tag:theconversation.com,2011:/ca/topics/financial-literacy-2352/articlesFinancial literacy – The Conversation2024-01-17T19:07:47Ztag:theconversation.com,2011:article/2177792024-01-17T19:07:47Z2024-01-17T19:07:47ZWhat are ‘good’ and ‘bad’ debts, and which should I pay off first?<p>With the cost of living soaring and many struggling to get a pay rise, it’s not surprising people are using debt to navigate life’s financial twists and turns.</p>
<p>Owing money can sometimes feel challenging, but not all debts should keep you awake at night.</p>
<p>So which debts are good and which are bad? And in what order should you pay them off? As it all depends on your personal circumstances, all I can offer is general information and not financial advice. Ideally, you should seek guidance from an accredited financial adviser. But in the meantime, here are some ideas to consider.</p>
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Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
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<h2>What is a ‘good debt’?</h2>
<p>Good debts can be strategic tools and help build a solid foundation for your future. They usually increase your net worth by helping you generate income or buy assets that increase in value. </p>
<p>With good debts, you usually get back more than what you pay for. They usually have lower interest rates and longer repayment terms. But personal finance is dynamic, and the line between good and bad debt can be nuanced. If not managed properly, even good debts can cause problems. </p>
<p>Some examples of “good debts” might include:</p>
<p><strong>Mortgages</strong>: A mortgage allows you to buy a house, which is an asset that generally increases in value over time. You may potentially get tax advantages, such as <a href="https://www.ato.gov.au/forms-and-instructions/rental-properties-2023/other-tax-considerations">negative gearing</a>, through investment properties. However, it’s crucial not to overstretch yourself and turn a mortgage into a nightmare. As a rule of thumb, try avoid spending <a href="https://www.cnbc.com/select/mortgage-affordability/">more than 30% of your income</a> per year on your mortgage repayments.</p>
<p><strong>Student loans</strong>: Education is an investment in yourself. Used well, student loans (such as <a href="https://www.studyassist.gov.au/help-loans/hecs-help">HECS-HELP</a>) can be the ticket to a higher-paying job and better career opportunities.</p>
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<a href="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman in a hijab looks at her phone." src="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560928/original/file-20231122-4580-k0yfz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Review the terms and conditions of any loans carefully.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-muslim-woman-wears-hijab-black-2252700881">Shutterstock</a></span>
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<h2>What is a ‘bad debt’?</h2>
<p>“Bad debts” undermine your financial stability and can hinder your financial progress. They usually come with high interest rates and short repayment terms, making them more challenging to pay off. They can lead to a vicious cycle of debt. </p>
<p>Examples of bad debts include:</p>
<p><strong>Payday loans</strong>: A payday loan offers a quick fix for people in a financial tight spot. However, their steep interest rates, high fees and tight repayment terms often end up worsening a person’s financial problems. The interest and fee you may end up paying can get close to the loan amount itself.</p>
<p><strong>Credit card debt:</strong> Credit cards can be like quicksand for your finances. If you don’t pay off your purchase on time, you’ll be subject to an annual interest rate of around <a href="https://www.rba.gov.au/statistics/tables/">19.94%</a>. For a A$3,000 credit card debt, for example, that could mean paying nearly $600 annual interest. Carrying credit card debt from month to month can lead to a seemingly never-ending debt cycle.</p>
<p><strong>Personal loans:</strong> People usually take personal loans from a bank to pay for something special, such as a nice holiday or a car. They often come with higher interest rates, averaging around <a href="https://www.finder.com.au/personal-loans">10%</a>. Spending money that you don’t have can lead to prolonged financial headaches.</p>
<p><strong>Buy-now-pay-later services:</strong> Buy-now-pay-later services often provide interest-free instalment options for purchases. This can be tempting, but the account fees and late payment fees associated with buy-now-pay-later services can lead to a long-term financial hangover. The convenience and accessibility of buy-now-pay-later services can also make it easy to get further and further into debt.</p>
<h2>So in what order should I pay off my debts?</h2>
<p>There is no one right answer to this question, but here are three factors to consider.</p>
<p><strong>Prioritise high-interest debts</strong>: Start by confronting the debts with the highest interest rates. This typically includes credit card debt and personal loans. Paying off high-interest debts first can save you money and reduce your total debt faster.</p>
<p><strong>Negotiate interest rates or switch lenders:</strong> Don’t be shy. A simple call to your lender requesting a lower rate can make a significant difference. You may also take advantage of sign-on offers and refinancing your loan with a new lender. In the banking business, customers are not usually rewarded for their loyalty.</p>
<p><strong>Consider different repayment strategies:</strong> Choose a debt repayment strategy that aligns with your preferences. Some people get a psychological boost from paying off smaller debts first (this is often called the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">snowball method</a>”). Others focus on high-interest debts (often known as the “<a href="https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/#:%7E:text=The%20%22snowball%20method%2C%22%20simply,all%20accounts%20are%20paid%20off.">avalanche method</a>”). Find what works for you. The most important thing is to have a plan and stick to it.</p>
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<a href="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An older man speaks on the phone." src="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560927/original/file-20231122-15-l1oafq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Don’t be afraid to call your lender and ask for a lower interest rate.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pensive-mature-man-communicating-someone-over-1656926761">Shutterstock</a></span>
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<p>Review the terms of each debt carefully. Certain loans offer flexibility in repayment schedules, while others may impose penalties for early settlement. Take note of these conditions as you develop your repayment plan.</p>
<p>Debt can be a useful tool or a dangerous trap, depending on how you use it. By understanding the difference between good and bad debts, and by having a smart strategy for paying them off, you can take charge of your financial future.</p>
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Read more:
<a href="https://theconversation.com/many-students-dont-know-how-to-manage-their-money-here-are-6-ways-to-improve-financial-literacy-education-177918">Many students don't know how to manage their money. Here are 6 ways to improve financial literacy education</a>
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<img src="https://counter.theconversation.com/content/217779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angel Zhong does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Feel like you’re drowning in debt? Owing money can sometimes be challenging, but not all debts should keep you awake at night.Angel Zhong, Associate Professor of Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2120982023-08-27T22:42:36Z2023-08-27T22:42:36ZFinancial education has its limits – if we want New Zealanders to be better with money, we need to start at home<p>Even as an economics student at university, I remember heading into town on a Friday night knowing what I needed to pay the bills before I could spend on socialising. But despite having the financial literacy to know better, Monday could still sometimes begin with a trip to the bank to ask for an overdraft extension. </p>
<p>So it was encouraging to hear that financial education has become a political talking point ahead of this year’s election. Both <a href="https://www.stuff.co.nz/national/politics/132778326/labour-promises-compulsory-financial-literacy-lessons-for-school-children-national-backs-the-idea">Labour</a> and <a href="https://www.1news.co.nz/2023/08/20/national-also-aiming-to-make-financial-literacy-compulsory-in-schools/">National</a> are promising to deliver compulsory financial literacy classes as part of the school curriculum. </p>
<p>Labour’s proposed financial literacy programme would include the basics of budgeting, financial concepts and how to be good with money. It would also include explanations of interest rates, retirement savings, insurance, debt and borrowing. </p>
<p>And when Prime Minister Chris Hipkins said “it shouldn’t matter what circumstances you were born into, you should still be able to learn concepts to help you”, he was right. Improved financial literacy can only be a good thing for New Zealand. </p>
<p>With the country in a recession, New Zealanders are facing both <a href="https://theconversation.com/dont-let-financial-shame-be-your-ruin-open-conversations-can-help-ease-the-burden-of-personal-debt-202496">ballooning debt and a legacy of poor saving</a>. The average household debt in New Zealand is now more than 170% of gross household income. This is higher than the United Kingdom (133%), Australia (113%) or Ireland (96%). </p>
<p>And yet, researchers remain divided over whether financial education can actually have a positive impact on financial behaviour in the long term. In New Zealand and elsewhere, it seems factors closer to home have a greater influence on a person’s financial literacy than anything learned at school. </p>
<h2>Education, borrowing and debt</h2>
<p>One 2014 <a href="https://openknowledge.worldbank.org/entities/publication/44870ac3-5b7e-57f7-be49-000f56f4cc30">meta-analysis</a> of 188 research papers and articles concluded financial literacy interventions had a positive impact on increasing savings, but had no impact on reducing loan defaults. </p>
<p>A <a href="https://openknowledge.worldbank.org/entities/publication/eb8b7699-0d2f-5d6d-ab1e-4262122c1a9c">second analysis of 126 studies</a>, published in 2017, found financial education positively affected financial behaviour – but this had limits for lower-income families. Much like the earlier study, the researchers found borrowing behaviour was more difficult to change with formal education than saving behaviour. </p>
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Read more:
<a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">Are you financially literate? Here are 7 signs you're on the right track</a>
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<p>An important caveat is that these analyses measured the short-term response to hypothetical questions, not long-term behaviour.</p>
<p>But even when examining the impact of financial education on short-term behaviour, researchers found it was difficult to influence how people handled debt. Compulsory financial education did not improve the likelihood of getting into debt, or the likelihood of defaulting on loans. </p>
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<h2>Home and financial knowledge</h2>
<p>In his famous work on <a href="https://hr.berkeley.edu/how-social-learning-theory-works">social learning theory</a>, psychologist Albert Bandurra proposed that observation and modelling play a primary role in how and why people learn. They are particularly relevant to the development of financial attitudes, confidence and behaviour. </p>
<p>Specifically, young people learn from the financial behaviour <a href="http://abrn.asia/ojs/index.php/apjssr/article/view/61/68">modelled by their parents</a>, discussions about money in the home, and from receiving pocket money.</p>
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Read more:
<a href="https://theconversation.com/financial-literacy-is-a-public-policy-problem-84695">Financial literacy is a public policy problem</a>
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<p>It has been suggested the differences in how money and finances are dealt with in the home are linked to why women generally <a href="https://theconversation.com/hilda-survey-reveals-striking-gender-and-age-divide-in-financial-literacy-test-yourself-with-this-quiz-100451">score lower on financial literacy quizzes</a>, as do people from lower socio-economic backgrounds. </p>
<p>Parents’ education and their financial sophistication – whether they have stocks, for example – <a href="https://www.mdpi.com/1911-8074/16/4/252">have been shown</a> to affect their offspring’s financial literacy. Women are also found to have <a href="https://institute.eib.org/wp-content/uploads/2016/10/women-conf-lit.pdf">lower financial confidence</a>, even when they have the right knowledge.</p>
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<p>In a <a href="https://www.emerald.com/insight/content/doi/10.1108/YC-07-2017-00717/full/html">New Zealand study</a> of over 1,200 young people aged 14 and 15, the age of the first financial discussion between parent and child was found to be an important influence on future financial knowledge, attitudes and intentions. </p>
<p>The study found boys, on average, had their first financial discussion in the home at a younger age than girls. The age at which these initial discussions happen influence a person’s financial literacy levels at tertiary education age and beyond, even accounting for other demographic variables. </p>
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Read more:
<a href="https://theconversation.com/there-are-serious-problems-with-the-concept-of-financial-literacy-84836">There are serious problems with the concept of 'financial literacy'</a>
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<p>These findings suggest the way parents talk and manage finances in the home may be subject to a gender bias, contributing to <a href="https://onlinelibrary.wiley.com/doi/10.1111/ijcs.12179">different levels of financial literacy</a> – and confidence – between girls and boys. </p>
<p>So, as we consider adding financial education to New Zealand’s curriculum, it’s important to consider all of the factors that will feed into a student’s money literacy – and not just focus on test results in a classroom setting.</p><img src="https://counter.theconversation.com/content/212098/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Agnew does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both major political parties have promised to introduce financial literacy to New Zealand’s curriculum. But is school really the best place to teach students about money?Stephen Agnew, Senior Lecturer of Economics, University of CanterburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2023312023-03-26T19:12:37Z2023-03-26T19:12:37ZAre you financially literate? Here are 7 signs you’re on the right track<figure><img src="https://images.theconversation.com/files/516886/original/file-20230322-26-t0tjld.jpg?ixlib=rb-1.1.0&rect=0%2C32%2C5378%2C3604&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-in-brown-coat-holding-a-bank-card-3784391/">Photo by Andrea Piacquadio/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>With the cost of living and interest rates rising, a growing number of Australians are struggling to manage their <a href="https://www.smh.com.au/money/planning-and-budgeting/almost-half-of-australia-is-financially-stressed-here-s-one-way-to-fix-it-20221011-p5bowq.html">finances</a>. Many are experiencing real <a href="https://www.anu.edu.au/news/all-news/australians-under-increasing-financial-stress#:%7E:text=The%2520level%2520of%2520financial%2520stress,say%2520they%2520are%2520struggling%2520financially">financial stress</a>.</p>
