Financial Literacy Research

In 2004, the Commonwealth Bank Foundation commissioned research to investigate people’s ability to make informed and responsible financial decisions and examine the relationships between financial literacy and its impact on individuals.

The research revealed a profile of those Australians with the lowest levels of financial literacy and demonstrated significant potential benefits for both individuals and the Australian economy from improving financial literacy.

Overview of results

• Annual personal and household income is related to financial literacy; it is likely that the higher a person’s financial literacy score, the higher their annual income
• Those with higher financial literacy are significantly more likely to have owned a business
• The higher their financial literacy score, the more confident people are of their ability to raise 10 per cent of their annual income within a week, boosting their ability to withstand sudden financial pressure
• Lower financial literacy scores are directly related to respondents having been unable to pay their mobile phone, utility and credit card bills in the last 10 years.

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:

• be aged 16 to 20 years old (38.6 per cent)
• be male (55.6 per cent)
• be unemployed (7.1 per cent) or students (29.6 per cent)
• 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)
• have lower annual personal income (34 per cent reported annual personal income under $10,000)
• have lower annual household income (44 per cent reported annual household income under $50,000)
• have never worked in paid employment.

Effects of increasing financial literacy

Increasing the levels of financial literacy by a modest amount amongst those Australians who are least financially literate over 10 years would have a significant impact on the Australian economy and individuals.

The economy

Improved financial literacy levels could contribute $6 billion per year to GDP and create over 16,000 new jobs. Specifically, we would experience:

• improved decision-making in the workforce, resulting in greater productivity
• less capital wastage with improved decisions on starting new businesses and home purchasing
• increased flow of funds to Australia’s more profitable businesses via better saving and investment decisions.

Other potential indirect benefits to the economy include:

• reduction in the need for welfare
• increased economic opportunities
• bolstering of national savings
• creation of well-informed consumers.

Individuals

• a one point increase in a person’s financial literacy score could increase an their annual income by and average of $1,955 per annum for males and $919 per annum for females
• increase annual personal income by $3,204 per person on average
• reduce probability of being unemployed on average by 0.16%
• a 2 per cent reduction in the proportion of people unable to pay their mobile phone bill
• a 1 per cent reduction in the proportion of people unable to pay their utility bill.

Sources of financial knowledge

For 16-20 year olds in the lowest 10 per cent of financially literate people, the main sources of financial knowledge were family, friends and colleagues (86%), experience/trial and error (69 per cent), and school (68 per cent).

The relationship between financial literacy and school was significant. A large number of young respondents stated they received their existing financial knowledge from school. This was also the case for other participants who have low levels of financial literacy.

This suggests that schools provide a major source of education which impacts the way people manage their personal finances. It also suggests that school is one of the most appropriate educational environments to teach people financial literacy skills to help them make informed decisions on financial matters in the future.

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Key findings
Research report