Our financial literacy crisis: can you answer these 5 money questions?

I’m convinced this constitutes a national crisis. I think governments are entirely to blame. And I’m very worried about what these declining levels of financial literacy will mean for both future inequality and financial stability. More on that later.

First, perhaps you’d like to test yourself? Here are the five questions researchers posed, along with the percentage of men and women who were able to correctly answer them in the 2016 survey (no breakdown is available yet for 2020).

Answers at the bottom of this column. No cheating…

Question 1. Numeracy [Male: 90.7%; Female: 79.5%]

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?

Question 2. Inflation [Male: 77%; Female: 63.8%]

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?

Question 3. Diversification [Male: 77.4%; Female:72.6%]

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?)

Question 4. Risk–return [Male: 87.8%; Female 79.4%]

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?)

Question 5. Money illusion [Male: 77.5%; Female 73.3%]

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? [updated to the year 2024 in the 2020 survey]

According to Professor Alison Preston of the UWA Business School, for a person to be considered financially literate, they need to at least be able to answer all three of the first three questions correctly.

In 2016, only 55 per cent of Australians could do so, leaving 45 per cent of Australians aged over 15 meeting the definition of “financially illiterate”. That’s approximately 8.5 million financially illiterate Australians, and climbing in the latest results.

“The unavoidable conclusion,” according to the latest HILDA report, “is that no progress has been made on improving the financial literacy of the Australian population since 2016, and in fact we have gone backwards.”

So, what is being done?

Well, if you answered “not a lot” to this question, you’d be correct.

At a federal government level, there has been an awful lot of navel-gazing and report-writing about the best definition of financial literacy, be it “financial capability” or “financial wellness”.

Under the previous federal government, responsibility for “financial capability” was stripped away from the corporate regulator and transferred to Treasury.

Treasury wrote a fancy report finalised just before the last election concluding, among other things, that new “consumer data rights” laws will give consumers better visibility of their finances and lead to better decision-making.

ASIC still runs the MoneySmart website which has some great financial calculators and tools, but is clunky and outdated.

State governments, of course, remain largely responsible for deciding the school curriculum. There is a not-for-profit, grant-making national body called Ecstra, which has designed a new “Talk Money” program for schools, but it runs on an opt-in basis and is limited in scope.

If it were up to me, I’d design a taxpayer-funded, nationwide schools-based financial literacy program similar to the Life Education Australia program (remember the giraffe?!). Rather than burdening already stressed teachers with responsibility for teaching money concepts, kids of all ages would be whisked away from school for one day each year to engage with age-appropriate activities to build their financial know-how throughout their school years.

At the urging of consumer groups, private banks have been kicked out of the schools sector, including the Commonwealth Bank’s “Dollarmite” program. But in the haste to eject the private sector, little has been done to fill the void.

As things stand, governments are failing in their duty to ensure Australians are equipped with the financial capabilities they will need to navigate an increasingly complex world.

Not only will this contribute to a more unequal society, but a riskier one, too, if ill-informed consumers make poor financial decisions, either by over-leveraging or falling for financial scams.

Of course there would be costs involved in designing and delivering a world-class, nationwide money education program.

If we don’t, however, the costs of financial illiteracy will be borne by those who can least afford it.

[Correct answers: Q1 $102; Q2 Less; Q3 False; Q4 True; Q5 Exactly the same]

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