Ten steps to increase your financial literacy

The feeling of fear and anxiety of not knowing your subject matter strikes most of us. When it comes to your finances, it is no different. Making financial decisions comes with consequences, both good and bad.

Being financially illiterate, however, increases your chance of making poor decisions. It can also mean missing opportunities that you might otherwise have taken advantage of. For others, not being financially literate may mean the difference between financial success or financial stress.

Generally, people with strong financial literacy are invested in understanding how their finances work, so typically, they will not have gaping holes in their knowledge.

They are very curious, very interested in their finances – how they work, why they work and understanding the levers to pull to make changes for the better.

They are already financially mindful.

If you know your level of financial literacy has been holding you back, you can take positive steps to become competent and confident but note it will take time.

Think of it as learning the language of money – then you can understand how you interact with your money and how you can use services and tools to get more out of it.  We believe being financially literate is a life skill, and we are always learning.

You may know some things adequately but not others – for instance, you can budget well but have a poor understanding of tax.

To improve your financial literacy is a journey of discovery, learning and experiences to a point where you feel confident with your finances to make the next right decision. Knowledge is power. The lack of knowledge can leave us vulnerable in many areas of life.

Here are the ten steps to increase your financial literacy.

Step 1 – Willingness to learn

According to Investopedia, financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

Financial literacy – or the lack of it – is without question the foundation of your relationship with money. Is it scary, daunting, or a challenge? You need to be willing. That means accepting you have blind spots or areas where you need to learn to understand.

Understand why you are at this point and get willing.

Step 2 – Get organised with your financial paperwork and track what you spend

This is a simple action that is incredibly useful.

However, and whenever you do it, keep your financial documents together in simple categories – paper and digital.

Track what you spend. This can be done through several means, these include:

  1. An app
  2. A spreadsheet
  3. A journal

Aim for weekly and just do it.

Step 3 – Learn money basics. Simple and compound interest, risk diversification, inflation, saving and investing money

Here is where your need to use that willingness to learn because learning new things can be daunting. You might be tempted to drift into thinking ‘ignorance is bliss’, but it’s equivalent to being mindless.

Start at the beginning, go slowly, use Google and look for credible sources. The first starting point we recommended using is www.moneysmart.gov.au.

Some money basics:

What are simple and compound interest and their differences?

What is inflation, and how does it impact our cost of living?

Saving money and simple ways to do it.

What is credit?

What are investments and the different types available?

What is risk diversification and the benefits?

Step 4 – Learn budgeting techniques and make it a regular event

There are many techniques and templates for budgeting, but you will not be able to make one without properly organising your paperwork and tracking your spending.

Budgeting involves a few simple steps, but the fundamentals are to accurately track your spending and income and estimate them for the future.

How much did I spend in the last three months, organise in clear categories – regular bills, examples include rent/mortgage payments, electricity/gas bills, phone, groceries, school fees, health insurance and car expenses.

Now list out your discretionary spending—for example, entertainment and eating out expenses.

Income. How much income did I receive? Examples include your take-home pay, income from savings or investments, any Government benefits.

The next steps are:

Compare the two totals – income and expenses. Do you have a surplus or deficit?

Identify where you can cut expenses and return to surplus or create savings if already in surplus. Be realistic, you will not sustain life without any luxuries at all, but it’s better if they are small and meaningful.

Put it into practice. Start living according to your budget. This is developing a new healthy habit.

Learn from what is happening. Adjust, ask for help, only make your budgeting more complex when you can master living to a basic budget.

Step 5 – Use available financial learning resources

Read credible financial books, websites, undertake a personal finances course and listen to leading financial commentators.

Here is where you begin feeding a growing hunger for learning about financial concepts. It is good to follow podcasts and commentators as they will likely shift through the gears to deal with different financial scenarios.

They may also leave you scratching your head. Consider a financial course at some point to understand the concepts that still baffle you.

Plenty of short courses are available online. If you are tempted to think of a course as a cost rather than an investment, hold that thought.

As Harvard psychologist Howard Gardner said, “If you think education is expensive, try estimating the cost of ignorance.”

Step 6 – Understand how credit scoring, basic taxes, and superannuation works

You are now undertaking a deep dive into some areas that may have baffled you – but again, think of knowledge as power.

Spend time researching each area:

What are credit scores? How do they work, and can you improve them?

Taxes – start with the tax you pay; look at your payslip.  Ask the payroll department to explain it to you. The Australian Taxation Office (ATO) website has good information, but that can be daunting. If necessary, ring their helpline and ask them to explain terms and concepts you do not understand.

An excellent introduction to tax is to try and understand your tax return. Talk to your tax agent, if you use one, and make sure you understand your income tax return before you sign and lodge.

Superannuation – as it’s compulsory, you will have a superannuation account. Ask your super fund how its works for you and where your money is invested?

Step 7 – Set realistic financial goals on spending, saving and investing

Very much related to step 4, but importantly, you cannot do this without mastering step 4. You will develop goals on saving and spending once you understand how much you make and spend.