<p>But even in the best of times, managing your finances is hard. Every day, you’re making complex financial decisions (some of which carry huge ramifications) and there are more financial products and services available than ever before. Navigating this minefield can be overwhelming and lead to financial anxiety. </p>
<p>Being financially literate helps. But what does “financial literacy” mean in practice?</p>
<p>Here are seven signs you’ve got the basics covered.</p>
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Read more:
<a href="https://theconversation.com/kids-and-money-five-ways-to-start-the-conversation-193632">Kids and money: five ways to start the conversation</a>
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<h2>1. You track your cashflow</h2>
<p>By tracking your cashflow on a regular basis, you’re ensuring your expenses don’t exceed your income. In other words, you make sure you’re earning more than you spend.</p>
<p>A good sign you’ve successfully managed your cashflow is that you have a surplus or a buffer.</p>
<p>These left-over funds can be used to boost savings, pay off debt or meet other financial commitments. </p>
<p>Cashflow management allows you to assess whether there are opportunities to increase your savings and/or reduce spending. Being able to manage your earnings and spending is a key financial skill.</p>
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<span class="caption">Do you know where your money goes?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-in-blue-denim-jeans-holding-silver-iphone-6-5076514/">Photo by cottonbro studio/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<h2>2. You have a budget – and you follow it</h2>
<p>Setting and following a budget requires financial discipline, which is a key part of financial literacy. </p>
<p>By following a budget, you’re putting a measure in place to live within your means and reduce the risk of overspending. </p>
<p>With all the competing demands that come with managing money, your budget can be a tool to keep you on track. And developing this habit over time can empower you to make wise financial decisions.</p>
<h2>3. You understand the difference between good debt and bad debt</h2>
<p>Love it or hate it, debt forms part of our financial portfolios and sustains the financial institutions we interact with. Knowing how to make debt work for you is a skill and a sign of good financial knowledge. It is crucial to understand the difference between good debt and bad debt.</p>
<p>Good debt is debt used to improve your long-term financial position or net worth, such as a home loan.</p>
<p>Bad debt tends to be consumption-driven and doesn’t have lasting value. Examples include payday loans or retail accounts.</p>
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<span class="caption">Do you have a budget to keep you on track?</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/woman-uses-calculator-7491011/">Photo by RODNAE Productions/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>4. You have your money in various places</h2>
<p>One of the key concepts of financially literacy is understanding the importance of diversification.</p>
<p>By having your money spread across various places (such as a savings account, property, the share market, superannuation and so on), you’ve reduced the concentration of risk.</p>
<p>This helps protect your wealth in tough economic times.</p>
<h2>5. You understand how financial assets work, along with their pros and cons</h2>
<p>Financial assets refers to things like cash, shares and bonds. It’s important to understand how financial assets work and how they can either help or hurt your financial position.</p>
<p>For instance, savings accounts are a safe financial instrument that earn interest on the amount accumulated within the account. But the fact they’re so safe also means that they won’t outperform inflation. </p>
<p>This type of knowledge is an imperative part of financial literacy.</p>
<h2>6. You’re aware of your financial strengths and weaknesses</h2>
<p>Financially literate people reflect on their capabilities. </p>
<p>When you can appreciate where your financial strengths and weaknesses lie, you can make better financial decisions and prioritise your needs.</p>
<p>On the other hand, being oblivious to your strengths and weaknesses means you miss opportunities to improve your financial health.</p>
<p>For example, perhaps you buy unnecessary stuff when you feel sad. Or maybe you panic when faced with tough financial choices and make quick decisions just to make the problem go away.</p>
<p>Neglecting to reflect on patterns of behaviour can lead to serious and possibly irreversible financial mistakes.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=421&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=421&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=421&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=529&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=529&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517075/original/file-20230322-20-f6yeod.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=529&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Understanding debt is important.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/stressed-woman-looking-at-documents-6963054/">Photo by Mikhail Nilov/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>7. You set financial goals and put measures in place to meet them</h2>
<p>Financially literate people plan for their finances. This involves setting goals for either earnings, savings, investments, and debt management or putting measures in place to protect wealth (via, for example, insurance to protect your wealth against loss). </p>
<p>Setting goals is one thing, but it’s also important to have a system and habits in place to achieve them. </p>
<p>Make sure you understand what you’re trying to achieve with your goals, why the goals are important and how you’ll achieve them.</p>
<p>Boosting your financial literacy can feel tough at first. But tackling your finances head on, controlling spending, participating in financial markets, handling debt, being able to understand financial assets and working towards financial goals can help you feel in control of your financial situation. </p>
<p>Everyone’s financial situation is unique, so none of what I’ve said here should be taken as financial advice. You can find <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">free financial counsellors</a> via the government’s MoneySmart site and if you need help with debt, contact the <a href="https://ndh.org.au/about-national-debt-helpline/contact-us/">National Debt Helpline</a> on 1800 007 007.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/borrowing-money-isnt-always-a-bad-thing-debt-can-be-a-sensible-way-to-build-wealth-192630">Borrowing money isn't always a bad thing – debt can be a sensible way to build wealth</a>
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<img src="https://counter.theconversation.com/content/202331/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even in the best of times, managing your finances is hard. We’re told to make sure we are financially literate but what does that mean in practice? Here are seven signs you’ve got the basics.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1991042023-02-26T19:04:23Z2023-02-26T19:04:23ZWhat is trauma insurance and what do I need to know if I am considering getting it?<figure><img src="https://images.theconversation.com/files/509999/original/file-20230214-22-o9aoil.jpg?ixlib=rb-1.1.0&rect=0%2C18%2C4033%2C2113&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.pexels.com/photo/short-haired-sick-asian-woman-opening-curtains-of-windows-in-hospital-6798569/">Photo by Michelle Leman/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Trauma insurance (also known as crisis cover or critical illness insurance) is not a widely understood cover. Many people <a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">don’t even know</a> it exists.</p>
<p>So, what is trauma insurance, when does it pay out and how is it different to private health insurance? </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-income-protection-insurance-and-hows-it-different-to-total-and-permanent-disability-insurance-193535">What is income protection insurance – and how's it different to total and permanent disability insurance?</a>
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<h2>A lump sum for life-threatening medical conditions</h2>
<p>Trauma insurance provides a benefit for life-threatening medical conditions that seriously compromise the insured person’s current and future quality of life. </p>
<p><a href="https://www.canstar.com.au/life-insurance/trauma-insurance/">Examples</a> of major trauma medical conditions include:</p>
<ul>
<li>cardiovascular conditions</li>
<li>cancer</li>
<li>stroke and</li>
<li>kidney failure.</li>
</ul>
<p>So the word trauma here doesn’t refer to what you might usually think of as traumatising events, such as a car accident or abuse. Rather, it refers to specific life-threatening medical conditions. </p>
<p>The exact conditions covered will vary from policy to policy and are always defined in the policy document – so make sure you read it carefully.</p>
<p>The payout received from this cover ideally should be enough to pay off the mortgage (if you have one), with money left over for medical expenses, rehabilitation and any living expenses. </p>
<p>The amount you get will depend on your policy and your circumstances but could be in the <a href="https://www.finder.com.au/how-much-trauma-insurance-do-i-need#:%7E:text=The%20average%20trauma%20insurance%20policy,both%20you%20and%20your%20family.">hundreds of thousands</a> or even <a href="https://www.nobleoak.com.au/trauma-insurance/faqs-trauma/#:%7E:text=Trauma%20Insurance%20can%20provide%20a,at%20the%20time%20of%20Application">millions</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C6134%2C4065&q=45&auto=format&w=1000&fit=clip"><img alt="A cancer patient looks out the window." src="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C6134%2C4065&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509994/original/file-20230214-22-1avuqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The exact conditions covered will vary from policy to policy.</span>
</figcaption>
</figure>
<h2>When can you make a trauma insurance claim?</h2>
<p>To be able to make a trauma insurance claim, the insured person does not have to die or be permanently disabled by severe medical trauma.</p>
<p>Instead, the benefit amount is payable if one of the “medical events” you’re insured against – a stroke, for example – occurs. However, you only get the payout if the definition of that event in your trauma insurance policy is satisfied.</p>
<p>It is important to understand what is covered and what is not.</p>
<p>Some insurance companies cover more than <a href="https://books.google.com.au/books/about/Guide_to_Life_Risk_Protection_and_Planni.html?id=H8IYkwEACAAJ&redir_esc=y">30 conditions</a>, but some limit themselves to just a few major ones.</p>
<h2>So how is trauma insurance different to other types of insurance?</h2>
<p>Trauma insurance pays a lump sum when a person becomes critically ill or injured. That’s regardless of whether or not the insured person can still work or will be able to work in future.</p>
<p>Unlike total and permanent disability insurance, the insured person does not need to be totally and permanently disabled.</p>
<p>Income protection insurance usually pays a percentage of the insured person’s income, so they can sustain the quality of life they had before illness or disability. Trauma insurance, on the other hand, pays out a lump sum.</p>
<p>And unlike trauma insurance, both total and permanent disability and income protection insurances can be purchased within a <a href="https://www.choice.com.au/money/financial-planning-and-investing/superannuation/buying-guides/insurance-in-super">superannuation account</a>. Superannuation funds are <a href="https://www.superguide.com.au/comparing-super-funds/insurance-super">not permitted</a> to offer trauma insurance, so if you want trauma insurance you have to pay for this cover from your own pocket.</p>
<p><a href="https://www.griffith.edu.au/__data/assets/pdf_file/0030/295770/FPRJ-V4-ISS1-pp-53-75-insurance-literacy-in-australia.pdf">Research</a> interviews I conducted with financial advisers and consumers revealed most people who see financial advisers do not know much about trauma insurance. In fact, 25 out of 40 (63%) consumers I interviewed said they had never heard of it. </p>
<p>Some of the consumers I spoke to were confused about the difference between trauma insurance and private health insurance. Many thought they were very similar, if not the same.</p>
<p>Many people do not realise private health insurance pays only for a hospital stay (and, if you have extras cover, may reduce the cost of certain non-hospital treatments). It doesn’t cover ongoing living costs. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at the fine print." src="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/510265/original/file-20230215-23-3v4rtc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Always read the fine print.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/photo/photo-of-woman-wearing-denim-jeans-4100294/">Photo by Matilda Wormwood/Pexels</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Important things to check before you buy trauma insurance</h2>
<p>Most trauma insurance policies have a waiting period before you can claim anything (usually about 90 days).</p>
<p>Importantly, most self-inflicted injuries or illnesses will not be covered by the majority of trauma policies.</p>
<p>Death or disability caused by attempted suicide usually has a waiting period of 13 months, after which, in most cases, the insurer will pay out. If you die by suicide then your next of kin will get the lump sum.</p>
<p>Any pre-existing medical conditions must be disclosed at the time of application; the insurer may choose to exclude those conditions or apply a loading (which makes premiums more expensive). </p>
<p>If pre-existing conditions are not disclosed at the start, you run the risk of particular claims being rejected in future.</p>
<p>Trauma insurance does not cover <a href="https://moneysmart.gov.au/how-life-insurance-works/trauma-insurance">mental health conditions</a>. This is probably due to the fact people who claim for a mental health condition are <a href="https://fsc.org.au/resources/2235-fsc-kpmg-mental-health-analysis-summary-report-june-2021/file">likely</a> to claim again.</p>
<p>If you’ve got or are considering getting trauma insurance, make sure you check the definitions of what it covers, as well as the specific inclusions and exclusions.</p>
<p>Trauma insurance is relatively expensive. That’s chiefly because the possibility of a claim is higher than many other types of personal insurance.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A person does walking rehab exercises." src="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/510267/original/file-20230215-26-isvwp0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The payout received ideally should be enough to cover things like mortgage, medical expenses and rehabilitation.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Possible peace of mind</h2>
<p>Overall, trauma insurance is expensive but may offer some people peace of mind they will have the money needed to pay privately for medical expenses and treatments if a serious medical event strikes.</p>
<p>If the cover is high enough to pay off a person’s outstanding debts, this may take the financial pressure away so they can concentrate on recovering from illness.</p>
<p>This will also reduce the financial burden on the government, as the insured person will not need to claim any payments from Centrelink.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-to-switch-health-insurers-if-youre-worried-about-cybersecurity-costs-or-claims-194248">How to switch health insurers if you're worried about cybersecurity, costs or claims</a>
