MBA, BSc, DipFP
Financial Planner / Managing Partner
The Importance Of Financial Literacy
Financial products and markets are becoming more and more complex and difficult to navigate by the day. The proliferation of products is mind-boggling. Yet, many of us have limited financial literacy at best. In fact, as few as 63% of men and 48% of women in Australia are considered financially literate.[i]
According to Keith Hall, ‘a key characteristic of the financially literate is an early understanding of the need to save for retirement’.[ii] But there is much more to it than that.
So, when we talk about financial literacy what do we mean, why is it important, and how do we go about achieving it?
What Is Financial Literacy
One of the simplest explanations we have seen is from Keith Hall, who said:
‘When we talk about financial literacy we are usually referring to a set of skills that allow people to manage their money wisely.’[iii]
Specifically, these skills would include, at a minimum, understanding of:
- Basic numeracy, including interest calculations
- How to budget and set realistic financial goals
- How to balance paying bills and saving
- How loan products work, and how to evaluate their suitability – including personal loans and mortgages
- How credit cards work
- The impact of risk and return on investing
- Knowing when it is time to look for professional advice
- How the broader economy impacts your own financial position
One thing it’s important to understand is, being highly educated does not necessarily mean you have good financial literacy. The two do not always go hand in hand.
The Benefits – Building Financial Resilience
Having a good understanding of money and financial products is empowering and leads to an increased level of financial resilience. Not only will it provide you with peace of mind in an area that is increasingly complex, but it will improve your chances of achieving your financial goals, including:
- Purchasing a home
- Providing a comfortable day-to-day life not driven by living paycheque to paycheque
- Creating a strong financial buffer against unforeseen circumstances like illness and job loss
- Ensuring a comfortable retirement where you have sufficient funds to relax and do the things you’ve always wanted to do
If you have a working knowledge of financial issues, you are also less likely to be misled by products or offers that are ‘too good to be true’, thereby reducing the risk of serious, or even catastrophic, losses.
Interestingly, financial literacy has also been linked to better general health.[iv]
The Cost Of Illiteracy
A lack of financial literacy can lead to financial vulnerability, a reduced standard of living, and in worst-case scenarios, a reliance on welfare, particularly during retirement.
A lack of understanding around credit-based products like payday lenders and credit cards can have a profound negative impact on your financial well-being for many years, including your ability to obtain a home loan, and even simple things like a phone plan, if your credit score has been negatively impacted.
How Can I Improve My Knowledge?
We all know people who are ‘good with money’. It’s not luck, and they weren’t born with this knowledge. It’s a skill that can be learned. Knowledge is power, so by improving your knowledge you will undoubtedly improve your financial well-being.
A few ideas to help get you started include:
- Understand where you are spending your money now. Do a budget and track your spending. You may be surprised to find there are areas of ‘leakage’ which you can plug, leaving you with more to save, or use for debt reduction. If you have a credit card, the interest you are probably paying on outstanding balances will be one area of leakage, and once you see in black and white how much that is, you may be inspired to take some action.
- Study the topic. Many Community Colleges offer courses in personal financial management. These are generally low cost and low commitment and the right one can be useful in providing you with foundational knowledge, not to mention having a profound impact on your financial health.
- Stay up to date. There is an enormous amount of information out there on the economy, financial products, and trends. Whether you prefer to pick up a book, a magazine subscription, listen to a podcast, or read a blog, there will be some way to keep your ear to the ground. Just choose carefully. Make sure your source, whatever it is, has the knowledge, expertise, and qualifications to provide you with reliable and unbiased information.
- Find an expert. If nothing else, finding a financial planner you trust is animportant step to understanding your own finances, and the pressures put on them by the broader market. A good financial planner will ensure you have the knowledge you need to make informed decisions. Again, choose carefully. Our articles on What Makes a Good Wealth Manager and Independent Financial Advice can give you some tips.
Children & Financial Literacy
The truism ‘you can never start too early’ applies to many aspects of life, and none more so than financial education. Studies suggest that young men and students are amongst those with the lowest financial literacy.
In an overcrowded curriculum, most schools don’t have the time, or skills, to teach these important life lessons, so it falls largely to parents. How you go about this will obviously depend on the age of the child, but the first lesson is simple. Practice what you preach.
For tips on how you can start this conversation with your children check out moneysmart.gov.au/teaching-kids-about-money.
If you would like to improve your financial resilience by building financial literacy, Manly Financial Services can help guide you on your journey. Give us a call on (02) 9976 3388 or contact us via the below link.Interested in knowing more?