Money Slipping Through Nation’s Fingers
MORE than 40 per cent of Australians cannot name their electricity company, don’t know what their mortgage interest rate is and don’t know if their mobile phone plan is good value, a new study shows.
The report by The Australia Institute shows Australians borrowed $274 billion through home loans last year and spent $226 billion on their credit cards – but questions how smart their decisions were.
It reveals about 70 per cent of Australians make irrational decisions about money and are either overconfident or overwhelmed by money matters or oblivious to sensible financial management.
Illustration: John Shakespeare
Yet most people, even those who admit to having been in financial difficulties in the past year, rate themselves as “better than average” money managers.
“Australians have an exaggerated self perception of their financial knowledge and decision-making skills,” the report says.
Based on an online survey of 1180 adults in October, the study shows education is not the main determinant of good or bad financial behaviour with the tertiary qualified almost as likely as early school leavers to make poor decisions.
Almost 30 per cent of those who describe themselves as “better than average” carry a credit card debt or have made other basic mistakes.
More than half those took out home loans recently had not considered that they might lose a job or become sick.
The survey found a minority – 22 per cent – paid credit card debts in full, compared phone plans and bought things they needed in sales. The report’s authors describe this group as “human calculators”.
The report says orthodox economics is based on the assumption that all adults act rationally, like human calculators. But the survey paints a different picture.
“Some people are hyper-vigilant about petrol prices but oblivious about paying $2 when withdrawing money from the ATM,” it says.
Alina Foulkes, 23, a business analyst from Paddington, estimates she is losing several hundred dollars a year by not shopping around for mobile phone and credit card plans.
“I just haven’t been proactive enough in scoping out the best deals,” she said. “It’s a time thing and it also seems too complex. If I knew it would take 10 minutes, then I’d do it.”
People aged over 55 were much more likely than younger people to be “human calculators”.
More than one-third of Australians lacked confidence in saving for retirement, while more than one-quarter had suffered financial difficulties in the past year – including 15 per cent of high income earners.
“The majority of low-income earners report being able to meet their financial obligations, while a significant minority of high-income earners do not,” the report says.
Over-confidence was a big cause of financial stress and led people to believe they could solve complex financial problems by themselves.
Irrational behaviour included people holding money in savings accounts earmarked for special purposes such as a wedding or holiday when they had not paid off their credit cards in full and faced more than 20 per cent in interest a year.
Irrationality extended to investment behaviour with people four times more likely to see a fall in share prices as an opportunity to invest than they were to see a fall in superannuation value as a similar opportunity, although most super funds were invested in shares.
“Only when we have admitted that it is difficult to be a human calculator … will it be possible to persuade more people to use the digital calculators lurking in their desk drawers,” it says, “or failing that, to call someone who enjoys the challenge.”
Adele Horan SMH 1.12.2010
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