David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: Compounding problems: an overdue financial lesson

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Photo / Thinkstock
Photo / Thinkstock

I was very surprised at not scoring 100 per cent in this little financial quiz built for UK school-kids.

Overconfidence, perhaps; lack of attention to details, maybe; guesswork on the compounding questions when actual calculations might have helped, definitely.

The test, in fact, was harder than I imagined it would be: it seemed to based on real life rather the theoretical number-crunching I've been dealing with this week past.

What is the British education system coming to?

Compulsory financial literacy is the answer.

From next year British school children will be forced to tackle some of the numerical challenges as exemplified in the above test: currency exchange, compound interest (I recommend an algorithm), loan repayments etc.

There were no fund management questions included but the quiz was just a small sample of the UK financial literacy curriculum. Undoubtedly, the UK curricula creators could come up with a few.

How about, 'If my pension fund [or, for local readers, insert KiwiSaver provider] has 20 years of above average returns followed by 20 years of below average returns will the performance fee collected by the manager in the first two decades represent good value to me?'

I don't know the answer. Good question, though.

In New Zealand financial literacy hasn't yet been deemed a compulsory subject but the educators are working with government agencies such as Sorted to embed the topic in schools, including building up these resources for teachers.

Still, even the most financially literate of our citizens run into money trouble now and then. As Allied Farmers announced to the NZX on Monday a pesky lender has called in an overdue loan.

ALF is very surprised by the action of the Lender given that ALF has been working co-operatively with the Lender on a sensible timeline for repayment, and given that ALF has a first ranking secured lender, the NZX release says.

(The release includes a useful lesson in compounding, too: $500,000 original loan; principal plus interest due comes to $540,000. If the term of the loan was X years where X is unknown but let's say it was 2 what was the effective interest rate?)

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

Read more by David Chaplin

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