Understanding financial literacy. Why is it important?
Updated: Aug 18, 2022
Have you ever found yourself chatting away with someone and they suddenly bring up the topic of money management, leaving you feeling stressed or confused?
These feelings can come about due to numerous reasons. Primarily being:
You don’t feel knowledgeable about finances and lack financial literacy
You believe your personal finances aren’t a topic for conversation
You lack financial management skills and don’t want anyone to know
There’s no doubt that some discussions around personal finances aren’t warranted for general conversation. Though, there's a level of importance around financial literacy that every Australian needs to know. Not only for intermediate family conversations, but for self-development.
What is financial literacy?
Financial literacy is understanding the key factors of personal finances. This can lead to informed decisions surrounding finances and building or maintaining wealth. Factors that constitute personal finances include how to save, budgeting, understanding taxes, credit management, debt, investing, creating income and more.
A major premise behind this concept is that people can maintain a level of financial control to support their wealth goals or provide for the ones that they love.
Understanding the financial literacy of Australians
Numerous studies have been conducted to understand where Australians are positioned in relation to financial literacy and financial management. A 2020 presentation from The University of Western Australia, highlighted that only 55% of Australians are financially literate. While above the global average, this percentage is still concerning.
There were various discrepancies regarding the financial literacy of Australians from this presentation. Some notable trends were:
63% of males are reported to be literate compared to 48% of females
40.5% of women from non-English speaking backgrounds (in Australia) are financially literate, whereas 49.2% of Australian born women are literate
Younger Australians are the least literate, and the rate increases with age and drops again for the elderly population
With many young people lacking financial literacy skills, there's concern the Australian education system is partly to blame. An article composed by two lectures from the University of The Sunshine Coast identified a gap in financial literacy within the curriculum. Students aren't being taught financial management tools, and with no strand of education specific to this topic, they're expected to learn simple finance and mathematics.
Why is it important?
Learning financial literacy, especially from an early age, is important for developing skills that allow you to make informed financial decisions. There are numerous reasons why financial literacy is important and we’ve listed a few of them below:
You have greater control of your finances
Financial control can make you feel like you’re more prepared for expenses and emergency situations. Rather than feeling out of pocket, you'll have funds available to you.
Improved money management
Money management/ financial management can allow you to take on debts (i.e., home loans and personal loans) and pay them off without the risk of going into bankruptcy and impacting your ability to acquire future loans. Further to this, you'll know how to protect yourself and your assets.
You gain a wealth of knowledge
This knowledge can lead to informed decision making surrounding suitable interest rates, offers, and discounts. With this, you'll not feel like you’re left paying more than you necessarily need to.
You learn ways to make your money work for you
When you become financially literate, you understand the basics of the tax system and investing. Investing in passive income producing assets can help you to create an additional income that can support you in the long term and eventually produce more than an earned income. There are various strategies for investing. Our favourite is real estate.
How to improve your financial literacy
It’s never too late to learn new skills. In fact, we’re learning something new every day. There are various ways to learn or improve your financial literacy. You should do this constantly as the world is forever evolving.
- Understand the basics of budgeting
- Subscribe to financial newsletters
- Listen to finance related podcasts (there are some fun and engaging ones out there)
- Read personal finance and self-development books
- Engage with financial tools and resources on social media
- Talk to finance experts