Financial Literacy is -

*          “the knowledge and understanding of financial concepts, and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts”.

Financial literacy is a combination of financial knowledge, skills, attitudes and behaviours necessary to make sound financial decisions, based on personal circumstances.

Important to read:

*        Summary of Productivity Commission's Staff Working Paper Links Between Literacy and Numeracy Skills and Labour Market Outcomes dated Aug 2010; and

*        Chapter 1

Financially Uneducated And Vulnerable Australians that Lack Financial Acumen notes -

level 3 is regarded by the survey developers as the ‘minimum required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy’.

Below is an extract from "The financial literacy of young Australians: An empirical study and implications for consumer protection and ASIC’s National Financial Literacy Strategy" by Paul Ali, Malcolm Anderson, Cosima McRae and Ian Ramsay:

"INTRODUCTION
There is increasing recognition of the importance of financial literacy to consumer protection in Australia and internationally. The growth in both the range and complexity of financial products and
services requires individuals to have sufficient financial  literacy to make sound investment decisions and to understand their consumer rights and identify when these have been infringed. Financially
literate consumers are more likely to be informed and confident and therefore better able to participate in economic life. Financial literacy is one of four key factors, along with sufficient income, access to
suitable and affordable financial products and appropriate regulation, identified as necessary for individuals to achieve positive financial  outcomes and secure financial  wellbeing.
The Australian Securities and Investments Commission (ASIC), at the request of the Australian Government, developed, and is implementing, the Australian National Financial Literacy Strategy (National Strategy)."

"108
Some very basic questions, such as how to calculate which notes to request to withdraw a set amount from an ATM machine could not be answered by 15%-20% of students.
Up to 20%-30% of students were unable to detect indicators of credit card fraud. Both studies found a “startling number of anomalies” in the actual financial capabilities of young Australians. This is considered to place young people at greater risk of adverse financial decision-making."

Below is an extract from Section 4 of the Writer's letter to RBA dated 8 December 2011:

"In 2004, the Commonwealth Bank Foundation commissioned research to investigate peoples' ability to make informed and responsible financial decisions and examine the relationships between financial literacy and its impact on individuals.   Lower financial literacy scores were directly related to respondents having been unable to pay their mobile phone, utility and credit card bills in the last 10 years.  Below is its 'Profile of the least financially literate':

The research shows that the 10 per cent of people with the lowest financial literacy levels are more likely to:

1.    be aged 16 to 20 years old (38.6 per cent)

2.    be male (55.6 per cent)

3.    be unemployed (7.1 per cent) or students (29.6 per cent)

4.    have lower education levels (15 per cent of those not currently studying had some high school education and 20 per cent of those not currently studying had completed Year 12)

5.    have lower annual personal income (34 per cent reported annual personal income under $10,000)

6.    have lower annual household income (44 per cent reported annual household income under $50,000)

7.     have never worked in paid employment."

The below extracts from Section 'E2.3 Some implications of the findings' in ANZ Bank's ADULT FINANCIAL LITERACY IN AUSTRALIA  -  December 2011 acknowledge that some Australians lack Financial Literacy:

"The 2011 Survey provides a guide to the groups in the community who may benefit from efforts to lift their levels of financial literacy: these are the groups listed above.

The 2011 Survey also shows that financial literacy is complex. Individuals and groups may perform well on some components of financial literacy but not others and people’s financial attitudes affect their level of financial literacy quite strongly.

This provides some guidance for designing financial literacy programs.  For example, programs focused solely on raising financial knowledge and numeracy may be effective in improving components of financial literacy such as choosing financial products, keeping track of finances and staying informed; however, their affect on planning ahead is likely to be more limited.

Programs that also take into account and seek to positively influence people’s financial attitudes are likely to be more effective than those that do not. Financial self-efficacy, which is a measure of confidence in dealing with money and of willingness to engage with money management, is positively associated with all components of financial literacy.

The research finds that 36% of people find dealing with money is stressful, even when things are going well.  Together these findings suggest that effective program design needs to:

•      find a way to engage people

•      help to overcome the stress some people associate with dealing with money and build confidence in managing money.

This in turn highlights the need for support in the form of advice, ‘coaching’ and tools amongst some groups in the community."

There have been a number of important Australian studies on financial literacy in the past decade. These include the ANZ Adult Financial Literacy in Australia survey which was conducted four times between 2003 and 2011, and identified that certain groups have lower levels of financial literacy: young people under 25, people with no formal post-secondary education, people with relatively low levels of income and assets, blue collar workers and women.6

Financial education is a key theme in financial literacy. However, more knowledge does not necessarily translate into changed behaviours, and financial literacy alone does not guarantee the resolution of financial difficulties. For a financial literacy program to be successful, it must take into account and seek to positively influence people’s financial attitudes as well as to increase financial knowledge and literacy and lead to behaviour change.7

Furthermore, not all people have the same opportunities to actualise their financial literacy, as income levels, income security and systemic factors may present barriers. Consequently, provision of adequate structural elements such as consumer protection and appropriate and affordable financial products and services are necessary, alongside adequate income support and regulation.

To account for these issues, many writers have advocated that financial literacy should be understood in relation to an individual’s behaviour according to context and not solely based on their financial knowledge.8 This is embodied in the concept of financial capability which was adopted for this study. The most widely recognised framework for financial capability was developed by Atkinson and her colleagues at the University of Bristol in the UK.9 They see financial capability as encompassing how financial literacy translates into changed behaviour and accounts for circumstantial and structural factors. Its four key aspects are:

While financial capability is a more inclusive way of thinking about the skills and behaviours required of individuals in relation to their management of finances, it does not address factors such as the availability and accessibility of suitable financial products and services for all demographics. Full participation in economic life also requires, in addition to financial capability, the opportunity to act on these capabilities. This points to the key role institutions and policies have in creating a fair and equitable structural environment.