It’s no secret Australia is in the midst of a financial literacy crisis, but just how big of a problem is it?
Before we can decide how financially literate our young Aussie students are, it’s worth defining what it means to be financial literate. Financial literacy is "the ability to make informed decisions about your personal finances". This might sound a bit broad, but there are a number of ways to measure the extent to which people possess the skills and knowledge to make these decisions.
One of the most common methods, known as the Big-3, was created by the Household, Income and Labour Dynamics in Australia (HILDA). As a part of this system, individuals are given a 5-question test in the three major financial concepts: interest rates, inflation and diversification.
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 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.” (True or false?)
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.” (True or false?)
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, the same as today, or less than today with your income?
According to this survey, financially literate people will be able to get all five questions correct. That is, they would answer: $102, less, false, true, exactly the same.
Interestingly, but perhaps unsurprisingly, young Australians between ages 15 and 17 performed worse than their older counterparts. In 2016, 28% of teenage boys and 15% of teenage girls were able to pass this test. These levels are highly concerning given the fact young people are receiving more and more financial power. As a result, we are seeing worrying trends like young people taking on debt like BNPL earlier, saving much less and most importantly, lacking confidence in themselves to take care of their finances.
While the statistics are worrying, young people are not financially illiterate because they don’t want to be. 81% of surveyed Australian teenagers reported being interested in learning about managing their finances. So, it’s not a question of how we can motivate the youth of today to learn, rather, it’s about providing them with the resources to do so.
Consider sitting down with your class today and finding out how you can support them in becoming financially independent young adults today.