Financial Literacy: The Road Out of Financial Anxiety
Published 14 February 2020
By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland
Studying finance, like studying anything, is often viewed as a means to an end. And that end is usually a job, a salary and a career. There is nothing wrong with that. But there is a much broader potential benefit to be gained from acquiring even some rudimentary finance knowledge.
Studies undertaken around the world have repeatedly found low levels of financial literacy (Lusardi & Mitchell 2011). One study in Australia found that no more than half of Australian high school students were able to understand even a single basic financial literacy concept (e.g. relating to bank accounts) (Worthington 2013).
The individual and societal flow-on effects are potentially significant. Not only does poor financial literacy lead to poor financial outcomes such as a failure to save enough for retirement (e.g. Hauff et al. 2020), it can have consequences for health and wellbeing and family cohesion (Bennett et al. 2012). Some people may even develop financial anxiety, making it even more difficult for them to confront important financial decisions (Shapiro & Burchall 2012).
Fortunately, financial literacy, including knowledge of financial institutions, instruments and markets, is not ‘restricted knowledge’. Once you learn it, you can share it. Beyond developing skills and knowledge required for a job or a career, students of finance might take additional satisfaction from knowing that their skills may be used to help themselves, their families, their friends and their communities to make better decisions.
One simple example will suffice. According to recent studies (Mather 2019), Australians who own their own home require around $500,000 to live comfortably in retirement. The earlier one starts, the easier it is to save this amount. It surprises many people to learn that just $250 per month saved at a relatively modest average rate of return (6% p.a.) between the ages of 25 and 65 will achieve the $500,000 benchmark. If you know someone who feels discouraged about ever achieving their financial goals, you can explain to them that financial security might not completely out of their reach.
Discussion Question
Financial literacy (or illiteracy) only affects financial decisions, such as retirement saving. It has no deeper societal implications. Based on further reading and/or personal experience, discuss the validity of this statement.
Further Reading
The example with which we ended (above) is a simple ‘future value annuity’ application. See Financial Institutions, Instruments and Markets 9e, Chapter 8: Mathematics of Finance for some more technical discussion. Once you have mastered some of the financial math skills, you can change the time frame and rate of return in the scenario to see the impact on the size of the final sum that can be saved.