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</em>
</p>
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<img src="https://counter.theconversation.com/content/199104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tania Driver does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trauma insurance provides a benefit for life-threatening medical conditions that seriously compromise the insured person’s current and future quality of life.Tania Driver, Lecturer in Financial Planning, James Cook UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1750522022-02-21T19:08:00Z2022-02-21T19:08:00ZThinking of joining a multi-level marketing scheme or MLM as your side hustle? Read this first<figure><img src="https://images.theconversation.com/files/441190/original/file-20220117-17-17z9037.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7200%2C4785&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Multi-level marketing (MLM) is a business model that relies on direct selling and consultants recruiting friends and relatives to also become consultants, salespeople or distributors.</p>
<p>MLM salespeople sell products – such as beauty products, kitchenwares, essential oils or health supplements – directly to end-user retail consumers. These sales are made through relationship referrals, word-of-mouth marketing, and increasingly through <a href="https://www.businessinsider.com/mlms-use-social-media-facebook-portray-financial-success-2019-7?r=AU&IR=T">social media</a>. </p>
<p>Billed as entrepreneurial self-employment, many people (<a href="https://directselling.org.au/statistics-research/">mostly women</a>) join MLMs to supplement their income or make some money while caring for kids.</p>
<p>However, while MLMs promise financial independence, flexibility and work-life balance, it’s been <a href="https://centerforinquiry.org/wp-content/uploads/sites/33/quackwatch/taylor.pdf">widely</a> <a href="https://amazingprofitsonline.com/wp-content/uploads/2021/02/AARP-Foundation-MLM-Research-Study-Report-min.pdf">reported</a> by <a href="https://slate.com/business/2018/12/multilevel-marketing-podcast-review-the-dream-facebook.html">media</a> and <a href="https://brill.com/view/journals/jlso/aop/article-10.1163-24714607-bja10029/article-10.1163-24714607-bja10029.xml">researchers</a> that very few MLM sellers make any profit.</p>
<p>To find out more, we <a href="https://eprints.qut.edu.au/216593/">surveyed</a> 287 current and former MLM consultants in Australia. </p>
<p>Many <a href="https://research.qut.edu.au/centre-for-justice/wp-content/uploads/sites/304/2022/02/Briefing-Paper-Series-Feb2022-Issue20-17022022.pdf">said</a> they made less than A$5,000 a year from their MLM business. But even this figure is likely an overestimate for many; around half of those we surveyed said they didn’t include all costs in their profit calculations.</p>
<p>Around 40% of former MLM consultants told us they left for financial reasons.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/multi-level-marketing-has-been-likened-to-a-legal-pyramid-scheme-the-backlash-against-it-is-growing-117931">Multi-level marketing has been likened to a legal pyramid scheme – the backlash against it is growing</a>
</strong>
</em>
</p>
<hr>
<h2>How do MLMs work?</h2>
<p>Under Australian Consumer Law, legal MLM enterprises are not classed as pyramid schemes because consultants’ income is predominantly derived from selling products or services rather than recruiting others into the scheme.</p>
<p>However, consultants are incentivised to recruit others because recruits become their “downline”. Most MLMs offer commissions based on downlines’ sales in addition to their own sales. </p>
<p>For example: Mary recruits Jane as a consultant and now Jane is in Mary’s downline. So now Mary gets to keep a portion of the money Jane makes from her sales. Jane goes on to recruit Angela to her downline; now both Mary and Jane get to keep a portion of the money Angela makes from her sales.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/441194/original/file-20220117-27-1ws6o7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Most MLMs offer commissions based on downlines’ sales in addition to their own sales.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<p>There are close to <a href="https://directselling.org.au/statistics-research/">half a million independent MLM sellers in Australia</a> selling products ranging from health and beauty products to craft supplies, home wares and fashion.</p>
<p>Critics say the MLM business model depends on <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/soc4.12692">exploiting women’s social circles</a> as well as aspirations or obligations to generate income while managing caring responsibilities.</p>
<h2>Is it really a side hustle if you end up losing money?</h2>
<p>The most common reason for joining an MLM is to earn extra money. But a <a href="https://www.magnifymoney.com/blog/news/survey-vast-majority-multilevel-marketing-participants-earn-less-70-cents-hour/">US survey</a> of more than 1,000 MLM sellers found the majority made less than US 70c per hour in sales – before deducting expenses.</p>
<p>Fewer than half made US$500 over five years. Nearly a third acquired credit card debt to finance their MLM involvement. </p>
<p>A <a href="https://www.aarp.org/aarp-foundation/our-work/income/multilevel-marketing/">2020 study by AARP</a> (formerly known as the American Association of Retired Persons) found 1 in 13 US adults had tried MLM at some point, and nearly half had lost money.</p>
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<p>In our <a href="https://eprints.qut.edu.au/216593/">study</a>, we were interested in the financial literacy of MLM consultants in Australia. You can <a href="https://qutc.syd1.qualtrics.com/jfe/form/SV_cUuwCVysxdvaT7U">test your financial literacy</a> using the questions we asked consultants. </p>
<p>We compared the actual and perceived financial literacy of MLM consultants, and found many were unable to answer questions assessing basic financial literacy.</p>
<p>We also asked MLM-specific financial literacy questions and found a sample of the general population (meaning people not involved in MLMs) were more likely to answer these questions correctly than most of the MLM sample.</p>
<p>We also found some respondents are particularly vulnerable to MLM recruitment as they have high levels of optimism and materialism and are overconfident of their financial knowledge. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
</strong>
</em>
</p>
<hr>
<h2>Questions to ask yourself before joining an MLM</h2>
<p>If you are considering joining an MLM, our research suggests you need to consider the following questions first.</p>
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<p><strong>1. Can I afford to join an MLM?</strong></p>
<p>You may need to purchase a starter kit or demonstration products, or pay a joining fee. Two-thirds of consultants told us they spent more than $1,000 starting their MLM business. </p>
<p>But the majority told us it took more than a year to make any profit. So if you are going to take out a loan, consider the repayment terms, including interest. </p>
<p>Some MLM companies have annual membership fees. Others have monthly or quarterly sales targets and you may feel pressured to meet these by purchasing additional products yourself to meet your quota. In fact, 40% of consultants told us they did not make any profit in their MLM business. </p>
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<p><strong>2. Do I really have the financial knowledge and skills to run my own MLM business?</strong></p>
<p>Most MLM recruits have little or no experience running a home-based business; only 20% seek ongoing advice from a financial professional.</p>
<p>This is concerning, as MLMs typically have complex commission and remuneration structures.</p>
<p>We also found many sellers overestimate their financial knowledge compared to their actual financial literacy.</p>
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<p><strong>3. Do I have all the information I need to make an informed decision to join?</strong></p>
<p>It is important to collect as much information as possible before making this decision.</p>
<p>MLM consultants and the person trying to recruit you have a vested interest in highlighting success stories and downplaying how statistically improbable it is you’ll achieve them. </p>
<p>Do your homework, compare alternatives and ask current and former consultants about their experiences to get both sides of the story. </p>
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</figure><img src="https://counter.theconversation.com/content/175052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deanna Grant-Smith received funding from Ecstra Foundation to undertake this research. She is a board member of the TJ Ryan Foundation, a progressive public policy think tank. This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p><p class="fine-print"><em><span>Laura de Zwaan receives funding from Ecstra Foundation and the Financial Basics Foundation. She is affiliated with the Financial Planning Academic Forum and is an Academic Member of the Financial Planning Association. </span></em></p>Is it really a side hustle if you end up losing money? We surveyed 287 current and former MLM consultants in Australia. The findings paint a bleak picture.Deanna Grant-Smith, Associate Professor, Queensland University of TechnologyLaura de Zwaan, Lecturer, School of Accountancy, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1705662021-11-08T15:05:48Z2021-11-08T15:05:48ZEarly access to retirement savings in South Africa is a risk: here’s why<figure><img src="https://images.theconversation.com/files/429031/original/file-20211028-24-sexry8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>The COVID-19 pandemic has put a financial strain on businesses, households and individuals. It’s leading more older adults to retire early, according to recent <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7665781/">research</a>. This means retirees could be making increased claims on social security benefits. </p>
<p>The pandemic pressures are one reason that South Africa’s <a href="http://www.treasury.gov.za/comm_media/press/2021/2021081101%20MEDIA%20STATEMENT%20-%20EARLY%20ACCESS%20TO%20RETIREMENT%20SAVINGS.pdf">National Treasury</a> announced in August 2021 that it planned to overhaul the retirement rules. With the rise in costs of living and income insecurity, many people simply can’t afford to wait until retirement to access their pensions. It is expected that the overhaul will come into effect in 2022. </p>
<p>Currently, retirement fund members can only access their pre-retirement benefits upon resignation or retrenchment. Even then, a steep level of tax is imposed on cashing out pensions to dissuade members from accessing these funds prematurely. This system has been in place since <a href="https://www.gov.za/documents/pension-funds-act-22-may-2015-1349">The Pension Funds Act of 1956</a>. Members that resign or are retrenched are encouraged to preserve their pensions for retirement, as <a href="https://files.eric.ed.gov/fulltext/EJ1199114.pdf">previous research</a> found that pensions are the only form of long-term savings for many South Africans in formal employment. The situation is more dire for the unemployed and those in informal employment, who are estimated to make up two-thirds of all South Africans. </p>
<p>The treasury’s decision may have positive short-term outcomes where individuals can use their pensions to meet immediate and urgent financial needs. But its long-term implications are a cause for concern, or they should be. <a href="https://gbata.org/wp-content/uploads/2021/09/2021-GBATA-Readings-Book-9.13.21.pdf#page=225">My research</a> suggests that most individuals are unlikely to understand these implications clearly and are therefore at risk of making poor financial decisions for the long-term. Only 6% of South Africans are estimated to be financially independent at retirement. </p>
<h2>Financial literacy</h2>
<p>For many people in South Africa, their family property and retirement savings are the biggest part of their wealth. If they start tapping into their retirement savings and investments early, their wealth won’t have time to grow and their nest egg might be used up sooner than planned. </p>
<p>It starts with savings. And <a href="https://files.eric.ed.gov/fulltext/EJ1199114.pdf">research consistently demonstrates</a> that people are more likely to save if they are financially literate. They have to <a href="https://www.researchgate.net/publication/340130176_Retirement_funding_adequacy_in_black_South_African_townships">understand</a> the advantages of long-term savings. Professional financial advice is instrumental in fostering long-term savings and investments, yet less than 20% of South Africans have financial advisers. </p>
<p>The ability to save for retirement is complicated in South Africa by the fact that differences in employment, income and financial literacy are still racialised. The national treasury’s proposal may widen these differences. </p>
<p>While <a href="http://www.scielo.org.za/scielo.php?script=sci_arttext&pid=S2222-34362018000100047">past studies</a> have explored the general financial literacy of South Africans, little is known about their retirement literacy. </p>
<p>I decided to fill in some of this gap by conducting a study of 125 individuals who hadn’t yet retired. The study was done in the Eastern Cape province of South Africa, where most of the respondents indicated that they are black South Africans, with a bachelor’s degree as their highest level of education. The research sought to answer two questions: 1) To what extent do individuals perceive themselves to be retirement literate? 2) How does the perceived retirement literacy of individuals compare to their actual retirement literacy?</p>
<p>I found a clear discrepancy between how much people thought they knew and what they actually knew about finance for retirement. With the financial pressures caused by the pandemic, and conversations around early access to retirement funds, the need to bridge this divide is apparent.</p>
<h2>Good intentions</h2>
<p><a href="https://gbata.org/wp-content/uploads/2021/09/2021-GBATA-Readings-Book-9.13.21.pdf#page=225">My research</a> comprised two parts. In the first, I administered a questionnaire about what respondents thought of their own retirement knowledge, retirement planning skills, intentions to actively plan for retirement and the activities undertaken to plan for retirement.</p>
<p>The questionnaire revealed that most people who participated in the research (65%) intended to plan for their retirement by making contributions towards a pension fund and planned to seek professional financial advice for their retirement. The sample also agreed (43%) that they understood how retirement funds operate. More than half of the respondents (53%) stated that they were comfortable with the concepts relating to retirement, they could apply their knowledge to improve their financial welfare and were preparing for a financially secure retirement.</p>
<p>In the second part of the study, I investigated the actual retirement literacy of individuals through a multiple-choice test. The main areas of the test covered: general financial knowledge; retirement-related investments and advanced retirement knowledge. One question weighed their understanding of inflation and its impact on savings. Another gauged their knowledge on asset allocations in retirement funds. The knowledge around tax implications on retirement benefits was also assessed. </p>
<p>Overall, 59% of the sample failed the retirement literacy test. While most people (75%) could correctly answer the general finance-related questions, less than half of the respondents (47%) could answer the retirement-related finance questions. When more advanced retirement-related concepts were presented to the respondents, only 10% gave the correct answers.</p>
<p>In particular, the respondents lacked knowledge on how shares, in the long-term, outperform other types of financial securities and the significance of preservation funds. This finding corroborates <a href="https://jefjournal.org.za/index.php/jef/article/view/486/881">reports</a> on how many South Africans don’t save their retirement provisions received from their pension when changing jobs or employers.</p>
