ALMOST half of all Australian adults lack basic financial literacy with 8.5 million people struggling with saving, burrowing and risk management decisions.
And the ease of digital payments may be making it harder to track spending, says Professor Isabella Dobrescu, head of the UNSW’s School of Economics.
She says Australia ranks among the top 10 countries for financial literacy but almost half of adults (45% or 8.5 million people) still struggle to make informed decisions making them more vulnerable to debt, financial stress/abuse and to economic disruption.
“Millions of people do not have the basic knowledge needed to confidently decide how much to save, how much to borrow or how to manage financial risk,” she says.
“Financial literacy is not just an individual problem; it is a societal problem. We need to start building the national capability on this,” she says.
Prof. Dobrescu says financial literacy doesn’t mean becoming a financial expert; it starts with making daily decisions about money.
DEFINING LITERACY: The estimated Australian adult financial literacy was contained in an analysis of the University of Melbourne’s 2016 Household, Income and Labour Dynamics in Australia (HILDA) Survey. Respondents were considered financially literate if they correctly answered all three questions about interest, inflation and investment diversification.
“It is about understanding how to budget, how to save, how much to borrow and how to manage risk. It is about how you make decisions with your money, and so much broader than the stock market,” she says.
The professor says economic literacy allows people to make informed decisions that factor in broader economic conditions like interest rates, inflation and living costs.
“We live in a world of constraints. We have limited money, limited time, limited information and limited attention,” she says.
“Being economically literate helps you make the best in this constrained world, which is the real world.”
DIGITAL SPENDING’S ALMOST PAIN-FREE IMPACT
Prof. Dobrescu says the rise of digital payments like tap-and-go, digital wallets and online subscriptions can make it harder for people to track their spending.
“The biggest behavioural change has been removing the pain of paying,” she says.
“When we used cash, we saw the coins and notes leaving our wallets. Now we tap with a card, tap with a phone or click on a subscribe button.”
Prof. Dobrescu says these ‘painless’ transactions can make it harder to recognise their impact on account balances over time particularly with auto-renewed payments.
“Transactions happen so quickly that we do not always stop and think about the money leaving our account,” she says.
“When spending becomes less visible, it becomes harder to understand where our money is going and make informed decisions about how much to spend and save,” she says.
GIVE YOUR FINANCES REGULAR CHECK-UPS
To make spending more visible, Prof. Dobrescu says time should be set aside each month to review expenses and identify recurring, and unnecessary, payments.
“Take an hour, look at your expenses and understand where your money is going,” she says.
“It is about bringing some of that friction back and becoming more aware of the decisions you are making. It’s a time cost but it will pay off in the medium to long-term.”
She says financial health checks should begin some basic questions: Do you know where your money is going? Do you have an emergency buffer? Are you carrying high-interest debt? Do you understand your superannuation?
“Superannuation is a black box for many people,” she points out.
“They know money is going into it but they may not know how much they have, where it is invested, what insurance is included or whether it will be enough for retirement,” she says.
“The questions people should ask also depend on their stage of life,” Prof. Dobrescu says.
“In your 30s, you should be building the foundations; managing debt, establishing an emergency buffer and starting to take your superannuation seriously.
“Your 40s are a balancing act. You may have a mortgage, children or other caring responsibilities while needing to start thinking more seriously about retirement.”
By their 50s, Prof. Dobrescu says, people should better understand if their retirement savings is almost enough and the costs of future health or aged care.
“The foundations you put in place earlier in life matter but it is never too late to become more engaged with your finances,” she says.
