Have you ever had a conversation with someone who swears that school was completely useless? Looking back, I think there is actually a point to be made – albeit, embedded deep within a statement that is often used for shock value.

Age may have gotten the better of me, but I simply cannot recall ever sitting in a financial literacy class at school. Unless you studied a relevant ATAR subject (accounting or economics perhaps), concepts such as superannuation, taxes and the share market remained largely vague upon graduation.

As it turns out, this can have implications that resonate throughout the country.

Can you answer these five questions?

The 2020 Household, Income and Labour Dynamics in Australia (HILDA) survey on financial literacy tests participants by asking the below five questions.

  1. Interest rates: Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made? 
  2. Inflation: Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account? 
  3. Diversification: Buying shares in a single company usually provides a safer return than buying shares in a number of different companies. (True or false?) 
  4. Risk: An investment with a high return is likely to be high risk. (True or false?) 
  5. Money illusion: Suppose that by the year 2024 your income has doubled, but the prices of all of the things you buy have also doubled. In 2024, will you be able to buy more than today, exactly the same as today, or less than today with your income? 

The results

To the avid investor these may appear overly simplistic, however, many may be surprised by the results.

In this case, a score of 100% was required to be deemed as financially literate. The average number of correct answers for both men and women fell from the previous survey in 2016, with women experiencing the sharpest decline.

On average, men were able to answer 4 out of 5 questions correctly whilst the average woman answered 3.5. Surprisingly, those aged 15 to 24 had the largest decline in financial literacy of all age groups. The average correct score fell from 3.4 in 2016 to 2.9 in 2020. Amongst the G20 countries, Aussie women demonstrated the second-highest gap between men and women.

The unavoidable conclusion that HILDA found is that Australia has made no progress towards improvement since 2016, and in fact has gone backwards.

Figure 1: Mean score on financial literacy test, 2016 and 2020. Source: HILDA Statistical Report. 2022.

Does this constitute a national crisis? Perhaps. We make financial decisions every second of every day – even when we don’t realise it. Buying that $6 latte is just as much a financial decision as salary sacrificing is, although with a varying weight to respective outcomes.

How it effects young Australians

Now, do informed people make better investment decisions? As it turns out, that is not always the case. But for all intents and purposes, financial literacy is foundational for individuals seeking to build wealth in modern Australia. Literacy bridges the income inequality gap as well as leads to higher levels of financial well being.

Would you withdraw your super for a deposit?

The Super-for-housing scheme is a prime example of how financial literacy plays into ultimate decision making. In an effort to battle the housing crisis in Australia, the Coalition’s scheme proposed taking money out of superannuation to aid first home buyers reach their deposit requirements.

Aussies followed suit and drained a collective $38 billion from super accounts. Multiple consequent studies show that the implications of this choice will have a detrimental impact on individual retirement outcomes over the next few decades. Arguably, this policy undermines the purpose of superannuation and also encourages poor investor behaviour.

The consequent surge in property demand from people with access to their super balances, only pushed house prices further up. In Shani’s article Super should not fund housing, she explains that Morningstar models estimate a 30-year old couple partaking in this policy and retiring at 65 would have $635,800 less in super.

Weighting up the decision to withdraw retirement funds to purchase a property requires a reasonable level of financial literacy and I’d argue that many weren’t in a position to understand the implications on their future super balances.

HECS debt piles up

Currently there stands ~$78 billion of outstanding Higher Education Contribution Scheme (“HECS”) debt across the country. Although many countries engage in the practice of student loan debt, I’ve always thought it odd that we allow 18-year-olds to commit to significant levels of debt after simply reviewing a brochure.

At no stage is there a formal discussion with an advisor regarding the financial implications and eventual repayment obligations. This is not intended as a critique of HECS or university attendance; however, given that this age group has consistently demonstrated the lowest levels of financial literacy, one might expect mechanisms in place to better support such a substantial decision.

Naturally, there are consequences to enabling access to debt, despite lower levels of financial literacy in the demographic. A study from Curtin University found that young Australians are pressured by financial obligations (such as HECS), worsening mental health and declining trust in political institutions amidst a cost of living crisis. There have been calls for an overhaul of the system across a wide range of political perspectives. Low financial literacy can have detrimental impacts on younger generations that commit to life-long debt without understanding the implications.

Poor investment decisions

Young investors often approach the market with a ‘get rich quick’ mentality – a flaw that I can certainly relate to. A study looking at whether financial literacy had an impact on financial outcomes, found that low literacy led to lower portfolio returns.

Figure 2: Financial literacy and portfolio returns. Source: Financial literacy and vulnerability: lessons from actual investment decisions. Milo Bianchi. 2018.

As noted by the HILDA survey, it appears no progress has been made over the last few years. With the Federal election upon us, how can we expect constituents to make impactful decisions, without having the literacy to understand how it effects their finances?

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