According to the OECD International Network on Financial Education, financial literacy is defined as ’a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing’.

With the above in mind, when it comes to achieving your financial goals and objectives, financial literacy plays an important ongoing role. For example, consider for a moment the effect its absence or presence has had on your life as you have navigated your way through the personal finance environment as:

• An individual, a partnership and a family unit.
• A wealth accumulator or retiree.

This is one of the reasons why we believe in providing you with a safe place to improve upon your financial literacy – the Financial Knowledge Centre can help you to learn about areas of your personal finances in a variety of formats (e.g. learning modules, articles, videos, calculators, and quizzes).

The Household, Income and Labour Dynamics in Australia (HILDA) Survey

The HILDA Survey follows the lives of over 17,000 Australians each year, collecting information on many aspects of life, such as household and family relationships, income and employment, and health and education, which in turn can be used to inform public policy moving forward.

One of the areas of focus in the 2018 HILDA Survey was the collection of information pertaining to the financial literacy of Australians. This was undertaken via the provision of a 5-question quiz, which covered several key areas, i.e. numeracy, inflation, portfolio diversification, risk versus returns, and money illusion.

Without skipping too far ahead, less than 50% of those that completed the quiz were able to answer all five questions correctly. As such, we have included the quiz below. See how you go. The correct answers can be found at the end of this article.

1. Numeracy. 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. Inflation. 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? (More, exactly the same or less?)

3. Portfolio diversification. 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. Risk versus returns. 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. Money illusion. 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? (More, exactly the same or less?)

Importantly, as a rough guide, the measure of financial literacy can be calculated as the sum of correct answers to these five questions. How do you think you went? Before scrolling down to the answers, take a look at the financial literacy scores of those that completed the quiz as part of the 2018 HILDA Survey.

Highlights

As previously mentioned, when looking at the overall number of correct responses, less than 50% of those that completed the quiz were able to answer all five questions correctly.

Also, without drilling down into other demographic considerations (e.g. education, employment, etc.), as you can see, there is a gender divide and differences across age groups – hopefully this information will be used to further inform public policy moving forward (e.g. financial literacy in schools).

Lastly, upon further analysis, the 2018 HILDA Survey found a correlation between financial literacy scores (low, two or fewer correct answers; medium, three or four correct answers; high, five correct answers) and certain financial attitudes, financial behaviours and economic outcomes. For example, a high financial literacy score correlated with the following:

• Financial attitudes.
  • Taking average or above-average financial risk.
  • Having a longer saving and spending time horizon.
  • Being future-orientated and premeditative (as opposed to impulsive).

• Financial behaviours.
  • Saving in general, as well as saving regularly each month.
  • Being involved in making household decisions about managing day-to-day spending and paying bills, large household purchases, as well as saving, investing and borrowing.
  • Having a credit card for personal use and paying off the full balance each month.

• Economic Outcomes.
  • Having a higher income and net wealth.
  • Being able to raise $3,000 for an emergency.
  • Having a higher perception of satisfaction with their financial situation.
  • Having a lower reporting of being in relative poverty* (and perception of being poor) and financial stress.

*Unable to afford the goods and services needed to enjoy a normal lifestyle, i.e. if household equivalised income is less than 50% of the median household equivalised income (e.g. according to the Australian Bureau of Statistics, $853 per week).

Moving forward

When it comes to achieving your financial goals and objectives, financial literacy plays an important ongoing role. Financial literacy is a life skill that will help you to make sound financial decisions and ultimately achieve individual financial wellbeing.

If you would like to further test your financial literacy then take some time to go through our quizzes, which cover a range of topics, such as cashflow and debt management, investments, superannuation, insurance planning, taxation and estate planning. Importantly, if you find that there are areas where you may need improvement then consider revisiting the relevant sections of the related learning modules.

Correct answers

1. Numeracy. Answer = $102
2. Inflation. Answer = Less
3. Portfolio diversification. Answer = False
4. Risk versus returns. Answer = True
5. Money illusion. Answer = Exactly the same