<h2>Perceived and actual knowledge</h2>
<p>Now that many people are under financial pressure and may soon be allowed to spend a portion of their retirement savings, it’s important that they should understand the options and risks.</p>
<p>While the services of a professional financial planner can assist in managing retirement plans and savings, the extent to which money management is taught at home must also be considered. </p>
<p>A act of saving is a <a href="https://www.researchgate.net/publication/241701965_Psychological_and_psychosocial_predictors_of_attitudes_to_working_past_normal_retirement_age">cultural value</a>, one that is passed on from one generation to another. Instilling this value from a young age can change the way finances are managed from young adulthood into older age. This would have the benefit of reducing dependence on family and government grants at retirement. </p>
<p>Overcoming the taboo around money talk in families and communities assists the development of positive financial attitudes, demystifies financial management and promotes financial well-being.</p><img src="https://counter.theconversation.com/content/170566/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s important for South Africans to understand the options and risks before they dip into their retirement savings.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1694652021-10-13T19:12:04Z2021-10-13T19:12:04ZWhy your ex may be able to claim half your superannuation, even if you aren’t married<figure><img src="https://images.theconversation.com/files/426072/original/file-20211012-15-1aike4k.jpg?ixlib=rb-1.1.0&rect=1341%2C461%2C2652%2C1586&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Picsfive/Shutterstock</span></span></figcaption></figure><p>Moving in together is an exciting time for people in relationships. Likely the last thing on your mind is what might happen in the event of a breakup. </p>
<p>But it’s worth knowing that if you split, your ex could be able to file a legal claim for up to half your superannuation, under <a href="https://www.ag.gov.au/families-and-marriage/families/superannuation-splitting">certain circumstances</a>. </p>
<p>And for all states (except <a href="https://www.gotocourt.com.au/family-law/superannuation-split-wa/">Western Australia</a>), you don’t need to be married, have kids or own a house together; even people in de facto relationships may have to split their super when they break up.</p>
<p>For the purposes of family law, a de facto relationship is when you and your partner live together in a relationship as a couple on a genuine domestic basis but are not married. </p>
<p>The superannuation of both partners is included in the pool of assets divided on separation. Super is often the single biggest financial asset younger people have, so make sure you know what the law <a href="https://www.ag.gov.au/families-and-marriage/families/superannuation-splitting">says</a> on this question. </p>
<p>Here’s what you need to know.</p>
<h2>By order of the court, or by agreement</h2>
<p>Splitting up super could become a bigger issue in years to come, as compulsory employer contributions ratchet up. When superannuation was made compulsory almost 30 years ago, <a href="https://www.apra.gov.au/superannuation-australia-a-timeline">employer contributions were 3%</a>. As of July, <a href="https://www.ato.gov.au/Business/Business-bulletins-newsroom/Employer-information/Super-Guarantee-rate-rising-1-July/">they’ve hit 10%</a>. So these assets are getting bigger, faster. </p>
<p>According to the federal attorney-general’s <a href="https://www.ag.gov.au/families-and-marriage/publications/superannuation-splitting-frequently-asked-questions">website</a>, superannuation can be split either by:</p>
<ul>
<li><p>an order of the Federal Circuit and Family Court of Australia (or Family Court of Western Australia for married couples in Western Australia); or</p></li>
<li><p>a superannuation agreement (a financial agreement that deals with a superannuation interest).</p></li>
</ul>
<p>The <a href="https://www.legislation.gov.au/Series/C2004A00275">Family Law Act 1975</a> gives the Family Court the power to deal with superannuation interests of spouses (including de facto spouses). </p>
<p>The superannuation cannot usually be taken as a cash payment; in most cases, it is rolled over to the recipient’s own superannuation account.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A couple sit angrily on a couch." src="https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/425403/original/file-20211008-23-li5okq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">If you split, your ex could be able to file a legal claim for up to half your super, under certain circumstances.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/people-are-using-artificial-intelligence-to-help-sort-out-their-divorce-would-you-142731">People are using artificial intelligence to help sort out their divorce. Would you?</a>
</strong>
</em>
</p>
<hr>
<h2>But why?</h2>
<p>These laws were designed to tackle the longstanding issue where one person in a relationship – usually a woman – would have a tiny amount of super relative to her partner. </p>
<p>That’s because, back a generation, it was common for women in particular to give up work and spend many of their productive years as primary carers for their children. Even now, women are more likely than men to reduce their working hours to raise a family and <a href="https://theconversation.com/voluntary-super-a-good-way-to-increase-womens-dependence-on-men-120979">have a fraction of the superannuation of their male partners</a>. </p>
<p>The laws are meant to ensure equity in the event of the relationship foundering, and improve the life of the person with less financial power in the relationship after it ends.</p>
<p>But society has changed and we are more likely to separate and re-partner. That, plus the higher amounts involved, means these cases may be cropping up more often now than in the past.</p>
<h2>How do these laws apply to me?</h2>
<p>You don’t have to be married to potentially have to split your assets.</p>
<p>It applies if you have a child together or have been in a de facto relationship <a href="http://classic.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s90sb.html">for at least two years</a>. The definition of a de facto relationship under <a href="http://classic.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s4aa.html">section 4AA of the the Family Law Act 1975</a> is based on whether you were living together in a genuine domestic relationship. </p>
<p>According to the Act, a person is in a de facto relationship with another person if:</p>
<blockquote>
<p>(a) the persons are not legally married to each other; and</p>
<p>(b) the persons are not related by family </p>
<p>(c) having regard to all the circumstances of their relationship, they have a relationship as a couple living together on a genuine domestic basis.</p>
</blockquote>
<p>The circumstances of the relationship are set out and include matters such as how you organise your financial arrangements, whether you have children, your commitment to a life together and whether other people would see you as a couple. </p>
<p>So consider these issues before you move in together or take steps to cement your relationship. </p>
<p>Remember that any split isn’t necessarily half-half. You can enter into an agreement without going to court, but if you do end up in court the judge will take into account the relevant circumstances including whether you have kids, direct and indirect financial contributions to the relationship, and the ongoing needs of each party.</p>
<p>And if a relationship has ended in bitterness, judges will hopefully be alert to the possibility a legal claim for an ex-partner’s super could be part of a vindictive effort to cause distress, and take that into account.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at a legal letter" src="https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/425407/original/file-20211008-21-1ii1riz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Judges will hopefully be alert to the possibility a legal claim for an ex-partner’s super could part of a vindictive effort to cause distress.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Go in with your eyes open</h2>
<p>It’s not common for people in new or de facto relationships to draw up legal documents to protect themselves. </p>
<p>Go in with your eyes open, but you do have to have a certain amount of trust. Engaged couples do sometimes look at drawing up a financial agreement (a prenuptial agreement), which can address issues like super. </p>
<p>You can read more about superannuation and your rights in the event of a breakup on the <a href="https://www.ag.gov.au/families-and-marriage/families/superannuation-splitting">federal attorney general’s website</a>, which has also produced a “frequently asked questions” <a href="https://www.ag.gov.au/sites/default/files/2020-03/Superannuation%20splitting%20frequently%20asked%20questions.pdf">factsheet</a> on the matter. </p>
<p>You can also:</p>
<ul>
<li><p>search online for factsheets on the issue produced by your state government</p></li>
<li><p>contact a legal aid organisation in your state or contact a free legal helpline such as <a href="https://www.legalaid.nsw.gov.au/get-legal-help">LawAccess NSW</a> or its equivalent in <a href="https://www.legalaid.vic.gov.au/contact-us">Victoria</a>.</p></li>
</ul>
<p>Remember, a financial agreement – either before or after the relationship has broken down – is not binding if both parties have not obtained independent legal advice.</p>
<p>Couples who have already been through the difficulties of divorce, separation, or being widowed may be more likely to make legal arrangements to choose what will happen in the event of separation or death, particularly if they want to make sure children from that relationship are financially secure. </p>
<p>And absolutely everyone – young and old – should look seriously into where your super will go in the event that you die. It’s important to ensure your super goes where you want it to. </p>
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Read more:
<a href="https://theconversation.com/voluntary-super-a-good-way-to-increase-womens-dependence-on-men-120979">Voluntary super: a good way to increase women's dependence on men</a>
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<p><em>Correction: an earlier version of this story said a financial agreement – either before or after the relationship has broken down – is not binding if both parties have not obtained financial advice. It should have said “have not obtained independent legal advice”. The story has now been corrected.</em></p><img src="https://counter.theconversation.com/content/169465/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson has received funding from the ARC, AHURI and CPA Australia. Helen is the Chair of the Social Policy Committee and a Director of the National Foundation for Australian Women (NFAW), and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. She is a Registered Tax Agent and a member of the SMSF Association. This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>For young people, super is the biggest single asset they have – so it’s worth knowing what the law says on how it could be split if a relationship ends.Helen Hodgson, Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1309382020-02-19T14:00:40Z2020-02-19T14:00:40ZGrowing up in a banking desert can hurt your credit for the rest of your life<figure><img src="https://images.theconversation.com/files/316009/original/file-20200218-10976-1d3pxr0.jpg?ixlib=rb-1.1.0&rect=137%2C245%2C4974%2C3157&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's lonely out there.</span> <span class="attribution"><span class="source">Winslow Productions via Getty Images</span></span></figcaption></figure><p><em>The Research Brief is a short take on interesting academic work.</em></p>
<h2>The Big Idea</h2>
<p>A banking desert is an area without traditional financial institutions and services. They are common in rural areas because large financial institutions are reluctant to operate in less populated areas that are less profitable. Two colleagues and I found that people who grow up in a bank desert on Native American reservations are at a <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X19301205">financial disadvantage throughout their adult life</a>. They are less likely to use traditional credit, such as a credit card or a mortgage. When they do, their payments are significantly higher than average, and they’re more likely to fall behind on payments. These effects persist even for people who move to areas with more banking services. </p>
<h2>Why it matters</h2>
<p>Young adults who were exposed to the financial system at an early age – for example, when a parent opens up their first savings account – are more likely to become financially literate. This is important because financial illiteracy leads to <a href="https://www.consumerfinance.gov/about-us/blog/credit-mistakes-could-be-costing-you-money/">costly mistakes</a> when navigating the intricacies of financial products. Our results highlight the importance of learning from interactions with local banks and developing a credit history at a young age. </p>
<h2>How we do our work</h2>
<p>In this particular study, we looked at bank deserts in a setting with particularly scarce access to financial services: Native American reservations. A 2001 study of financial access on reservations <a href="https://www.cdfifund.gov/Documents/2001_nacta_lending_study.pdf">found that only half of reservations</a> had a bank within 30 miles. Though a recent analysis shows that access to banking on reservations has improved, someone living in a reservation <a href="https://nni.arizona.edu/application/files/6514/8642/4513/Accessing_Capital_and_Credit_in_Native_Communities__A_Data_Review.pdf">must travel an average of more than 12 miles</a> to reach their nearest bank branch. </p>
<p>For our study, we used Equifax credit bureau data to observe credit outcomes for people who grew up in Native American bank deserts and compared them with those who were raised on reservations with a branch on site. While merely living on a reservation has been linked to <a href="https://www.forbes.com/sites/johnkoppisch/2011/12/13/why-are-indian-reservations-so-poor-a-look-at-the-bottom-1/#2d35fa493c07">poverty and negative consequences for individuals later in life</a>, we found that at least for credit outcomes it was the lack of banking that really mattered.</p>
<p>We also surveyed nearly 1,000 Native Americans to understand how bank deserts affected their attitudes toward finance. We learned that Native Americans who grew up in bank deserts had worse financial literacy and were less trusting of bankers. These differences led young people to develop worse credit histories, a disadvantage that lasts a lifetime.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&rect=79%2C172%2C4713%2C3326&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=439&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=439&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=439&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316007/original/file-20200218-10991-m4twb8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A deserted bank building in the oil ghost town, Slick, Okla., in 1940.</span>
<span class="attribution"><span class="source">Russell Lee/Underwood Archives/Getty Images</span></span>
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<h2>What still isn’t known</h2>
<p>An important question that still hasn’t been answered is whether technology can help solve the problem. <a href="https://www.americanbanker.com/list/10-ways-technology-will-change-banking-in-2019">Online banking has expanded</a> significantly, with numerous apps that make it easier to manage one’s finances without stepping foot in a branch. In theory, this could extend financial access to people in bank deserts. However, we found that bank deserts have long lasting effects despite the recent proliferation of online banking, suggesting that online banking does not fully replace having a local bank nearby.</p>
