an investment firm that offers unusually high interest returns should get you wondering. At the very least, you should ask more questions and understand what you’re going into.

The world desperately needs to become better educated on the topic of money, finance and economics. Africans and for that matter Ghanaians even need it more. Our circumstances are unique. The regulatory regime is not very efficient and that makes us vulnerable. We are therefore our last line of defense. Only information can strengthen that line of defense.   It certainly won’t solve all of our financial problems but it will impact positively empower our financial decisions.  We have a long road ahead of us but it’s not too late to get started. My subsequent articles will try to address some of the basics. Watch this space. 

Answers: 1-A, 2-C, 3-B

The New Pension Scheme - What You Must Know

I listened with utter shock the level of "unawareness" some members of the public displayed concerning the new three tier pension scheme on Joy fm. But then I thought again and realized first and foremost this is Ghana. The unfortunate truth is that majority of us are not bothered by policy changes. 

Secondly, we're 'last minute' people. We only want to know when we absolutely have to know. Hence most people have heard about the new three tier Pension scheme but are least bothered.

However, this is our MONEY which is being kept for us and I believe we should know at least the basics of the new policy and how it affects us now and in the future. 

This writes up will bring us up-to-date on the must-knows of the new three tier pension scheme. I’m pretty sure most of us know what majority of pensioners go through just to access their paltry monthly stipend from SSNIT. This and other similar developments informed the need for a radical overhaul of the entire pension system.

THE OLD SYSTEM

The old system was pretty simple. Your employer pays 12.5% to SSNIT on your behalf while you pay 5% of your basic salary for yourself. In other words, SSNIT receives 17.5% from you and your employer to keeps towards your pension until you retire. Upon retirement, SSNIT gives you an initial lump sum and thereafter you receive monthly allowance from the same institution. That’s about it. Very simple huh! See how it works below.

How the old pension scheme worked

THE NEW SYSTEM

This new system is equally simple or let’s say should be as simple by the time I’m done explaining. Don’t let the ‘Three Tier’ name scare you. Like I said earlier, the problems associated with the old scheme including people accusing SSNIT of bad investments of pension funds compelled government to take some action. A committee was set up and it recommended the set up of a three tier scheme. The idea I believe was to create some “competition” by bringing on board the private sector in the management of pension funds. 

What did government do?

Well, they increased the contributions by both employer and employee marginally by 0.5%. So now employee pays 5.5% and employer pays 13%. This makes a total contribution of 18.5% of your basic salary. Then they split the contribution in two unequal parts (5% and 13.5%). The 13.5% contribution constitutes the First Tier or Tier 1 of the scheme and the 5% is the Second Tier or Tier 2.

I can stop here and we’re good. But you need to know where these monies go. After all it’s your money. You need to know who keeps it. 

So let continue.

The tier one (T1) goes to SSNIT and tier two (T2) goes to the private sector. We all know SSNIT so I won’t talk about them. Because government wants to make sure the pension money given to the private sector is very safe and prudently utilized, it created a three point management system for the funds. This means that, three private sector companies will take care of your 5% contribution. These are the Trustee, the Custodian and the Fund Manager. They are supposed to work together to make sure your money is safe and invested properly. Amongst these three institutions, the Trustee is the one your company is most likely to deal with directly even though some exceptions may apply in certain cases.

With this new arrangement, upon your retirement, the Trustee will pay you your lump sum instead of SSNIT. The Trustee will pay you the accumulated sum of your 5% monthly contribution from your active working life. SSNIT will then pay ONLY your monthly allowances.

I’m sure you’re wondering what the Tier three (T3) is since I have not mentioned it this far. Before I even talk about the T3, I must say that T1 and T2 are mandatory schemes. Thus, every employer must pay T1 and T2 for employees. T3 however is optional or entirely voluntary. It’s also targeted at those in the informal sector even though formal sector employees can fully take advantage of it. If you choose to participate in T3, the government allows you up to 16.5% of tax exemption on your monthly contribution. Kindly note that tax is charged after your T1 and T2 has been deducted. This means you don’t pay tax on those contributions. 

Putting everything together gives us the Three Tier pension scheme. I’ll demonstrate this graphically to give us an idea what goes on in the scheme.

How the new Three tier pension works

I’m pretty sure you've gained some valuable insight into the whole pension thing now. I’d advice you ask your employer or accountant who your Trustees is. You need to know. It’s imperative. I'll publish the benefits of the new scheme in subsequent posts.

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@abekahbrown

WE DON'T ADMIT, BUT WE LOVE MONEY!

