How Financially Literate Are You?

Monday, April 7, 2014

How financially literate are you? That's probably a bit like asking how fit you are, or, if you're a guy, how much housework you do (c'mon fellas!) - the answer is probably more aspirational than fact. But, it's an important question, not just to ask yourself, but to put to those around you, as they too are a part of the universe of transactions that define our financial well-being.

In recent years, some studies and some new initiatives have attempted to give us a snapshot of where we're at and to try and ensure the gaps are being addressed.

Some of those gaps are pretty wide. According to figures in a report on international financial literacy done by the OECD in 2005, 67% of Australians said they understood the concept of compound interest. But when tested, only 28% actually understood enough to answer some simple questions.

More recently, the Australian Bureau of Statistics noted in a 2013 survey that almost 8 million Australians were ranked in the lowest two levels of numeracy, meaning they could not perform basic mathematical functions.

These days, individuals are being encouraged to take more responsibility for their financial well-being as governments seek to sweep big ticket expenses out of their budgets. With increasing life-spans, ballooning debt levels and rising volumes of increasingly complex financial transactions and new products at every turn, many people are struggling to keep up.

Globally, one of the the best known means of helping us all deal with this is the OECD's International Gateway for Financial Education portal. It's one example of a free, state-run (in this case member state-run) financial education programs established in many developed economies.

In Australia, a series of initiatives have been in place since the early 2000's, leading to the National Financial Literacy Strategy. This in turn lead to the creation of the Money Smart website as a bolt-on to the main site for the Australian Securities and Investment Commission.

This site carries loads of updates, links and advice to help us all come to grips with the increasingly complex – and let's face it, occasionally unscrupulous – world of finance and investment.

The Money Smart site is extremely useful and is aimed squarely at the general public. It covers all the likely trouble spots for most of us, such as credit and debt, super, scams, and money management and includes video seminars as well as further reading and onward links.

And it’s all freely available.

As well as state-run programs, there are also more targeted initiatives run by the private sector. One such example from around the world is the US-based TD Ameritrade university, which just launched recently.

Criticisms of these attempts to get us all to wrap our heads around the world of finance tend to come from the angles that a) states and businesses have a vested interest in keeping us all chasing the financial gravy train and that b) financial literacy comes at the cost of social and spiritual engagement.

To the extent these critiques may be valid, it’s probably fair to put in a few caveats. Firstly, most financial transactions are voluntary. So it's important you think before you act at all times. And, secondly, these programs won't tell you how to live your life, only how to give you the tools to help keep funding it.

Finally, [Warning: Plug Alert] as a new contributor to the Insight, I would recommend this site as a complimentary financial literacy tool. All the writers here are doing a great job in helping us all improve our financial skills and understanding.

As the 2008 GFC showed us, even experts can get in over their heads. We've all got a lot to learn and, now, there's more and more options becoming available. No-one knows how to get more blokes cleaning up around the house though...