<h2>What else is happening</h2>
<p>Our research on Native American bank deserts is related to <a href="https://nni.arizona.edu/application/files/6315/2822/4505/Accessing_Capital_and_Credit_in_Native_Communities.pdf">ongoing policy research</a> that seeks to understand how banking can be sustained on reservations. Though we focus on how people are affected by lack of access to finance, there are also important gaps for small businesses that need credit to grow their businesses.</p>
<h2>What’s next</h2>
<p>I am generally interested in understanding how households access and use credit. My latest research studies how receiving large cash windfalls from the discovery of shale natural gas affects households’ access and use of credit. Payments from shale natural gas discoveries can frequently exceed US$100,000. We hope to understand how this money affects <a href="http://gattonweb.uky.edu/faculty/hankins/conf2019/shale.pdf">debt repayment</a> and <a href="https://conference.nber.org/conf_papers/f131649.pdf">self-employment</a> outcomes for households.</p>
<p>[<em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em>]</p><img src="https://counter.theconversation.com/content/130938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Cookson does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Banking deserts make it harder for children and young adults to become financially literate, which leads to worse credit and a lifetime of disadvantage.Tony Cookson, Associate Professor of Finance, University of Colorado BoulderLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1271022019-12-09T01:18:57Z2019-12-09T01:18:57ZLitigation is the real reason financial reports are becoming harder to read<p>Westpac can expect a bumper turnout of shareholders at its annual general meeting in Sydney on Thursday, many of them angry at its alleged role in <a href="https://www.austrac.gov.au/sites/default/files/2019-11/20191120%20Westpac%20Concise%20Statement%20FILED%2019008953.pdf">facilitating child exploitation</a> in the Philippines, its 23 million alleged breaches of anti-money-laundering laws, and its initial ritualistic response to the allegations. </p>
<p>This included donating <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media_release_response_plan.pdf">A$18 million</a> to an anti sexual exploitation charity, followed by the <a href="https://www.asx.com.au/asxpdf/20191126/pdf/44by46ysjf6w06.pdf">departure of its chief executive</a> and the foreshadowed departure of its chairman later in the year.</p>
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Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
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<p>Some of those shareholders will be clutching the bank’s <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Full_Year_Financials.pdf">154-page financial statement</a>. They’ll need to understand it to ask questions about Westpac’s financial performance.</p>
<p>Back at the start of the 2000s, Westpac’s financial statement was only <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/res0900.pdf">35 pages</a></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=852&fit=crop&dpr=1 600w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=852&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=852&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1071&fit=crop&dpr=1 754w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1071&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1071&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">‘Help when it matters’.</span>
<span class="attribution"><a class="source" href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Full_Year_Financials.pdf">Westpac's 154 page statement of financial results.</a></span>
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<p>Much of what’s been added to statements such as Westpac’s has been in response to the threat of litigation. Companies making false or misleading disclosures risk class actions. It’s safer to include more rather than less, even if it makes the total hard to navigate.</p>
<p>Australia has just had its <a href="https://theconversation.com/why-australias-first-securities-class-action-judgment-sort-of-cleared-myer-125925">first class action judgement</a>, after earlier cases that had been settled out of court. The United States has had many. </p>
<p>My own research with colleagues in the United States finds that caution in the face of the threat of litigation has made financial reports <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478994">increasingly less readable</a> over time.</p>
<h2>How might litigation make reports harder to read?</h2>
<p>Firms can be sued for making misleading disclosures. This happens most often where shareholders allege that the firm failed to disclose all relevant information, or where it has failed to meet projections. </p>
<p>After such class actions, firms can face increasing difficulties with customers, suppliers and lenders, being seen as less credible. Managers face <a href="https://doi.org/10.1016/j.jfi.2011.09.001">pay cuts and termination</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-australias-first-securities-class-action-judgment-sort-of-cleared-myer-125925">Why Australia's first securities class action judgment (sort of) cleared Myer</a>
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<p>One way to head off such class actions is to make disclosures more detailed. </p>
<p>Increasing detail enables firms to add caveats, footnotes and nuance, conveying uncertainty – the consequence of which is that their reports are less clear.</p>
<h2>How we teased out the link</h2>
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<a href="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=903&fit=crop&dpr=1 600w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=903&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=903&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1135&fit=crop&dpr=1 754w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1135&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1135&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="http://gunning-fog-index.com/">The Gunning Fog Index for this article</a></span>
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<p>My coauthors and I examined 96,000 US annual reports issued between 1993 to 2013.</p>
<p>We also collected data on class actions in relation to reports for those years.</p>
<p>One of the best readability metrics is the so-called <a href="http://gunning-fog-index.com/">fog index</a>, which measures the number of syllables per word and words per sentence in order to provide a measure of the number of years of education needed to read a statement.</p>
<p>It says this article needs the best part of 15 years.</p>
<p>We also used other indexes including the so-called <a href="http://stylewriter-usa.com/stylewriter-editing-readability.php">bog index</a> which scores documents on word choice and sentence structure.</p>
<p>We captured firms’ tendency to avoid declarative statements by calculating the proportion of words that were “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478994">uncertain</a>”, and measured their tendency to address specific legal threats by calculating the proportion of words that were legal in nature, both of which were subjective exercises.</p>
<h2>What we found</h2>
<p>We found litigation risk encouraged firms to take steps that reduced the readability of their financial reports. </p>
<p>After firms had experienced a class action, their readability metrics worsened significantly. This was even the case several years after that class action, suggesting a long-lasting change.</p>
<p>We found if a chief executive had experienced a class action at one job, their reports were likely to be less readable in subsequent jobs, strongly suggesting that litigation drove hard to read reports rather than the other way round.</p>
<p>We also found:</p>
<ul>
<li><p>litigation experience increased the size and volume of firms’ disclosures. While worsening readability, this at least had the virtue of increasing thoroughness</p></li>
<li><p>litigation experience was associated with using more complex words and more words per sentence. This implies firms add more detail and nuance to their disclosures, potentially increasing their accuracy</p></li>
<li><p>after litigation, firms used more uncertain words in their reports. This suggests they avoid declaratory statements in an attempt to better reflect the risk and uncertainty associated with projections</p></li>
<li><p>following litigation, firms use more legalistic terms. This implies they attempt to preempt legal action by specifically addressing potential legal issues.</p></li>
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<p>The Australian Securities and Investments Commission (ASIC) has expressed concern over what it calls “<a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-279mr-asic-calls-time-on-disclosure-reliance/">sludge</a>” in reports that covers bases but leaves readers uninformed. </p>
<p>It says over-reliance on disclosure “in some ways proved an enabler” of the poor conduct revealed by the banking royal commission. </p>
<p>Our work and the work of ASIC suggests much needs to happen to make reports both accurate and readable.</p><img src="https://counter.theconversation.com/content/127102/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council</span></em></p>Westpac’s 154 page financial statement will be a challenge for shareholders attending Thursday’s annual general meeting. In the early 2000s, it was only 35 pages.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1122132019-02-22T05:49:11Z2019-02-22T05:49:11ZDon’t bank on Dollarmites to teach financial literacy: here are our alternatives<figure><img src="https://images.theconversation.com/files/260341/original/file-20190222-195870-17bnfyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Research shows combining maths education and financial literacy concepts is a better way to teach children good financial habits and boost numeracy.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The recent <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">royal commission into banking</a> has revealed rampant wrongdoing by the big banks. As a result, there is <a href="https://www.abc.net.au/news/2019-02-20/dollarmites-program-out-of-schools-aeu-push-banking/10806554">renewed public interest</a> in school banking schemes. The Commonwealth Bank’s <a href="https://www.commbank.com.au/banking/school-banking.html#terms">Dollarmites</a> program has once again come into the spotlight. </p>
<p>Dollarmites was awarded a 2018 <a href="https://www.choice.com.au/shonky-awards/hall-of-shame/shonkys-2018/commonwealth-bank-dollarmites">Choice Magazine</a> Shonky award. The program has over 300,000 active participants, and although it’s not the only school banking program, it’s the largest by far.</p>
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Read more:
<a href="https://theconversation.com/should-banks-play-a-role-in-teaching-kids-about-how-to-manage-money-effectively-67775">Should banks play a role in teaching kids about how to manage money effectively?</a>
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<p><a href="https://www.commbank.com.au/banking/school-banking.html#terms">According to the Commonwealth Bank</a>, the motive behind the Dollarmites program is to teach good savings habits and develop financial literacy. But I could find little independent research evidence it actually does.</p>
<p>On the surface, the Commonwealth Bank’s intentions are good. But <a href="https://www.abc.net.au/life/how-to-switch-banks/10007610">research</a> has found 40% of people develop loyalty to their banks and continue banking with them into adulthood.</p>
<p>We need to consider other options. Here are some research-backed alternatives.</p>
<h2>Alternatives to school banking</h2>
<p>Financial literacy can be taught both at home and at school, in practical and meaningful ways. If we consider the core business of schools to be learning, then our classrooms are not an appropriate place for the distractions of corporate marketing. There is definitely no time to be wasted on the logistics of organising school banking. </p>
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Read more:
<a href="https://theconversation.com/financial-literacy-is-a-public-policy-problem-84695">Financial literacy is a public policy problem</a>
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<p>In fact, schools have several options when it comes to teaching financial literacy. There are a number of free resources already aligned to the curriculum. </p>
<p>In <a href="https://www.moneysmart.gov.au/media/560516/moneymathematicsengagement_final_report_14_september_2016-assoc-prof-catherine-attard.pdf">my research</a>, using ASIC’s <a href="https://www.moneysmart.gov.au/teaching/how-teachers-can-use-moneysmart">MoneySmart</a> resources, financial literacy was combined with maths. Students did activities that allowed them to deal with real money while applying maths skills. </p>
<p>For example, some students borrowed money from the school principal to set up small businesses. They then ran their business at a school market day, and used their profits to buy Christmas gifts for underprivileged children. </p>
<p>Simple activities such as setting up classroom economies or allowing children to help plan events (such as class excursions) are also excellent at engaging children in financial literacy in a fun, realistic and interactive way.</p>
<p>Findings from my study showed learning about money and maths improved engagement, understanding of mathematical concepts and knowledge of financial concepts such as budgeting, profit and loss, lending and interest. </p>
<p>There are also resources such as <a href="https://www.banqer.com.au/">Banqer</a>, a free subscription-based app that allows students to manage fictitious money to budget and cover expenses (such as “renting” a desk). In my professional opinion, apps such as this are high quality. They may have corporate sponsorships, but are offered brand-free, which is preferable. </p>
<h2>Parents can teach financial literacy too</h2>
<p><a href="https://www.igrad.com/articles/childhood-money-habits-learned-from-parents">Parents</a> are one of the biggest influences on the financial habits of children. Parents have a responsibility to model good financial behaviours.</p>
<p>Involving children in shopping, having discussions about family budgeting and encouraging children to save some of their pocket money using a bank account of their choice all <a href="https://www.moneysmart.gov.au/media/560516/moneymathematicsengagement_final_report_14_september_2016-assoc-prof-catherine-attard.pdf">contribute</a> to the development of financial literacy. These are really simple, everyday things parents can do to help their children learn financial literacy.</p>
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Read more:
<a href="https://theconversation.com/teaching-kids-about-maths-using-money-can-set-them-up-for-financial-security-85327">Teaching kids about maths using money can set them up for financial security</a>
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<p class="fine-print"><em><span>Catherine Attard has previously provided advice to the MoneySmart program. In 2015 she was awarded funding from Financial Literacy Australia. </span></em></p>There are better ways to teach financial literacy than through school banking schemes.Catherine Attard, Associate Professor, Mathematics Education, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1004512018-07-30T19:52:09Z2018-07-30T19:52:09ZHILDA Survey reveals striking gender and age divide in financial literacy. Test yourself with this quiz<figure><img src="https://images.theconversation.com/files/229628/original/file-20180727-106508-4qibrv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The latest HILDA data found women exhibiting much lower levels of financial literacy than men.