I love money. I know you do too. Everybody loves money. Yet, only a few people admit they do. We pull out all the stops just to earn a few more. Some work two or more jobs. Others do some business, even if petty, just to make some more money. Yet, we try so hard to hide our love of money. I know people who sell mobile phone credit in their offices to make more money. Interestingly, the office is their primary market. Thank God our actions betray us.

A friend of mine carried out a random survey of about 30 of his friends on a whats app group. The question he asked was simple. ‘Do You Love Money?’ Only two people responded. One was honest enough to admit. The other said “I don’t love money. I need it”. I call that a disguised admission. There’s no middle ground here. Either you do or you don’t. Majority of the group members simply stayed away and I’m least surprised.

In our part of the world, we have been programmed from birth to believe that money is the root of all evil. Who wants to love something that is touted as the root of all evil? Many of us have come a long way from that time. I have grown to learn that the love of money can also inspire people to do great things. You may disagree. Perhaps on religious grounds. But I doubt if you’ll disagree with me on the fact that no one would put in as much effort into a competition with no prize money as they would in a competition with prize money of a million dollars.

Entrepreneurs love money. It gets them to think hard. It pushes them to be innovative. It makes them think of how to solve problems profitably. Otherwise what's the motivation? Some of them also admit it in disguise though. They describe it in all sorts of ways. I spend most of my free time thinking of and analyzing business ideas. Thinking of what problems I can also solve profitably. I know my 'eureka' moment is nigh. Bill Gates quit school because he spotted an opportunity. I'm not sure he knew he was going to be the richest man in the world one day. But I’m dead sure he knew very well his effort and hard work would pay off big time. He's retired now but still earns money. Everyone admires him mostly for his money. 

Our orientation on being motivated to work for more is typically interpreted as greed. It will take a little more effort to see beyond that. It's not evil to love money. It's evil to allow your love for money lead you to do evil. Unfortunately, money runs the world. It has corrupted it. People literally worship it. More value is placed on money than on human life which is very regrettable. But I guess that only underscores it’s importance. This is never to say that the end justifies the means. The end never justifies the means in this regard. What is wrong is wrong.

But bad people will do bad anyway. Even when it comes to money. It doesn't make the love of money evil. You may be familiar with this ‘For the love of money is the root of all kinds of evil. And some people, craving money, have wandered from the true faith and pierced themselves with many sorrows’. A great man once said, money only exposes what you truly are on the inside and at heart. I couldn't agree with him more. If money corrupts you, then you’re corrupt at heart. Money only exposed you. In the same light, if the love of money makes you wander away from your faith, then the money was only a reality check on your life. If you are corrupt with small money, then obviously you’ll be super corrupt with more money.  A philanthropist at heart will help more people with more money. Once again Bill Gates is a shining example with the malaria research he funds.

Don’t blame the money or the love of it. Blame the person. Like DMX said, guns don’t kill people, people kill people.  I had the opportunity to make about 3000 pounds a fortnight. I turned down the offer simply because I considered it dirty. I love money, don't forget. 

Albert Camus said “It's a kind of spiritual snobbery that makes people think they can be happy without money”. Indeed, there's nothing wrong with falling in love with something that makes you happy. Too much money can't be bad. For me, it’s only a guarantee that generations of my family that will come after me are insured against poverty. The more money I leave them, the longer the guarantee period. Money can't buy happiness no doubt. I've heard rich people say that many times. What I’m yet to witness is a rich man giving up all his money to be happy. They'd rather be unhappy in comfort. 

If Carlos Slim wakes up one morning to discover he's only as rich as Oprah Winfrey, I’m sure he'll consider himself poor. If the Nigerian billionaire Dangote wakes up with Kofi Amoabeng of UT's money, he'll cry his eyes out. Too much of money can't be bad at all as long you can fight the temptation. Admitting your love of money doesn't make you evil either. 

May be I don’t know what I’m talking about. May be the basis of my argument and  my perception about money are gravely flawed. May be my perspective is shallow. Or may be for some other reason known to you, I got the whole thing wrong.

Unless you can convince me beyond all reasonable doubt that you’ll let an opportunity to make a million dollars pass, you’re just like the rest of us who are bold enough to admit our love of money, only delusional.

Let your love of money inspire you into greatness. Let it inspire you to be innovative. If you’re content with just enough of it, don’t think luxury. Luxury is beyond enough. It’s for us. The one’s bold enough to admit our money love.

How To Manage your Cash 101

Ok. Let's cut all the pleasantries and get down to the reason for this article. I'm not rich. Not yet. Not even close. I may not be the best person to tell you how to manage your cash. I'm not an expert. But I've seen people do it in the ‘baddest’ of ways. Trust me; you don’t want to go on that same path.

