Are you financially literate?

LIFE did not change radically on the day I learned the Rule of 72. But it certainly made a little more sense.

The Rule of 72 is a neat mathematical shortcut for figuring out how many years it will take for an amount to double, given a fixed annual rate of interest. All you have to do is divide 72 by the rate of return or interest. So if your time deposit earns six percent, for example, this means you'll have to wait 12 years to get double your original amount.

Let's say you managed to keep your hands off your yearend bonuses in 2007, and you estimate that you'll need double that amount in eight years—when your eldest starts college, or when you want to have enough for a down payment on a house. Divide 72 by eight, and the rule suggests that you'll have to find a way for that money to grow at nine percent interest each year.

Those of you who studied business or learned about investing while still in the pits of puberty are probably appalled that something so basic could have escaped a grown woman for so long. You'd be surprised. I did a quick informal poll of 10 of the smartest people I know—all of them well into their thirties, which is why they shall go unnamed here—and only one knew the Rule of 72. One! (Granted, most of the lovely people I know are humanities types.)

Of course, we all need a lot more than the Rule of 72 to make better decisions concerning our savings, spending, budgeting and retirement plans. One doesn't learn overnight the value of patience, or the need to avoid making financial decisions based on fear, or why dividend reinvestment will make you feel better, in the long run, than the fleeting pleasures of retail therapy.

But realizing how little one knows about the basics of financial literacy helps, for starters. We know that about 84 percent of all Filipinos were found functionally literate (meaning they weren't "innumerate") as of 2003. No one measures financial literacy, but one indicator could be our savings—and here the figures are dismal indeed.

Throughout the 1990's, Indonesia had a lower per capita income than the Philippines. But in the entire decade, we reported a higher gross domestic savings (GDS) rate—savings as a percentage of GDP—only once, in 1999, compared to Indonesia. In that year, our GDS stood at 19.8 percent, compared to Indonesia's 13.2 percent. In contrast, Thailand reported a GDS of 35.4 percent; Malaysia, 37.7 percent; and Singapore, 51.2 percent. For all the other nine years, Indonesians saved more than we did—even if their pay packets, on average, were thinner than ours.

"Money is better than poverty, if only for financial reasons," Woody Allen has said. We may have limited or no influence over some strategies that can raise a country's ability to save, such as land redistribution and rationalizing population growth. But we can certainly begin with ourselves and our households, and the start of a year is a great time for setting or reviewing financial goals.

(Appears in the Op-Ed pages of today's Sun.Star Cebu.)