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The <a href="https://melbourneinstitute.unimelb.edu.au/hilda">Household, Income and Labour Dynamics in Australia (HILDA) Survey</a> tells the stories of the same group of Australians over the course of their lives. Starting in 2001, the survey now tracks more than 17,500 people in 9,500 households.</p>
<p>One of the most striking findings from <a href="https://melbourneinstitute.unimelb.edu.au/hilda/publications/hilda-statistical-reports">this year’s HILDA report</a> is the large gender divide in financial literacy. Women exhibit much lower levels of financial literacy than men.</p>
<p>The <a href="https://www.oecd.org/finance/financial-education/49319977.pdf">OECD International Network on Financial Education</a> defines financial literacy as:</p>
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<p>a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve financial wellbeing.</p>
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<p>A series of questions assessing basic competencies in financial concepts such as inflation, portfolio diversification and risk versus return, developed by <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5450829/">Annamaria Lusardi and Olivia Mitchell</a>, was put to the 17,500 HILDA respondents in 2016.</p>
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<iframe style="width:100%;height:600px;border:1px solid #cfcfcf;" src="https://www.riddle.com/a/160739?" title="Pop Quiz – How financially literate are you? Take the HILDA financial literacy test." width="100%" height="400"><section></section><section></section><section></section><section></section></iframe>
<p></p></div><p><a href="https://www.riddle.com" rel="nofollow" target="blank">Quiz Maker</a> – powered by Riddle</p><p></p>
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Read more:
<a href="https://theconversation.com/home-ownership-falling-debts-rising-its-looking-grim-for-the-under-40s-81619">Home ownership falling, debts rising – it's looking grim for the under 40s</a>
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<p>We found that, across Australia as a whole, about 50% of men correctly answered all questions, compared with only about 35% of women.</p>
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<span class="attribution"><a class="source" href="https://melbourneinstitute.unimelb.edu.au/hilda/publications/hilda-statistical-reports">HILDA</a></span>
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<p>In a world in which women are as engaged in the modern economy as men, it is not clear why this is the case. But it very much matters.</p>
<p>The report shows that low financial literacy is associated with poor financial well-being. For example, the poverty rate among people with low financial literacy is over twice the poverty rate among people with high financial literacy.</p>
<p>Women are indeed over-represented in poverty statistics and other measures of socioeconomic disadvantage. Low financial literacy cannot be ruled out as a factor in these outcomes.</p>
<p>This is further reinforced by the finding that women do not, on average, rate themselves lower than men on their personal financial management capability. </p>
<p>They are therefore unlikely to compensate for their lower financial literacy by, for example, seeking expert advice.</p>
<p>Some of the other findings from this year’s HILDA report are covered in this short video:</p>
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<h2>Age matters too</h2>
<p>While the gender divide is the most striking finding, substantial differences across age groups are also found. The young – aged under 25 – are the least financially literate, while those approaching retirement – aged 55 to 64 – are the most financially literate.</p>
<p>Young people scored particularly poorly on the question assessing understanding of inflation. The low-inflation environment that has persisted in Australia for some time now may have contributed to this. Young people simply have not experienced much inflation in their lifetimes.</p>
<p>Financial literacy is also strongly associated with household income and household wealth. Saliency no doubt plays a role in financial literacy: people with very little money are unlikely to take much interest in financial concepts such as diversification and the risk-return trade-off. Unfortunately, this is likely to help perpetuate their low financial well-being.</p>
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Read more:
<a href="https://theconversation.com/its-not-just-women-at-the-top-who-are-paid-less-than-men-88474">It's not just women at the top who are paid less than men</a>
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<h2>Financial literacy affects attitudes to finances</h2>
<p>Financial literacy is strongly connected to our attitudes to financial matters, in ways that give insights into why financial well-being might be lower for those with lower literacy.</p>
<p>Perhaps most important in this regard is that willingness to take financial risks is very low for the least financially literate. In contrast, it’s quite high for the most financially literate. </p>
<p>For example, 73% of those with low literacy report not being prepared to take any risks, compared with only 36% of those with high literacy.</p>
<p>Saving and spending horizons also tend to increase as financial literacy increases.</p>
<p>Of the least literate, 55% report that the next week or the next few months is the most important time-frame in planning saving and spending. By contrast, over two-thirds of those with high financial literacy report that the most important period in planning saving and spending is the next year, or longer. </p>
<p>Consistent with this finding, measures of “motivation traits” show that financial literacy is positively associated with “future orientation” – the extent to which one thinks about the long term when making decisions. </p>
<p>Financial literacy is also associated with lower impulsiveness and a greater desire to achieve things in life. </p>
<h2>Financial behaviours</h2>
<p>Differences in financial literacy do translate into differences in financial behaviours.</p>
<p>Perhaps unsurprising is that people with low financial literacy are less likely to get involved in decisions about household finances. This may be a rational response to the knowledge that one has low financial literacy, or it could reflect a lack of interest in (or perhaps even exclusion from) financial matters. This in turn might lead to both low participation in household decisions and low financial literacy.</p>
<p>More concerning is that low financial literacy is associated with a lower propensity to save regularly and, relatedly, a greater likelihood of experiencing financial stress, such as an inability to pay the rent or mortgage on time, or having to sell or pawn something of value.</p>
<p>The decision to hold a credit card is also a very large point of difference between low-literacy and high-literacy people. Three-quarters of people with low levels of financial literacy do not have a credit card, compared with 30% of those with high financial literacy.</p>
<p>That said, this is possibly not a bad thing. That’s because those with low financial literacy who do have credit cards are considerably less likely to pay off the outstanding balance each month than the financially literate.</p>
<p>Overall, these findings suggest much more work remains to be done to improve financial literacy in Australia – across genders, generations and income groups.</p>
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<p><em>To hear Roger Wilkins, Deputy Director (Research) of the HILDA Survey, explain the latest HILDA findings in an interview, listen to the latest episode of our podcast Trust Me, I’m An Expert over <a href="https://theconversation.com/trust-me-im-an-expert-what-the-huge-hilda-survey-reveals-about-your-economic-well-being-health-and-family-life-100751">here</a>.</em></p><img src="https://counter.theconversation.com/content/100451/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger Wilkins receives funding from the Australian Research Council. </span></em></p>The Household, Income and Labour Dynamics in Australia (HILDA) Survey, out today, found women exhibiting much lower levels of financial literacy than men. How do you score?Roger Wilkins, Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/994412018-07-05T08:14:53Z2018-07-05T08:14:53ZRoyal commission scandals the result of poor regulation, not literacy<p>Thousands of Aboriginal people <a href="http://www.abc.net.au/news/2018-07-04/banking-royal-commission-funeral-insurance-customers-not-covered/9941052">were sold unsuitable financial products</a> and vulnerable consumers are <a href="http://www.abc.net.au/news/2018-04-26/rise-of-instant-cash-loan-machines-in-disadvantaged-nsw-areas/9696134">targeted by instant cash loan machines</a> because the financial landscape supports predatory practices. </p>
<p>And insurance agents were able to exploit and target Aboriginal people because the industry <a href="https://download.asic.gov.au/media/3393361/rep454-published-29-october-2015.pdf">isn’t fully regulated</a>.</p>
<p>The cultural, economic and political arrangements that allow this to happen are called “<a href="https://books.google.com.au/books?hl=en&lr=&id=_QrFBAAAQBAJ&oi=fnd&pg=PR5&dq=Changing+practices,+changing+education&ots=PhjPZmeHoa&sig=CjJJwf6VTHgLT7g9meYcIt0qyqY#v=onepage&q=Changing%20practices%2C%20changing%20education&f=false">practice architectures</a>”. They include the complex language used to deceive consumers into buying unsuitable products, incentivised high pressures sales tactics, and a lack of care and concern for vulnerable consumers. </p>
<p>All of these aspects are within the scope of financial regulators. The funeral insurance industry can push dodgy products because no one is watching. Predatory financial practices will continue until governments and/or regulators do something about it. </p>
<h2>Changing exploitative and predatory financial practices</h2>
<p>To change predatory financial practices requires regulatory action to constrain the ability to exploit vulnerable consumers. Educating consumers about predatory financial practices and fostering <a href="https://theconversation.com/consumers-need-critical-thinking-to-fend-off-banks-bad-behaviour-93489">critical thinking skills</a> is also needed. </p>
<p>But financial literacy education alone is <a href="https://link.springer.com/chapter/10.1007/978-981-10-0360-8_10">not enough</a> when <a href="http://www.abc.net.au/news/2018-07-03/bank-royal-commission-funeral-insurance/9936696">deliberate deception</a> in financial products and services is permitted.</p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S105353571100093X">Research shows</a> Indigenous Australians are too trusting in the role of government to regulate financial matters and can fall prey to predatory lenders. For example, the researchers found there was a belief the Australian Securities Investment Commission would check the accuracy of all prospectuses and that personal loan interest rates are legislated. </p>
<p>To ensure vulnerable consumers are protected requires a lot more than financial education. It <a href="https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/ilr94&section=7">requires regulation</a>.</p>
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Read more:
<a href="https://theconversation.com/financial-literacy-is-a-public-policy-problem-84695">Financial literacy is a public policy problem</a>
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<p>Earlier this year the royal commission revealed, among other things, mortgage brokers were paid a commission based on the <a href="https://www.afr.com/business/banking-and-finance/banking-royal-commission-untangles-mortgage-broker-conflicts-20180319-h0xnq8">size and duration of the loans they issued</a>.</p>
<p>This meant an applicant going to a broker was more likely to end up with a larger mortgage over a longer term than one who dealt directly with their bank, a finding that was revealed in a review of the <a href="https://download.asic.gov.au/media/4213629/rep516-published-16-3-2017-1.pdf">industry</a>.</p>
<p>Consumers best interest must put be above those of the agents when it comes to insurance products and mortgages. </p>
<p>Much like how <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s961b.html">certified financial planners</a> are now mandated under the corporations act to work in the best interest of their clients. </p>
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Read more:
<a href="https://theconversation.com/time-to-bring-some-science-to-financial-regulation-29017">Time to bring some science to financial regulation</a>
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<p>The royal commission has also revealed funeral insurance agents gave the <a href="http://www.abc.net.au/news/2018-07-03/bank-royal-commission-funeral-insurance/9936696">appearance</a> of being an Aboriginal organisation, while deliberating exploiting Aboriginal people. </p>
<p>Fixing the problem requires the Australian Securities Investment Commission to change the predatory financial practices so the financial landscape can operate ethically. </p>
<p>In the case of mortgage brokers, exploitative practices were encouraged based on the way brokers are remunerated. So how brokers are remunerated has been changed to align with the best interest of the client. </p>
<p>Selling insurance similarly has a number of cultural, social and financial elements that can be acted upon. There are the cultural aspects of what it means to be a broker, the economic incentives to push clients towards certain products, and social elements that encourage agents to put their own needs ahead of those wanting insurance to protect and cover their loved ones.</p>
<p>Together, these arrangements form practice architectures which make it possible to constrain the practices used in mortgage broking and the insurance industry. Different practice architectures are required to make possible other, non-predatory, methods of mortgage-broking and selling insurance. </p>
<p>Once what it means to be an ethical mortgage broker or an ethical funeral insurance agent becomes the norm, then the social and cultural concern for others’ well-being may be realised. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-cant-just-throw-more-regulation-at-the-ethical-issues-raised-by-the-banking-royal-commission-96646">Why we can't just throw more regulation at the ethical issues raised by the banking royal commission</a>
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<p>Predatory financial practices will not go away without effective regulation. The finance and insurance industry needs more effective regulation that forces higher ethical standards to be met in order to establish new financial practices. </p>
