If you struggle with financial literacy, you're not alone

By Candice Chung

What is HILDA? Launched in 2001 by the University of Melbourne, the survey follows the same group of Australians over the course of their lives – and it’s now tracking more than 17,500 people in 9500 households, gathering data about their family life, health and economic wellbeing.

What makes HILDA unique is that it provides a running narrative on how Australian life evolves over time. Whereas other national surveys may give a colourful cross-sectional snapshot of the population, HILDA’s long-term nature means it can measure issues such as changes in social attitudes and intergenerational advantages and disadvantages – making it a rich data source for policymakers.

For the first time, in its 18th year, the survey has reported on financial literacy. Five questions were asked about basic financial concepts such as inflation, calculating interest and portfolio diversification. The scores were then broken down by age group, gender and other socioeconomic factors and compared against their respective financial outcomes.

How financially literate are Australians?

Fewer than half of all Australians could answer all five basic financial questions correctly. Of particular concern is the large gender gap in the results. While 50 per cent of men managed to score a perfect five, only 35 per cent of women did the same.

“I was struck by the difference between men and women in the measure of financial literacy we included in the latest report,” says Professor Roger Wilkins of the Melbourne Institute of Applied Economic and Social Research and deputy director of the HILDA survey. “That wasn’t something I expected.”

Wilkins believes the gender divide is more likely a reflection of social and behavioural factors than any real differences in innate abilities.

“Men [tend to] take more interest in money matters, which might reflect traditional gender roles and gender norms more than anything else,” he says. Another key factor is the gendered difference in response style. 

“Women [are] more likely to say they don’t know the answer, rather than giving an incorrect answer,” Wilkins says.

Why does it matter? The survey found low financial literacy usually translates 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.

 

"If you’re in a household that has a passion for financial education, then you’re much more likely to value it. Not only will you end up learning more about how to manage your money well, you’ll also generate more wealth.” 

 

Age is another factor that plays into financial literacy. The survey found young people under the age of 25 are the least financially literate, with only 24 per cent answering all five questions correctly, compared to 55 per cent for those approaching retirement age.

“One reason is that these concepts become more relevant to you the more money you have,” says Wilkins. “That said, there may be an argument for specific programs at a school level to improve financial literacy among young people.”

Financial literacy as a force multiplier

In recent years, a number of national studies have consistently shown Australians’ financial literacy is generally poor. The Australian Securities and Investments Commission’s (ASIC) 2017 Financial Capability Survey reveals only 35 per cent of all Australians know the exact value of their superannuation. 

Deloitte Access Economics’ 2018 Financial Consciousness Index found nearly one-third of the population is “financially vulnerable” – concerned by a lack of job security and the ability to retire comfortably at the age of 65.

“Education is massively important,” says Mark Tanner, associate lecturer in finance at the University of Queensland Business School. 

“If you’re in a household that has a passion for financial education, then you’re much more likely to value it. Not only will you end up learning more about how to manage your money well, you’ll also generate more wealth. It’s a real multiplier.”

Wilkins agrees: “The more disadvantaged you are, the lower your financial literacy.”

The HILDA survey reveals socio-economic factors such as household wealth are strongly associated with people’s comfort with money. This is because those with little to save or invest are naturally less inclined to take an interest in concepts such as diversification and risk-return trade-off.

What we know vs what we do

Knowledge alone isn’t enough to improve someone’s financial health. “What’s important isn’t just the literacy, but what you can do with it,” says Tanner. 

As mentioned, one key finding from the HILDA survey is that people who have the highest financial literacy seem to be those who are nearing retirement. Tanner’s hypothesis is that they are the group most engaged with their super funds, thus making them more focused on financial matters. 

The bottom line? “You have to translate that knowledge into behaviour,” says Tanner.

Currently, there are plans to quiz HILDA respondents on financial literacy again in 2020. 

“A design feature of HILDA is that the data becomes more valuable the longer the study runs because we’re building up a bigger picture of each person’s life story,” says Wilkins. The next goal would be to find out whose financial literacy improved, and what factors might be predictive of that change.

Take the quiz: HILDA survey of financial literacy

The following five questions were asked to measure the financial literacy of Australian households. (Answers at the bottom of the page.)

1. Suppose you put A$100 into a no-fee savings account, with a guaranteed interest rate of 2 per cent 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 cent 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?

Quiz answers

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