Financial literacy: Whose responsibility is it anyway?

Financial literacy in Australia is an industry-wide problem.

It seems that even being a Dollarmite wasn’t enough to ensure our entire country built healthy savings habits, empowering us to make responsible financial decisions and avoiding financial strife by contributing to our savings, or super, rather than buying more avocado on toast than we can really afford, or sticking yet another purchase on Afterpay.

With household debt to disposable income ratio reaching a record 189.7% in March, we explore the role of financial education in contributing to this situation and what you can do to help.

Why should you care?

At Yell, we passionately believe that the financial services industry has the capacity and responsibility to make Australians’ lives better. Whether protecting or growing wealth, or enabling asset ownership, our industry should take an empowering role in our lives, helping us make informed decisions. The right decisions.

We believe that if falls to organisations that provide financial products and services, to provide the clarity and tools to support Australians as they educate themselves about their next decision.

And now we’ll tell you why.

How bad is it?

Launched in 2001, the HILDA survey tracks more than 17,500 people in 9,500 households throughout their lives, gathering data about their family life, health and economic wellbeing. And this year it included a report on financial literacy.

Five questions were asked about basic financial concepts:

1. 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. Imagine now that the interest rate on your savings account was 1 per cent 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. Do you think that the following statement is true or false? “Buying shares in a single company usually provides a safer return than buying shares in a number of different companies.”

4. Again, please tell me whether you think the following statement is true or false: “An investment with a high return is likely to be high risk.”

5. Suppose that by the year 2020 your income has doubled, but the prices of all of the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?

*Answers at the end of this blog (like you need them…)

If you are reading this, then we’d hope that you have sufficient financial nous to breeze through those questions with no issues.

But the results showed that fewer than half of all Australians could answer all five questions correctly. And the gender gap was significant. While 50% of men managed to score 5/5, only 35% of women did the same.

Why does financial literacy matter?

The survey found low financial literacy translates directly to poor financial health. For instance, poverty rates among the least financially literate are twice as high as the most literate group.

Those with low financial literacy are also less likely to get involved in household budget decisions, have a lower propensity to save, and are consequently more vulnerable to experiencing financial stress (ASIC: 18.5% of consumers are overwhelmed by credit card debt), which contributes to psychological stress (2015 Australian Psychological Society stress and wellbeing survey: money stress is a leading cause of anxiety and depression in adults) and a lower quality of lie.

Poor financial health has an impact both on the wider economy and on our capacity to use our disposable income to invest, save and grow our wealth – or even simply stay out of financial strife. It’s both a social and commercial imperative that Australians are better financially educated.

The situation looks to be continuing onto the next generation

The HILDA survey also reveals 15 to 24-year-olds are the least financially literate in the country. Of course, this can be partially attributed to the inexperience of youth in interacting with money, but it means that they may be doomed to repeat the same mistakes as the generation before them.

Credit is now more attainable than ever for young people thanks to services like Afterpay and Zip Pay, and this easily-attainable credit may present more of a danger than an opportunity for younger consumers. 44% of ‘buy now, pay later customers’ currently earn an income of less than $40,000 a year, and 24% of Afterpay’s revenue came from late payment fees.

So, whose responsibility is it to ensure that young people are financially literate and not making bad decisions that could have a long-term effect on their financial wellbeing?

Certainly, it doesn’t seem like parents can be relied upon to pass on healthy financial habits to their children if they themselves have limited financial literacy themselves.

Fintechs come to the fore

A range of start-ups have sprung up to try and ensure that Australia’s next generation is better armed.

Spriggy is aimed at 7-17-year-olds and aims to ‘teach young people the value of money’, with digital pocket money payments that parents can monitor and control.

Pocket money schedules can be set-up, so funds are capped at regular intervals and setting savings goals are encouraged. The onus, however, is on kids to self-regulate their spending, to ensure that they build healthy habits.

Making financial education relatable

What we like about Spriggy is the practical application of learning, rather than relying on theories and generic examples.

‘The Barefoot Investor’, Scott Pape, relates a story of how he connects with school groups when talking to them about financial literacy.

“At the start of my speech I ask the kids to put up their hands if they were interested in learning about financial literacy. After a few moments of the teenagers staring blankly at me, I ask another question: “Who wants to buy a car when they turn 18?” Immediately all the boys (and most of the girls) put their hands up.

From this point I have the class eating off my every word. Suddenly the mundane has become mandatory and they were full of questions about how to achieve it.

The answer to getting to their dream is, of course, by mastering simple lessons: learning how to set goals, following a savings plan, steering clear of debt and learning about investing.”

Improving financial literacy for all Australians should be seen as an opportunity

Raddon Research Insights found that financial education marketing programs create customers who are both more engaged and more profitable for banks.

Australian financial institutions are undoubtedly trying to educate their customers. More information is available to help consumer make decisions than ever before. The age of information asymmetry is over.

But too much information can be overwhelming. It can be more difficult to make a decision when you are aware of the consequences of making a ‘bad’ decision.

Those who were once relied upon to guide ordinary Australian towards make better financial decisions – the Advice segment – has been the subject of significant criticism in the Hayne Royal Commission, which means that customers are increasingly feeling like they are on their own.

What can you do to help?

The first thing that all organisations can do is to make sure that the information they are providing customers and potential customers not only tells them about their products, but helps them to understand whether the product is really right for them.

We’re not talking about a Compliance-worded PDS that means little to the average consumer here, but rather fundamental content about what your product does, written in a way that everyone can understand. This may mean using language or examples that seem overly-simple to you, but that is often what it takes to communicate with people whose mother tongue is not Finglish. For the Barefoot Investor, this meant talking to schoolkids about saving for a car. What would this be for your organisation?

The second thing you can do is to provide tools and calculators where appropriate to help consumers see the real effects of their decision, based on their circumstances. The more tangible it is, and the more personalised it is to their situation, the more likely they are to really understand how the decision will affect them.

Raising financial awareness and confidence can help improve the financial literacy of all of Australia, to ensure we’re all better able to participate in the economy. Financially knowledgeable people are far more valuable to the finance sector, which is a win-win for everyone.

* Quiz answers

1. $102
2. Less
3. False
4. True.
5. Exactly the same.