<p>This change can <a href="https://www.springer.com/us/book/9789814560665">begin by asking</a> whether the financial practices that have already been exposed are rational, reasonable, productive, sustainable, socially just or inclusive. And since they aren’t, what action can be taken to change the unjust financial practices? More and better regulation to protect consumers.</p><img src="https://counter.theconversation.com/content/99441/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Levon Ellen Blue does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We are seeing widespread financial exploitation because of cultural, economic and political factors that haven’t been addressed. Regulators should do more.Levon Ellen Blue, Lecturer, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/973182018-05-29T19:51:39Z2018-05-29T19:51:39ZSuperannuation is still mired in the same old issues, and no one is going to fix your nest egg but you<figure><img src="https://images.theconversation.com/files/220723/original/file-20180529-80653-1n8eakb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The best advice is still to keep track of your super yourself.</span> <span class="attribution"><span class="source">Africa Studio/Shutterstock.com</span></span></figcaption></figure><p>The Productivity Commission’s <a href="https://www.pc.gov.au/inquiries/current/superannuation/assessment/draft">latest report on superannuation</a> asks whether the current system is working for members – and answers <a href="https://theconversation.com/young-people-not-employers-should-choose-super-fund-productivity-commission-97329">firmly in the negative</a>.</p>
<p>The <a href="https://www.pc.gov.au/__data/assets/pdf_file/0017/228230/super-draft-cameos.pdf">report identifies</a> four factors that can chip away at super fund members’ retirement benefits: </p>
<ul>
<li>fees</li>
<li>rate of return</li>
<li>insurance</li>
<li>holding <a href="https://www.pc.gov.au/__data/assets/pdf_file/0017/228230/super-draft-cameos.pdf">multiple accounts</a> </li>
</ul>
<p>What is also clear from the evidence laid out in the report that the not-for-profit sector, including industry super funds, generally outperforms the retail sector. Generally they offer lower fees and higher returns, although there are some industry funds that rank among the lowest-performing.</p>
<p>Despite recent reforms such as the 2013 launch of MySuper, the superannuation system is still beset with the same problems of rising fees and patchy performance. And there is still no substitute for just hopping on the internet and proactively checking that your super is in the best possible hands. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/young-people-not-employers-should-choose-super-fund-productivity-commission-97329">Young people, not employers, should choose super fund: Productivity Commission</a>
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<p>The situation is made complex by the highly segmented nature of Australia’s superannuation system. Besides the public sector funds, the most significant sectors are the retail sector and the not-for-profit funds, including industry funds (see figure 1.5 <a href="https://www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf">here</a>). These sectors compete for as large a slice as possible of the overall pool. </p>
<p>Self-managed superannuation funds are also a rapidly growing sector of the market, however the regulatory framework applied to these funds has some significant differences to the rest of the market.</p>
<h2>Tracking your super</h2>
<p>Most employees have the right to choose their superannuation fund (<a href="http://kmo.ministers.treasury.gov.au/speech/008-2018/">although around one million don’t</a>), and if they don’t nominate a fund, employers will pay contributions into a default fund.</p>
<p>As the new report points out (see figure 1.2 <a href="https://www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf">here</a>), up to 40% of superannuation members hold multiple super accounts. In some cases this may be a deliberate choice – someone with a self-managed super fund may might, for example, choose to have their employer contributions paid into a conventional fund. But often multiple funds are a consequence of employees being enrolled into a new default fund instead of paying contributions into an existing fund.</p>
<p>A range of <a href="https://www.ato.gov.au/Individuals/Super/Keeping-track-of-your-super/">tools</a> is now available to help people consolidate their super, so as not to <a href="https://www.moneysmart.gov.au/superannuation-and-retirement/keeping-track-and-lost-super/consolidating-super-funds">lose any of their savings</a>. In the 2018 federal budget the government <a href="https://treasury.gov.au/consultation/c2018-t286292/">announced</a> that it would reduce the paperwork involved in this process by allowing the Australian Taxation Office to consolidate inactive super accounts with balances less than A$6,000.</p>
<h2>MySuper</h2>
<p>The primary aim of <a href="https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/choosing-a-super-fund/mysuper">MySuper</a>, introduced in 2013, was to provide a <a href="https://static.treasury.gov.au/uploads/sites/1/2017/06/R2009-001_Final_Report_Part_2_Chapter_1.pdf">simple default product</a> that meets the needs of members who are not engaged with their superannuation. They have no entry fees, offer simpler insurance and services, and lower administration fees that are charged on a cost-recovery basis. </p>
<p>But although the effects of MySuper are generally positive, the 2013 reforms may also have contributed to the erosion of funds identified by the new review.</p>
<p>This report confirms (see chapter 3, p.127 <a href="https://www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf">here</a>) that super fund fees in Australia are among the highest in the OECD, and the upward pressure on fees continues. Just this month, the Commonwealth Bank announced that it would <a href="https://www.smh.com.au/money/super-and-retirement/cba-s-superannuation-sting-is-out-and-out-gouge-says-minister-20180523-p4zh23.html">pass the costs of regulation onto some superannuation products</a>. </p>
<p>One of the consequences of introducing the fee charging limitations for MySuper accounts was that the previous member protection standards that limited fees on low-balance accounts was <a href="https://www.legislation.gov.au/Details/F2013C00067">repealed</a>. In the 2018 federal budget the government <a href="https://treasury.gov.au/consultation/c2018-t286292/">announced</a> that fees would be capped in respect of certain low balance accounts. </p>
<p>MySuper products must provide also life insurance on an opt-out basis. Insurance in superannuation has also been under scrutiny, with <a href="http://www.abc.net.au/news/2017-03-17/casual-workers-life-insurance-claims/8361198">inappropriate or junk policies being included in superannuation</a>. The government has announced proposals to change this to an <a href="https://treasury.gov.au/consultation/c2018-t286292/">opt-in</a> system.</p>
<p>This report adds to the evidence that overall the <a href="https://theconversation.com/industry-super-funds-saved-from-us-style-ideology-51662">current structure of not-for-profit funds is serving members well</a>. Although it supports <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s1088">proposals</a> to require the trustees of industry funds to increase the number of independent directors, the Productivity Commission highlights the need for a stronger focus on trustee skills and addressing conflicts of interest.</p>
<h2>Take responsibility for your super</h2>
<p>It is concerning that many of the problems identified by the new report are the same ones that arose in the <a href="http://fsi.gov.au/publications/final-report/">2014 Financial System Inquiry</a>, the <a href="https://treasury.gov.au/publication/super-system-review-final-report/">2015 Cooper Review</a>, and in the evidence to the <a href="https://theconversation.com/au/topics/financial-services-royal-commission-51154">Financial Services Royal Commission</a>. </p>
<p>Most of these issues raised have been part of the discussion for the past decade. The fact that they are still on the table shows a level of inertia in the system, and a reluctance by the industry to address its problems.</p>
<p>So how can we, as individuals, protect our retirement nest egg? The key is to engage with the superannuation system, and not just as we approach retirement. </p>
<p>Compare your super fund’s fees and returns with those of the best performing funds, and then choose accordingly. Reduce your fees and insurance premiums by consolidating your accounts, and make sure that any insurance in the fund meets your needs.</p>
<p>The difference at retirement is worth it – <a href="https://www.pc.gov.au/__data/assets/pdf_file/0006/228228/super-draft-infographic.pdf">up to A$407,000</a> for a 21-year-old by the time they finish their career.</p><img src="https://counter.theconversation.com/content/97318/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI and the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women (NFAW), and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. She is a Registered Tax Agent and a member of the SMSF Association; and holds a superannuation account with an industry fund. </span></em></p>Despite recent reforms, the superannuation system is still beset with problems such as high fees and patchy performance. You need to pay attention if you want to make sure your nest egg’s in the best hands.Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/884582017-12-05T23:45:44Z2017-12-05T23:45:44ZWhy financial literacy should be taught in every school<figure><img src="https://images.theconversation.com/files/197743/original/file-20171205-23047-mvomi1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">B.C.'s ambitious new school curriculum includes mandatory financial literacy instruction within math courses at every grade level, starting from kindergarten. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><ol>
<li><p><em>What would you do if you spotted a wild animal in your proximity?</em></p></li>
<li><p><em>If you know that inflation forecasts were one per cent lower than actuals and commodity bundles would cost two per cent more than expected, how much more should you save every year so that your retirement quality of life is not compromised?</em></p></li>
</ol>
<p>If you had quick answers to the first question but were not sure about the second, you are not alone! Several years ago, when our ancestors lived in rudimentary dwellings and had a barter economy, their decision-making primarily focused on questions like the first.</p>
<p>As our society has evolved and our economy has become more complex, we have to deal increasingly with questions about debt repayments, retirement savings, budgeting, mortgages and lines of credit. </p>
<p>And yet, the human brain has evolved over hundreds of years with the goal of survival. The more civilized and developed we have become, the more we are asking our brains and its associated apparatus to do what it was simply not designed to do.</p>
<h2>Finance is non-intuitive for humans</h2>
<p>Financial capability is one domain in which the inadequacies of humans are particularly stark. Changes in the financial landscape over the past 20 years have taxed our cognitive capabilities to new levels. </p>
<p>In the United States and elsewhere, the <a href="https://www.aeaweb.org/articles?id=10.1257/0002828041301632">move to defined contribution pension plans rather than defined benefits</a> has put citizens in the driver’s seat for making contribution and investment choices. </p>
<p>Rising costs of education also require families to plan better. An increase in the <a href="https://www.jstor.org/stable/2677899?seq=1#page_scan_tab_contents">number of options</a> and <a href="https://faculty.chicagobooth.edu/richard.thaler/research/pdf/Annuitization%20Puzzles%20(2).pdf">complexity of financial products</a> ranging from mortgages, loans, investment options and credit cards require citizens to be even more knowledgeable about their features. </p>
<p>And easy access to credit means that citizens have to make decisions about allocating consumption over time — a relatively new skill that wasn’t needed in the pre-credit era. </p>
<p>Finally, finance is non-intuitive to the human brain. Research has shown that people consistently <a href="https://eric-eisenstein.com/papers/Eisenstein&Hoch-Compounding.pdf">fail to grasp the impact of compound interest</a> or ongoing expenses on their wellbeing.</p>
<h2>The financial inclusion challenge</h2>
<p>So, how well do we do on financial capability? A 2011 study entitled <a href="http://www.nber.org/papers/w17103.pdf">Americans’ Financial Capability</a> painted “a troubling picture of the state of financial capability in the United States…. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.” </p>
<p>In Canada, the news was equally dim. The 2010 recommendations of the <a href="http://publications.gc.ca/collections/collection_2011/fin/F2-198-2011-eng.pdf">Task Force on Financial Literacy</a>, set up by the federal government, found that financial capability in Canada was no better than other countries. A total 31 per cent of Canadians were struggling to meet their bills and payments. </p>
<p>The task force also found that the diversity in our country makes financial inclusion challenging. “Aboriginal Canadians,” “young adults,” “very recent immigrants” and “low-income and low-net-worth households” were the categories of people found to be struggling just to make ends meet. </p>
<p>In writing about the importance of financial literacy, the task force wrote: “It is more than a nice-to-have skill. It is a necessity in today’s world — and, moving forward, should be treated as such by policy-makers, educators, employers and other stakeholders across the country.”</p>
<h2>Fixing the handicap</h2>
<p>Over the past seven years, efforts in Canada and elsewhere have focused on improving financial literacy and helping citizens make better financial decisions. </p>
<p>The <a href="https://www.canada.ca/en/financial-consumer-agency.html">Financial Consumer Agency of Canada (FCAC)</a> has led the charge in creating a culture of a financially literate Canada. The news is encouraging — there have been demonstrated improvements in financial capability and Canadians seem less stressed about their finances. </p>
<p>Yet, there is much work to be done. As the adage goes with any behavioural change challenge: It is relatively easy to make a change, but sustaining and growing the momentum are more difficult. </p>
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<img alt="" src="https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197749/original/file-20171205-22967-eli54j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>In particular, efforts have currently focused on teaching Canadians critical skills at the right time. This includes <a href="https://www.canada.ca/en/financial-consumer-agency/programs/research/national-research-plan-2016-2018.html">efforts such as “just-in-time” financial literacy and guidelines or “rules-of-thumb” to make better choices</a>. </p>
<p>In the language of the behavioural sciences, <a href="http://www-2.rotman.utoronto.ca/facbios/file/JOEP-debiasing.pdf">these efforts are referred to as <em>rebiasing</em> efforts</a>. Rebiasing simply refers to fighting one form of cognitive handicap with an intervention that may not necessarily fix the handicap. Giving people a rule of thumb to make better mortgage decisions doesn’t help them understand the theory of mortgages any better, it just helps them choose. </p>
<p>On the other hand, <em>debiasing</em> <a href="http://www-2.rotman.utoronto.ca/facbios/file/JOEP-debiasing.pdf">refers to interventions that truly fix the handicap</a>. When confronted with a mortgage, for instance, a debiased citizen might truly think in terms of interest rates, net present values and budgeting for payments rather than relying on a rule of thumb. It requires a fundamental mindset shift! It requires ongoing training and practice!</p>