Whether it is saving for a house deposit, holiday, retirement fund or buying a car, it is vital to work out how much you can afford and how long it will take you.

Set that goal, ensure your budget is set up to achieve your goals providing you with enough cash surplus. Adjust your expectations if any unexpected expense arises.

Step 8 – Before entering into any financial product or investment, research and understand how it works first

Learn the general rules: what is a good short-term investment, what is a long-term investment. What do quick returns say about the nature of investment?

By now, you should be getting a clear picture. Finances are complex, but they become clearer and more manageable with research and knowledge.

As the saying goes, ‘if you do understand it, do not invest in it’.

Cryptocurrencies come to mind, do you understand it, or are you just getting involved because you heard it’s an easy way to make quick money.

Step 9 – Seek professional help where appropriate

There are thousands of financial products, systems, and legislative requirements to the financial system – employing over 800,000 people.

But the financial system weaves into every area of life: it is the lifeblood of the economy.

We all need help with our finances. Never be afraid to seek out professional help.

Step 10 – Learn from your mistakes and enjoy your successes

You have to be willing to learn, step 1 – even when you think you know a lot, and undoubtedly by the time you get to step 10, you will know much more than you did when you started.

Enjoying your successes is vital. Ultimately, how we treat our money is how we treat ourselves – we work hard for it, don’t squander it.

Understanding money builds capacity, provides more choices and buys experience, so it is crucial we enjoy the money in our life and not let it rule our life.

Good luck!

Why our financial literacy matters – and what to do about it

While knowledge is power, the lack of knowledge can leave us vulnerable in many areas of life.

This is especially true when it comes to our relationship with money.

Financial literacy is the missing building block undermining many people’s financial capability and personal financial position, invariably leading to chronic financial stress issues.

According to the Global Financial Literacy Excellence Center, the research found that financial stress and anxiety are highly linked to low levels of financial literacy, problematic financial behaviours and decreased financial security.

The situation has worsened during the pandemic.

It is also widely accepted women have lower levels of financial literacy than men, including in Australia which is in the top 10 nations for financial literacy.

In Australia, 63% of men and 48% of women demonstrate an understanding of at least three basic financial literacy concepts, according to data collected in the national Household, Income and Labour Dynamics in Australia (HILDA) survey.

Questions asked of respondents in the HILDA survey were:

Q1: Interest Rate

“Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?”

Q2: Inflation

“Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, the same as today, or less than today with the money in this account?”

Q3: Diversification

“Buying shares in a single company usually provides a safer return than buying shares in a number of different companies.” [True or False]

Q4: Risk

“An investment with a high return is likely to be high risk.” [True, False]

Q5: Money Illusion

“Suppose that by the year 2020 your income has doubled, but the prices of all of the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?”

If understanding three basic financial literacy concepts can be considered financially literate, then these statistics suggest that around 8.5 million (or 45%) adults in Australia are financially illiterate

But few of us want to talk about the reality of financial capability – or our financial incapability, as the case may be.

Sadly, there is considerable shame associated with saying ‘I don’t understand how my Afterpay works, or my credit card statements, let alone how to effectively manage something as complex as share trading, as detailed as the fine print in a product disclosure statement or as expensive as a 30-year mortgage.

Many of us don’t even truly understand how our phone plans work, or what everything on our payslips means.

According to findings from the United States’ National Financial Capability Study, just 34% of Americans can answer four or five questions on a basic five-question financial literacy quiz correctly.

‘Study participants were asked five questions covering aspects of economics and finance encountered in everyday life, such as compound interest, inflation, principles relating to risk and diversification, the relationship between bond prices and interest rates, and the impact that a shorter-term can have on total interest payments over the life of a mortgage.’

‘Individuals need at least a fundamental level of financial knowledge. This knowledge, paired with financial decision-making skills, can best ensure an individual’s financial capability.’

It’s human nature to want to ‘set and forget’ complex financial issues, and too much product and service marketing leave us with the comforting but untrue idea that we can do that.

Financial instruments, personal situations all change – so our actions around finances must change too. Big companies are nimble and unless we want to pay too much, we need to at least understand that our personal financial decisions need to be flexible and we must be prepared to embrace changes in our finances.

But how do we know where to start?

But as the saying goes, we don’t know what we don’t know.

Financial mindfulness is a state of awareness and attention to your finances and financial behaviours that can support the growth of your financial literacy.

It is not the answer to a lack of financial literacy, but it can help us see reality and feel motivated to learn.

A key part of mindfulness is to observe our thoughts, feelings and behaviours as they are – not how we think they should be. This allows us to see the world as it is, rather than just accepting autopilot as a life-long strategy.

In the context of personal finances, developing financial mindfulness is a clear and useful step towards improving financial literacy.

In the second part of this two-part series, we will look at a range of clear steps to improve your financial literacy.

Next week: Ten steps to increase your financial literacy.