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How to solve Australia’s financial literacy problem


by Robin Christie | 16 Jul 2015
Teaching financial skills to Australians to keep their personal fortunes in check ignores the fundamental problem that emotions often cloud sound fiscal judgement.

This is the message coming from Gateway Credit Union CEO, Paul J. Thomas, who believes that schools, financial institutions, and society at large can all play a part in improving the nation’s financial literacy.

While he believes that simple financial concepts such as household budgeting and the difference between simple and compound interest should become part of the national discourse, he said that tackling human behaviour is also an essential piece of the puzzle.

Thomas, whose recently released book of blog posts, ‘Bite Sized Advice’, tackles the financial literacy issue in depth, explained that it’s not enough to assume that Australians will act rationally when presented with the right information. Mirroring the arguments of behavioural economists, he pointed to the importance of human nature to the financial literacy debate.

Two sides of the equation

Noting that financial literacy has been defined as ‘the ability to make informed judgments and effective decisions about the use and management of money’, Thomas’ explained that his own financial literacy framework boils down to two sides of a simple equation: ‘understand money’ and ‘understand yourself’.

In a theoretical sense, he said that understanding money involves using knowledge skills and tools to make rational decisions. “But the literature’s clear that doesn’t happen, because on the other side you have to understand yourself.” Developing this financial self-awareness, he explained, involves recognising that attitudes, behaviours and habits can lead to emotionally driven decisions.

“There are two parts to the financial literacy equation: there’s the head and there’s the heart,” he said. “I would argue that many people that get into financial trouble understand what money’s about, but have got a habit – they can’t stop spending.”

The roots of the GFC, for example, show a classic case of “people with knowledge and skills being overtaken by emotions”. In this case, greed overrode the knowledge that house prices don’t always go up.

“Tens of thousands of seemingly well educated Americans bought toxic financial mortgages,” he said. “And in hindsight you’d say that that was absolutely and utterly crazy to do.”

Looking ahead

How can the next generation of consumers are to become more financially literate than their forbears? Thomas believes that they need to be taught about the rational and emotional elements of decision-making in tandem.

It’s important to teach young Australians, for example, that it’s perfectly understandable to want to splurge their first paycheque on treats – or “keeping up with the Joneses”. But that this can quickly lead to financial stress, a debt cycle, living off credit cards – and even bankruptcy.

Thomas added that, in his experience, bankruptcy is normally caused by overspending – rather then a lack of income. “They haven’t gone bankrupt because they’re not earning enough money,” he said. “They haven’t gone bankrupt because they don’t understand it.”

Joint effort

Commenting on where financial institutions can fit into the financial literacy picture, Thomas said that there were two ways of looking at this: individually and collectively.

“Collectively, the law now requires us to be prudent lenders and honest providers of financial services,” he said. “At a lower level, and this is something that we’re happy to do at Gateway, is to literally take the time to sit down with people and help them prepare a budget.”

This may sound simple, but he said that it was surprising how many people haven’t really set a household budget – despite what they might say.

“There is nothing more powerful, and confronting, than to sit down and do a household budget,” he said, explaining that even simple insights into how much money goes on bread and milk can be extremely eye opening.

But the burden of post-school financial literacy education shouldn’t fall entirely on the shoulders of the finance sector, he said. Commenting on the actions that society at large can take, he said that the government’s Financial Literacy Board was a step in the right direction – as was the work being carried out by organisations such as The Smith Family.

“I don’t think it’s limited to any one sector, like financial institutions,” he said. “I think broader society has a role to play and can help.”

Comparing financial literacy education to commonsense public health awareness drives, he concluded that “we need to be constantly reminded of the importance of not just physical health but fiscal health”.

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