Financial illiteracy costing households $7k each year

One in four Australians lack the knowledge and skills to make financial decisions, with lack of confidence especially notable among women, according to research.

An Allianz survey across Australia, France, Germany, Italy, the US, the UK and Spain has found 26 per cent of Australians can be classed as having low financial literacy. Over half (58 per cent) are averagely financial literate and just 17 per cent demonstrate high financial literacy. 

According to this research, low financial literacy could be costing the average household in Australia around $7,381 every year and $107,886 over a 10-year period, compared to households led by people with a grasp of financial basics. 

“To gauge the financial benefits of being financial literate, we constructed ideal typical portfolios by level of financial literacy and calculated past real returns for each country studied,” the report explained.

“The results are straightforward: average annual returns for the last 20 years increase with the level of financial literacy. However, the difference in returns between average and high financial literacy is only marginal. 

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“The portfolios of these two investor types are already largely similar. This suggests that it is not necessary to become a proven financial expert to achieve good financial results; average financial knowledge is sufficient.”

A person with high financial literacy can expect to earn an extra $7,869 per year, which is more than six times the median weekly earnings of all employees in Australia in 2022.

Over the course of 30 years, the cumulative total stands at up to $804,381.

“Low financial literacy really hurts,” said Allianz chief economist, Ludovic Subran.

“In fact, over long investment periods, like when saving for retirement, it can literally cost you a fortune. But the good news is that making smart financial decisions is not rocket science. By acquiring basic knowledge and skills, people can move from low to average financial literacy and put a lot more money in their pockets." 

Patricia Pelayo Romero, senior economist at Allianz and co-author of the study, agreed that financial literacy is more than just mathematics. 

“Any successful financial literacy intervention, particularly those catering to women and young people, should start with confidence building,” Romero observed. 

Gender gap continues

The study also examined the difference in financial literacy between genders. Around 34 per cent of Australian women, compared to 16 per cent of men, were found to exhibit low financial literacy.

“Women disproportionately answer questions with the response ‘I don’t know’ instead of taking a chance and choosing one of the options provided. This can be interpreted as lack of confidence in one’s own knowledge and decision-making,” the report stated.

Globally, only 33 per cent of women reported feeling confident about their finances, Allianz said.

An Econosights report from AMP’s deputy chief economist, Diana Mousina, echoed similar results. It found the gap between adult male and female financial literacy in Australia stood at 8 per cent, greater than global peers like Germany (6 per cent), Italy (7 per cent), the US (5 per cent) and China (1 per cent).

“Despite having one of the highest GDPs and average wealth per household, millions of Australians remain financially illiterate, with women well behind men,” Mousina said.

“Lifting levels of financial literacy and closing this gender gap are important challenges for our society and would improve retirement outcomes for many.

“Underlining the importance of lifting literacy for women is that their superannuation balances remain well below men at all ages, compounded by the fact that they generally earn less than their male counterparts.”