Financial Literacy


June 4, 2012 by Chris Nöthling

The number one problem in today’s generation and economy is the lack of financial literacy. 

– Alan Greenspan

We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate.

– Robert Kiyosaki


Despite what the Australian press has to say about the topic, I believe that Financial Advisers have an important role to play, not-the-least being to give personalized financial literacy coaching for their clients. Managing personal finances is more complex than ever before. In the last 30 years we have seen an explosion in the range of financial services, products and providers – with an equally spectacular explosion in the number of them which failed. At the same time we saw an ever-increasing shift in assuming the burden of financial responsibility away from the state and away from companies to the average man on the street. We have also seen a simultaneous boom in the use of personal debt. The complexity of the financial domain has become overwhelming and the consequences of bad decisions devastating. Money management is a critically important life skill to have. In simple terms credit is freely available, we are overwhelmed by financial “advice” through a variety of media, there is an increase in product and distribution failures, bankruptcies are on the rise, and it is increasingly the responsibility of the person to manage and provide for their own financial security and for their retirement.

I am amazed and saddened after the recent catastrophes (house fires, bush fires, floods, cyclones, etc.) to discover how poorly Australians are making adequate financial provision. I am equally alarmed at the low-level of responsibility assumed by consumers with regards to each product failure. Sometimes the blame is directed at the product house, more often at the adviser, never at the consumer. Australia is a wealthy country with one of the most advanced financial services infrastructure in the world yet our clients stay stuck in a financially dependent mode.

My view is that if we are to make a significant contribution to the welfare of our clients and to raising the profile of our profession then building financial literacy of our clients is one of the key strategic levers we should focus on.

What is Financial Literacy

Financial literacy is the extent to which an individual understands money concepts and financial products and applies this knowledge to make informed financial. It refers mastering a set of skills and knowledge that allows an individual to make informed and effective decisions about the use and management of money which will have long-term implications for their financial well-being.

There are three critical elements of the definition:

  1. Acquiring and possessing knowledge and skill of financial matters;
  2. Which allows one to make good decisions about personal finance matters;
  3. That will benefit one now and for the rest of their life.

Not being financial literate can lead to making poor financial decisions that can have adverse effects on the financial health of an individual. Let me illustrate by way of some examples:

  • Consumers fail to plan when it comes to financial matters. They do not understand the value of seeking out financial information and more often than not the information they do receive is acquired by chance.
  • Consumers report that choosing the right investments is more stressful than going to the dentist.
  • Consumers have an insufficient understanding of the issues involved in choosing and managing a credit card. Consumers are apparently unaware of, or do not care about the increased interest burden on credit card debt which are not paid by the end of the interest-free period.
  • Consumers are living beyond their means and struggling to service an increase in household debt – household debt has more than doubled over the past decade.
  • Consumers do not understand risk and the importance of insuring against it. They take on financial risks without realising it.
  • Consumers lack knowledge about investing for retirement and what it takes to make adequate provision for retirement.
  • Consumers lack and understanding of inflation and the eroding effect thereof.
  • Consumers lack and understanding of interest and the concept of compound interest.

As a financial adviser you have been trained in these issues. You understand them so well that they have become a tacit part of your knowledge set and you may not realise just how important it is to share this knowledge with your clients.

Elements of Financial Literacy

If we were asked to develop a curriculum to cover financial literacy it may include some of the following:

  • Understanding your current financial situation. How to budget. Understand your spending choices. Monitor your cash-flow. Balance your check books and how to read account statements.
  • Understanding and managing debt. Selecting and managing a credit card. Interest & compound interest.
  • Understanding and managing risk. Understanding the risks involved in everyday life and understanding how insurance products can be used. Understanding the nature and amount provided by employee benefits.
  • Saving. Time value of money. Interest & compound interest. An understanding of the long-term benefits of saving. Understanding saving products. Building an emergency fund.
  • Investments. Understanding investment risk. Asset classes – Cash, fixed interest, property, equities. Time value of money. Understanding how the stock exchange works. Understanding investment vehicles and investment products. Modern portfolio theory. Identifying scams or dubious financial practices. How to evaluate potential investments.
  • Tax planning. Various types of taxes. Understanding tax-effective products.
  • Retirement planning. Understanding superannuation. Understanding retirement products.
  • Estate Planning. Understanding the purpose of estate planning. Understanding succession laws. Understanding wills, trusts and enduring power of attorney.
  • Understanding the role, process, and value of financial planning
  • Understanding personal financial issues pertaining to your small business. Understanding shareholder agreements, key man, buy and sell, contingent liability risks and the role that insurance can play in addressing these issues.

Benefits of improving Financial Literacy

The major benefits of improved financial literacy is an improved ability to make solid financial decisions which lead to a more secure and comfortable life.

  • Increased level of saving (includes an emergency fund)
  • A sustainable and well-managed debt level
  • Provide capital and income protection against unforeseen events.
  • Increased ability to handle financial and life set-backs
  • Increased quantity and quality of investment – better choice of products
  • Avoid dodgy schemes and financial scams.
  • Improved ability to achieve lifestyle goals (home, education, holidays, cars)
  • Reduced costs associated with financial transaction
  • Provide for a secure and comfortable retirement.

In short, by developing our client’s financial literacy we put them in a place where they have an improved ability to make the most of the financial options open to them.

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One thought on “Financial Literacy

  1. [...] an earlier post on Financial Literacy we spoke about the role advisers have to play in educating clients about managing their personal [...]

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