Top financial terms which are misunderstood

More than half (58%) of South Africans do not understand financial terms, says Columinte, an online research specialist. Columinte released its Financial Jargon Survey and found that many financial terms, such as assets, liabilities and hedge funds are not understood, despite the fact that many South Africans claim to understand their finances relatively well.
 
The study aimed to establish consumers’ understanding of financial terms which are commonly used in the financial industry. The study surveyed over 1 000 South Africans, who each hold at least one financial product.
 
“We conducted this study to assess the state of financial literacy in South Africa, and to raise awareness of the importance of being clear when communicating about financial matters,” said Henk Pretorius, CEO of Columinate.
 
The survey included terminology that has become commonplace in the banking, short-term insurance, long-term insurance and investment, and medical aid industries. Consumers were asked about their financial practices and then had to match terms to definitions, ranging from the familiar terms, such as electronic fund transfer (EFT), to less obvious investment terms such as hedge fund.
 
The findings
 
Pretorius said: “72% of respondents are focused on taking care of their families’ everyday needs, whilst a staggering 74% concentrate their efforts on becoming debt free. While these goals are admirable, only 45% of respondents are investing in education, whether for themselves or their family.”
 
Even though nearly half of the respondents (47%) claimed to have a moderate understanding of their personal finances, and 42% of respondents claimed they have a high understanding, an overwhelming majority (67%) spend only one to two hours per week on their finances.
 
The study also revealed that very few South Africans have sensible financial habits, where only 32% of respondents set financial goals for themselves, and 55% of respondents do not track their expenses.
 
“We also can’t help but wonder if the lack of consumers’ understanding in terms of their financial matters has a direct impact on South Africans financial goals,” said Pretorius.
 
The findings come after Justmoney published an article on the top ten financial mistakes many people make, click here.
 
Confusing terms
 
The survey found that the most confusing terms had to do with investment. Terms like equity (only 20% correct) and hedge fund (only 13%) were poorly understood.
 
Furthermore, the survey highlighted that a large proportion of respondents did not understand terms overdraft (23% incorrect) and assets (46% incorrect).
 
Pretorius warned that there are also challenges in specific parts of the financial services industry where consumers are likely to fail to distinguish between distinct terms. “In the short-term insurance industry home contents and buildings insurance were often mistaken for one another. The worst-case result of this confusion is a consumer that is not adequately insured for something they think they are covered for,” said Pretorius.
 
The survey didn’t show any specific consumer segment performing better than another, however, it was clear that younger and less affluent consumers were least likely to get beyond the 75% pass mark for their knowledge of financial jargon.
 
“Considering that younger consumers are those most likely to take out new financial products and services this heightens the importance of educating this segment of the market to allow them to make sound financial decisions.
 
“The low level of financial literacy and lack of good financial practices mean that consumers are at risk of various negative consequences, such as being unprotected against future risks, and unable to create financial prosperity. This serves as a wake-up call to both consumers and the financial industry alike,” said Pretorius.
 
Financial education
 
The survey aligns with the Financial Services Board’s (FSBs) suggestion that there is an irregularity in information available to consumers. The Financial Planning Institute (FPI) and FSB collaborated in order to create awareness on the rights and responsibilities of consumers, personal financial management, as well as the overall distribution of financial education.
 
However, the Professional Provident Society (PPS) confidence report shows that many people believe that there is a link between unemployment and financial literacy in South Africa.
 
“There definitely seems to be a link between unemployment and financial literacy. The FSB report found that employed people were significantly more financially literate than unemployed people,” said Macy Seperepere manager of the professional associates at PPS.
 
“When PPS Professional Confidence Index (PCI) respondents were asked about their confidence that unemployment in South Africa will improve over the next five years, a confidence level of 38% was recorded,” said Seperepere.
 
Furthermore, the PCI showed low levels of confidence in the South African education system also leading to poor financial literacy. PCI respondents revealed a confidence level of only 46% in the standard of education in South Africa at a basic school level over the next five years, while a confidence level of 60% was recorded when the same question was asked for tertiary institutions.
 
“These confidence levels are incredibly low and justify the low level of financial literacy, as this is where education about financial matters should begin,” said Seperepere.
 
The top four banks – Absa, Nedbank, First National Bank, and Standard Bank – do offer some forms of financial education, however, they are normally to help with investment terms and how to invest online. Nedbank does offer a financial tool for younger children to help them better understand how to budget, save, and the value of money, called My Money Map.