Well, I'm not promising anything but I hope you'll learn a thing or two. I don't earn the worse salary but of cause, it can be better. I've been flat broke a number of times. No one likes to be broke yet we all do. And it’s all because of how we manage our cash. How much you earn will never make you rich. Its how much you retain that could potentially lead you to richness.

Different folks have said different things about money. Some I agree with. Some I don’t. Unless you're Bill Gates or Jay Z or the Queen or have multiple streams of income, money is nothing anyone has enough and will ever have enough of. Unfortunately, that applies to you and me and about 99.9% of all the folks who will read this piece. At least that’s what my knowledge of economics tells me. I think they call that scarcity.

What I’m about to share with you won't make you filthy rich. It won't make rich either like I said. You're wasting your time if that's what you expect. You'll be better off watching TV. However, if all you want is how to practically manage your cash, then you're welcome. Continue reading! :-)

Let's begin.

Discipline is everything. It's never easy to manage cash. Yes. Truth be told. Especially when you need to cut back on certain expenses. We all wish we're handed a blank cheque at the end of the month. Even your boss wants that too. Our wants are endless. The means to satisfy those wants are acutely limited.Your salary will never be enough anyway. Hence your only option is prudent management. To begin with, you must recognize that you are mismanaging your cash and that your situation could be better. You must see the need to properly manage your cash and resolve to do that. Recognition of the problem is of extreme importance because it will subsequently become the driving force behind the much needed discipline. Not recognizing the problem to be resolved is like a teacher walking into a classroom and says to his students: Start work! I'm sure you'll think he's nuts. Indeed, problem recognition is the greatest motivator.

Now that we're motivated to make changes, we can continue. The experts will tell you to identify your priorities and draw a budget. I agree with them perfectly. You’re the best person to know the important things you spend your cash on. I can only speculate. But yes, you absolutely need to write them down and assign rough estimates to them. This will give you an idea how much provision to make for those expenses.

In as much as I agree with the experts about drawing a budget, it never works for me. I've tried it on many occasions and I always end up over spending my budget. I sometimes forget I even have a budget. I may have lacked the discipline it takes to draw and maintain a budget. If a budget didn't work for you either, welcome to the club.

It’s very frustrating when your efforts don’t yield the expected results. There are times that, just two weeks into the new month, I get broke and looking forward to the next pay day. Interestingly, I usually have no idea what I spend my money on. Some people have worse experiences. All of my experiences reinforced my resolve to remain disciplined. My frustrations however led me to discover some radical tools and since then, I’ve never looked back.

It’s never advisable to save money. Yes! You read right. Don’t save. Invest instead. The two are never the same. One keeps your money. The other makes your money work for you. In recent times, some banks try to lure clients into saving with them by offering them some paltry amounts on their monies. They call it interest.  Don’t be deceived by it. Always remember, the reason why you may be over spending is because you have easy access to your money. The harder it is for you to access your cash, the less likely you are to spend.  Investment of your cash is one of the best ways to manage it. So don’t save, just invest.

There are several investment vehicles you can consider depending your risk level and your expectations. Just walk to any investment house and ask about their products and buy into the one that suits your needs. The investment firm I use is NTHC Ltd. This is because they have three strong state institutions as shareholders. I know my money is safe with them.It’s very important you find a place to invest. From that point onwards, you have to treat investment as an expense. A special expense that pays you back.

Standing orders and post dated cheques are crucial tools that we’ll use to ensure we don’t  spend more than we estimated. This is very important. Research shows that, the more we have at our disposal, the more we spend. Hence, the dates for the standing order and post dated cheques should coincide with our pay day. Standing orders don’t really work for me. The bank may not execute the order or do it at the wrong time which could affect me harshly. One of the reasons why I chose NTHC is the flexibility they give me. I issue post dated cheuqes and they present them on time. I’m able to talk about NTHC this way because I have used and still use their service. However, if your choice of investment firm provides this convenience and flexibility, use it. It’s a life saver.

When you put these processes in place, all you have to do next is watch and wait. You’ll need loads of patience and discipline. Initially, it will be tough and slow. It might even not make sense at some points. But I can assure you of one thing. If you remain steadfast and resolute in your determination to prudently manage your cash, you will never regret you did.

Nothing good comes easy anyway. Unless you do something different, nothing different will happen. If you genuinely believe your cash management is poor, I can guarantee you that this piece will significantly transform your situation.

Always remember this quote: "If you don't like something, change it. If you can't change it, change your attitude".