Australians’ relatively weak level of financial literacy played a part in the difficulties households have had managing the rising cost of living over the past year, with a number of reports highlighting its role in challenges managing household budgets, retirement and general ‘financial wellness’.
A question for policymakers and financial institutions is why the investment in financial literacy programs and the growth in personal financial management tools has had no positive impact.
The most recent edition of the Melbourne Institute’s Household, Income and Labour Dynamics in Australia (HILDA) Survey, released at the end of last year, shows the scores of people of all ages dropping in a test that asks five relatively straightforward questions covering numeracy, understanding of inflation, diversification, risk and return, and “money illusion”.
Men scored an average of 4 (out of 5), compared with a score of 4.1 in 2016. Women scored 3.5 – down from 3.7 in 2016.
The lowest score was recorded by 15 to 24 year-olds, with an average of 2.9 – down from 3.4 in 2016. The highest scores were recorded by 45 to 54 year-olds and 55 to 64 year-olds. In both groups the average was 4.1 – down from 4.2 in 2016.
In its analysis, the report said: “The unavoidable conclusion is that no progress has been made on improving the financial literacy of the Australian population since 2016.”
It said the importance of financial literacy is that it correlates with financial wellbeing. The survey found financial wellbeing is higher among people with higher levels of financial literacy. And it suggested that low financial literacy could be a cause of poor economic outcomes.
Other research has come to similar conclusions. A University of Newcastle survey commissioned by Greater Bank last year found that only a quarter of respondents were able to correctly answer all five financial literacy questions, which covered interest rates, inflation, diversification, risk and the time value of money.
Your Financial Wellness published survey results in March, reporting that only 20 per cent of respondents could correctly answer three financial literacy questions.
Your Financial Wellness chief executive Alex Hassall said: “This lack of financial knowledge leads to higher financial stress and difficulty making sound financial decisions.”
In May, Canstar released the results of a survey showing most Australian (60 per cent) considered themselves financially literate. However, 46 per cent failed its 21-question TestMyMoneyIQ quiz.
In line with the results of other surveys, women did worse than men and young people did worse than old.
Canstar said: “Financial education won’t solve the cost of living crisis, but it can go a long way to improving people’s bottom line. Understanding basic money principles and putting them into practice on things such as everyday bills can be an easy way for people to claw back some much-needed savings.
“For instance, 73 per cent of Australians believe that if a credit card offers an interest-free period of 55 days, it generally means that you don’t pay interest on any purchase until 55 days after you buy the time. That is not the case and not understanding this concept could mean people end up paying more interest than they bargained for.”
In September, AMP published research linking poor financial literacy with the challenges most Australians have navigating the retirement system.
AMP surveyed people over age 50 about retirement issues. Seventy per cent did not know what an account-based pension was and 40 per cent did not know if they were eligible for an age pension.
AMP found that people are very uncertain about the right level of retirement spending, a question made more difficult by considerations such as whether to help children with a home loan deposit and whether to use a reverse mortgage or the home downsizer scheme.
The previous government launched a National Financial Capability Strategy in February 2022 but had not done much about it when it lost the election three months later. The current government does not appear to have taken up the program.