Financial literacy among Australian university students

Economic Papers (Economic Society of Australia), March, 2003 by Diana J. Beal, Sarath B. Delpachitra

1 Introduction

'Astute savers are distinguished by the diversity of the assets to which they allocate their funds, and the dynamic manner in which they manage their investments': so Connelly (2001, p. 7) characterises people with investment literacy. Financial literacy, however, is a broader concept for which the terminology has possibly only been in existence for a decade or so.

Financial literacy was defined in the UK by Noctor, Stoney and Stradling (1992) as 'the ability to make informed judgements and to take effective decisions regarding the use and management of money'. Schagen and Lines (1996, p. 91) operationalised this definition by proposing that a financially-literate person would enjoy a range of abilities and attitudes comprising:

* an understanding of the key concepts central to money management;

* a working knowledge of financial institutions, systems and services;

* a range of [analytical and synthetical] skills, both general and specific;

* attitudes which ...allow effective and responsible management of financial affairs.

Notwithstanding the exact definition of, and the skills required for, financial literacy, commentators throughout the developed world during the last decade have warned of insufficient personal financial literacy. Having financial skills has become more important as financial markets have been deregulated and credit has become easier to obtain as financial institutions compete strongly with each other for market share. Additionally, the easy issue and ubiquitous acceptance of credit cards have facilitated spending on consumption. Moreover, the development and marketing of financial products has burgeoned, people have been encouraged to invest directly by means of the internet and discussion of financial strategies has become part of everyday conversation. Furthermore, governments world-wide are moving down the path of encouraging their citizens to take more responsibility for their retirement incomes and to move away from public pensions. Employers are equally trying to shed the responsibility and risk associ ated with defined-benefit retirement schemes by changing to defined-contribution accumulation schemes where beneficiaries are responsible for their own investment strategies and eventual retirement benefits.

Symptoms of insufficient personal financial literacy include rising individual debt levels with overuse of credit cards, using personal loans for consumption and undertaking over-optimistic home-loan obligations, irresponsible overspending on consumption, foolish commitment to get-rich-quick schemes, making unwise high-risk investments inconsistent with required capital stability and entering inappropriate vehicle-leasing contracts, among others. On a more mundane level, people on lower incomes often make unwise commitments to mobile-telephone contracts, buy now-pay later purchases, long-term exercise-centre contracts and expensive diet plans.

In the UK early in the 1990s, many people including Mannion (1992) warned of dramatic increases in personal debt levels. The NatWest (Banking) Group established a charitable fund in 1994 to make a significant contribution to the society in which it operated. One of its first projects was to investigate financial literacy and to consider how an educational program might be fitted into the secondary school curriculum (Schagen and Lines, 1996). Following the publication of the findings of that research, NatWest sponsored a new financial literacy scheme for secondary schools (Edwards, 1997, p. X).

In the USA, the Federal Reserve Board was so concerned with the lack of basic financial skills among high-school leavers that in 1995 it funded the Jump$tart Coalition for Personal Financial Literacy (www.jumpstart.org, August 2002). Chase Manhattan Bank has taken up the cause of promoting the improvement of financial literacy by subsidising financial education. Since 1998, the Bank has spent $US5.5 million on 170 grants to programs which deliver financial education (Education USA, 19 February 2001, p. 8). Alan Greenspan, the chairman of the US Federal Reserve Board, views financial literacy as 'a tool for economic progress' and a means to prevent 'abusive lending practices that target...vulnerable segments of the population...[which] result in unaffordable payments, equity stripping and foreclosure' (Greenspan, 2002, p. 41).

Australians are not immune to the financial illiteracy problem and symptoms here, just as elsewhere, abound. Household debt has risen much faster than household disposable income; in 1992, the ratio of household debt to disposable income was about 1:2 or 50% but, by 2002, this value had risen to 1.1:1 or 110% (RBA, 2002, p. 20). Uninformed people fall prey to financial scams. The Australian Securities and Investments Commission (ASIC), set up to promote confidence in the financial system and to protect financial consumers, maintains an informative web site with a special education section known as 'fido' to try to protect consumers (http://fido.asic.gov.au, August 2002).