Chase home finance foreclosure

1 Introduction

'Astute savers are distinguished by the diversity of the assets to which they allocate their funds, and the dynamic manner in which they manage their investments': so Connelly (2001, p. 7) characterises people with investment literacy. Financial literacy, however, is a broader concept for which the terminology has possibly only been in existence for a decade or so.

Financial literacy was defined in the UK by Noctor, Stoney and Stradling (1992) as 'the ability to make informed judgements and to take effective decisions regarding the use and management of money'. Schagen and Lines (1996, p. 91) operationalised this definition by proposing that a financially-literate person would enjoy a range of abilities and attitudes comprising:

* an understanding of the key concepts central to money management;

* a working knowledge of financial institutions, systems and services;

* a range of [analytical and synthetical] skills, both general and specific;

* attitudes which ...allow effective and responsible management of financial affairs.

Notwithstanding the exact definition of, and the skills required for, financial literacy, commentators throughout the developed world during the last decade have warned of insufficient personal financial literacy. Having financial skills has become more important as financial markets have been deregulated and credit has become easier to obtain as financial institutions compete strongly with each other for market share. Additionally, the easy issue and ubiquitous acceptance of credit cards have facilitated spending on consumption. Moreover, the development and marketing of financial products has burgeoned, people have been encouraged to invest directly by means of the internet and discussion of financial strategies has become part of everyday conversation. Furthermore, governments world-wide are moving down the path of encouraging their citizens to take more responsibility for their retirement incomes and to move away from public pensions. Employers are equally trying to shed the responsibility and risk associ ated with defined-benefit retirement schemes by changing to defined-contribution accumulation schemes where beneficiaries are responsible for their own investment strategies and eventual retirement benefits.

Symptoms of insufficient personal financial literacy include rising individual debt levels with overuse of credit cards, using personal loans for consumption and undertaking over-optimistic home-loan obligations, irresponsible overspending on consumption, foolish commitment to get-rich-quick schemes, making unwise high-risk investments inconsistent with required capital stability and entering inappropriate vehicle-leasing contracts, among others. On a more mundane level, people on lower incomes often make unwise commitments to mobile-telephone contracts, buy now-pay later purchases, long-term exercise-centre contracts and expensive diet plans.

In the UK early in the 1990s, many people including Mannion (1992) warned of dramatic increases in personal debt levels. The NatWest (Banking) Group established a charitable fund in 1994 to make a significant contribution to the society in which it operated. One of its first projects was to investigate financial literacy and to consider how an educational program might be fitted into the secondary school curriculum (Schagen and Lines, 1996). Following the publication of the findings of that research, NatWest sponsored a new financial literacy scheme for secondary schools (Edwards, 1997, p. X).

In the USA, the Federal Reserve Board was so concerned with the lack of basic financial skills among high-school leavers that in 1995 it funded the Jump$tart Coalition for Personal Financial Literacy (www.jumpstart.org, August 2002). Chase Manhattan Bank has taken up the cause of promoting the improvement of financial literacy by subsidising financial education. Since 1998, the Bank has spent $US5.5 million on 170 grants to programs which deliver financial education (Education USA, 19 February 2001, p. 8). Alan Greenspan, the chairman of the US Federal Reserve Board, views financial literacy as 'a tool for economic progress' and a means to prevent 'abusive lending practices that target...vulnerable segments of the population...[which] result in unaffordable payments, equity stripping and foreclosure' (Greenspan, 2002, p. 41).

Australians are not immune to the financial illiteracy problem and symptoms here, just as elsewhere, abound. Household debt has risen much faster than household disposable income; in 1992, the ratio of household debt to disposable income was about 1:2 or 50% but, by 2002, this value had risen to 1.1:1 or 110% (RBA, 2002, p. 20). Uninformed people fall prey to financial scams. The Australian Securities and Investments Commission (ASIC), set up to promote confidence in the financial system and to protect financial consumers, maintains an informative web site with a special education section known as 'fido' to try to protect consumers (http://fido.asic.gov.au, August 2002).

As is apparently the case in many other developed countries, the education system in Australia outside the dedicated business, finance and economics courses at tertiary level appears to put little emphasis on financial education so that high-school leavers are little prepared for the major, and minor, financial decisions in life. Anecdotally, people gain their financial knowledge largely through trial and error.

This research was undertaken as the prelude to a larger project to determine the financial literacy of the Australian population. Measuring the current state of preparedness provides a benchmark against which any improvements gained through financial education programs may be measured at a later stage. Additionally, the research instrument was structured so that the areas most or least in need of improvement were highlighted. The cohort sampled as the research population was the student body at the University of Southern Queensland (USQ) located at Toowoomba in south-east Queensland.

This paper briefly reviews the financial literacy literature in the next section. The following section reports the research methodology in terms of the data collection and analytical method. The penultimate section reports the findings and discusses the results and the final section concludes.

2 Brief Review of the Literature

The financial literacy literature may be readily classified into two classes: evaluations of individual financial literacy education programs and tests of financial literacy among differing cohorts or populations. Huddleston and Danes (1999) examined the impact of a high-school financial planning program on a national sample of students in the USA. They found that teaching personal finance (PF) in high schools can increase financial knowledge and have a positive impact on both teenage financial behaviour and subsequent behaviour as adults. Further, they urged that PF become a mandatory component of consumer education in schools (Huddleston and Danes, 1999). At that time, only seven states of the 50 in the US required such programs.

Chatzky (2002), when commenting on the PF education of American teenagers, agreed that the majority are not getting such education, but even those that are being exposed to money matters do not appear to retain much of the content. She relied on evidence that the average high-school senior was able to answer only 50% of 31 Jump$tart Coalition for Personal Financial Literacy multi-choice PF questions correctly, whilst students who had completed a money-management course were only able to answer 48% correctly. After investigating what may have 'gone wrong' with the program, she suggested the following: PF education does not have 'a home' in US schools and high school is too late to start to teach it.

In some US schools, PF is taught as consumer economics, in others as economics, in some others as social studies and in others again as mathematics. In some schools, the first three disciplines are electives and, in others, the mathematics stream is divided into high and low streams with PF typically being in the low stream. Many students miss out, and high achievers have a high chance of missing such education, yet they are the students who later typically have to deal with repaying student loans. On the timing of PF education, Chatzky (2002) argued that financial education is more effective before people start to practise, yet 7% of US teenagers have their own credit cards and 18% have access to their parents' cards.