<h2>Financial literacy in schools</h2>
<p>What better place to change mindsets of future citizens than our schools and colleges? </p>
<p>The Organisation for Economic Co-operation and Development (OECD) runs a program called the Programme for International Student Assessment (PISA). <a href="http://www.oecd.org/daf/fin/financial-education/launch-pisa-financial-literacy-students-2017.htm">Since 2012, this program added financial literacy</a> to its assessment of math, science and reading in 15 countries (including seven Canadian provinces). </p>
<p>The measurement of these skills are essential — after all, it is difficult to impact something that can’t be measured. Critical to success in these initiatives is a curriculum that allows kids to make financial decisions and get feedback in a safe space. </p>
<p>This can be done through a combination of traditional classroom activities, technology enabled games and some limited real world practice.</p>
<p>Most Canadian provinces and territories embed financial literacy in their school curricula to some degree. The financial education children receive, however, <a href="http://business.financialpost.com/personal-finance/young-money/how-canadians-are-taught-financial-literacy-from-coast-to-coast">varies significantly depending on where they live</a>. </p>
<p><a href="https://www.theglobeandmail.com/globe-investor/globe-advisor/how-bc-children-are-learning-financial-literacy-from-k-to-12/article37032057/">British Columbia</a> stands out: A new curriculum includes mandatory financial literacy instruction within math courses at every grade level, beginning in kindergarten. </p>
<h2>The need for “street smarts”</h2>
<p>Results from PISA show that <a href="http://www.oecd.org/finance/financial-education/pisa-2015-results-volume-iv-9789264270282-en.htm">teaching financial capabilities in schools does have a significant and positive impact on financial decision-making by 15 year olds</a>. </p>
<p>The boost from school programs is especially significant in cases where there are high levels of parental involvement and when capabilities are developed through practice (either in simulated or real bank accounts) rather than through mere lectures. </p>
<p>The study — which included data from seven Canadian provinces, and in which <a href="http://www.oecd.org/edu/PISA%20Volume%20IV%20Financial%20Literacy%20Chart.png">Canada ranked third, after China and Belgium</a> — also shows that socio-economic status matters. It shows that while numeracy (being able to compute interest rates etc.) is important, it is definitely not sufficient. </p>
<p>Being “street smart” about things such as recognizing that some deals really are too good to be true, understanding the role of income tax or being vigilant for fraudulent e-mails also play an important role in financial capability. </p>
<h2>A financially-trained citizen base</h2>
<p>Developing a financially literate and fair marketplace has three large building blocks: </p>
<ol>
<li><p>Financial literacy for adults who need it now. </p></li>
<li><p>Behaviourally-informed regulation that ensures a fair marketplace. </p></li>
<li><p>A citizen base that acknowledges the centrality of financial capability to wellbeing and is trained to think financially. </p></li>
</ol>
<p>We have made inroads into the first two of these three blocks, and it is now time to tackle the third!</p><img src="https://counter.theconversation.com/content/88458/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dilip Soman serves on the research sub-committee of the Financial Consumer Agency of Canada. He has received research funding from the Social Sciences and Humanities Research Council of Canada (SSHRC).</span></em></p>Financial literacy is non-intuitive to the human brain and fundamental to survival today. We should follow British Columbia’s example and make financial literacy mandatory in every grade - across the country.Dilip Soman, Professor and Co-Director of Behavioural Economics in Action at Rotman (BEAR), University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/783322017-05-26T00:04:51Z2017-05-26T00:04:51ZWhy is Australian 15-year-olds’ financial literacy declining?<figure><img src="https://images.theconversation.com/files/170944/original/file-20170525-23232-1ozb54c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Teenagers don't know as much as they should about managing money. </span> <span class="attribution"><span class="source">from shutterstock.com </span></span></figcaption></figure><p>Around a fifth of 15-year-olds in Australia do not have basic financial literacy, according to a new OECD Programme for International Student Assessment (PISA) <a href="http://research.acer.edu.au/ozpisa/27/?__hstc=227787458.14ed1ab3be3183379f4ad95df89731f9.1489013362204.1490002521759.1495667339458.3&__hssc=227787458.7.1495667339458&__hsfp=3839247555">financial literacy assessment results</a> report.</p>
<p>Financial literacy is defined by the OECD as:</p>
<blockquote>
<p>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, to improve the financial wellbeing of individuals and society, and to enable participation in economic life.</p>
</blockquote>
<p>This topic has an elevated status in the <a href="http://www.australiancurriculum.edu.au/">Australian curriculum</a>, particularly within maths and humanities.</p>
<p>However, the report showed that young people are doing worse in this area now than previously. In particular, students struggled to read payslips and detect financial scams.</p>
<p>Low socioeconomic background, attending a rural and remote school, and Indigeneity influenced students’ financial literacy performance. Interestingly, girls outperformed boys.</p>
<p>So why the gaps and why is performance declining?</p>
<h2>Conventional approaches are driven by the finance industry</h2>
<p>OECD <a href="http://www.oecd.org/daf/fin/financial-education/2012%20Schools%20Guidelines.pdf">Guidelines on Financial Education in Schools</a> argue that the younger generation face increasingly complex financial problems. This is why there is a need to teach students skills and knowledge related to finance from a young age, to help them engage in society in later life.</p>
<p>The most important financial decisions people face involve choices - about work, study, transport, housing, insurances and investments. These choices are influenced by complex and changing economic and financial realities. This means there is a need to focus on basic skills and capabilities that will equip students to be critically informed in managing their money.</p>
<p>Since the 2007 global financial crisis, the Australian government has invested more than A$10 million in the <em>Helping our Children Understand Finance</em> policy and other related initiatives. </p>
<p>This work is led by the Australian Securities and Investments Commission (ASIC). Key to ASIC’s work in this area has been creating the MoneySmart brand. </p>
<p>The <a href="https://www.moneysmart.gov.au/">MoneySmart website</a> is marketed as a “one stop shop” for all things money-related and includes resources for schools and teachers.</p>
<p>The Commonwealth Bank’s <a href="http://www.startsmart.com.au/home/startsmart-programs/">Start Smart program</a> takes a similar approach, with guest workshops facilitated by bank employees. The Commonwealth Bank has a long history of recruiting customers at a young age through its school banking program.</p>
<p><a href="https://theconversation.com/should-banks-play-a-role-in-teaching-kids-about-how-to-manage-money-effectively-67775">This approach</a> to financial literacy education, which provides “one size fits all” lessons, <a href="http://www.sciencedirect.com/science/article/pii/S1477388014000176">has been critiqued</a> as missing the mark. Sure, some topics are generic, but local real world problems can vary significantly.</p>
<p>For example, a teacher recently explained to me that some of his secondary students were trading bitcoin. Meanwhile, teacher colleagues in rural communities were concerned about their students’ family farms and financial futures. These stories show that teachers are tuned in to their students’ financial literacy learning needs and interests.</p>
<p><a href="http://researchdirect.westernsydney.edu.au/islandora/object/uws:35574">A recent evaluation</a> exploring the potential of MoneySmart in low socioeconomic schools recommended that teaching resources should be reviewed. The report highlighted the value of working with teachers to develop real world mathematics lessons that fit local needs and interests, while exploring ways teaching practice might be enhanced. </p>
<p>With declining financial literacy results, it’s time to question whether conventional approaches are working. </p>
<p>New initiatives that do more to involve teachers in thinking about and planning for student financial literacy learning may have a greater impact. </p>
<h2>Students want lessons they can relate to</h2>
<p>Around 79% of Australian students have a bank account. What students then need to know about are the types of financial products and services available, and the risks and rewards they might bring. </p>
<p><a href="https://link.springer.com/article/10.1007/s13394-016-0184-0">My research</a> has shown that even primary school students value real world financial literacy learning experiences where they deem the tasks to be useful to their lives beyond school. </p>
<p>Such lessons involve practical tasks like applying literacy and numeracy to making sense of information that is presented in different formats. </p>
<p>Depending on the school, lessons that involve making decisions about takeaway menus, public transport pricing and mobile phone plans can be explored in Years 5 and 6, when students are beginning to <a href="http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2013.1849">think about using these services</a> themselves. </p>
<p>In secondary school, teaching and learning should continue to be dynamic and timely. For example, students need to learn to keep track of their money electronically, pose questions and think critically when interacting with banks, and protect their personal information from scams.</p>
<h2>Schools and teachers need support</h2>
<p><a href="http://www.fsa.gov.uk/pubs/consumer-research/crpr69.pdf">Behavioural economics research</a> shows that financial behaviour may depend as much on intrinsic values and attitudes learned at home as the knowledge and skills acquired at school. </p>
<p>This explains why the real impact of high school financial education on financial decision-making beyond school is difficult to measure. </p>
<p>There is little Australian educational research exploring how teachers make sense of this subject area - and how they approach it.</p>
<p>Australia is a diverse society in which <a href="http://www.publishing.monash.edu/books/cge.html">socioeconomic marginalisation and low educational achievement</a> tend to go hand in hand. This means that “one size fits all” approaches don’t always fit local circumstances.</p>
<p><a href="http://ro.ecu.edu.au/ajte/vol42/iss5/4/">My work with teachers</a> has revealed that feeling financially literate and being able sensitively to teach financial problem-solving and decision-making to students are two different things. </p>
<p>For example, in a project involving more than 30 primary school teachers, the majority agreed that they were financially literate. But only about half indicated being confident about teaching financial literacy. </p>
<p>Teachers want access to quality professional learning to help them navigate the Australian curriculum and develop their teaching. Teacher associations do a great job at supporting teachers in this work.</p><img src="https://counter.theconversation.com/content/78332/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carly Sawatzki does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Around a fifth of 15-year-olds in Australia do not have basic financial literacy.Carly Sawatzki, Lecturer, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/707352017-02-14T03:41:36Z2017-02-14T03:41:36ZYoung women can budget in the short term but struggle with long-term investments: survey<figure><img src="https://images.theconversation.com/files/156714/original/image-20170214-25999-zdqeo5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Young women in the survey showed less interest and knowledge on long-term investments.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Our investigation into the financial literacy of young women finds they are confident in implementing budgeting and savings strategies, but lack the knowledge and confidence required to implement long-term financial strategies. </p>
<p>This is surprising given that financial literacy usually refers to not only an understanding of how money actually works and how to make and manage money for day-to-day affairs but also how to use this in preparation for the future.</p>
<p>While our results are preliminary, based on social media users and require more detailed research, our results begin to draw links between social, institutional and personal attitudes towards financial knowledge.</p>
<p>A survey we distributed across social media found that 91% of 175 respondents had confidence in their ability to implement savings strategies (varying from simple to complex), and 89% were confident in their ability to budget. Strategies included everything from planning for a holiday to managing credit cards. Participants also considered budgeting and saving to be the most important aspects of their finances.</p>
<p>However, our survey participants expressed a distinct lack of appreciation for longer-term financial goals. While 72% of respondents felt that savings were extremely relevant to them, only 38% said the same about superannuation, and they showed even less interest in other long-term investment (23%).</p>
<p>Knowledge and confidence in implementing long-term investment strategies were even more concerning. Only 17% of respondents said they had a “medium” knowledge of superannuation and only 1% (or two of 175 respondents) felt that they had an in-depth understanding. In contrast, 55% indicated having little or no knowledge whatsoever.</p>
<p>The numbers look even bleaker for responses about investments. A low 12% of survey participants had medium levels of knowledge in this area, while again only 1% felt their knowledge was in-depth.</p>
<p>When asked about why they lacked financial knowledge, the barrier most commonly acknowledged by participants was lack of financial information taught at school (91%). Also 55% of participants reported feeling discouraged from learning about finance because they were women. This is consistent with <a href="https://theconversation.com/teachers-gender-bias-in-maths-affects-girls-later-37844">reports of female students being discouraged from studying</a> subjects such as science, technology, engineering and mathematics (STEM).</p>
<h2>Why financial literacy matters for women</h2>
<p>Women working full-time currently <a href="https://theconversation.com/will-the-real-gender-pay-gap-please-stand-up-64588">earn 84% of a man’s pay - at a 20 year average</a>. The impact is this: women will earn around [A$650,000 less than men across their lifetimes](<a href="https://www.ncoss.org.au/sites/default/files/public/campaign/New%20Year%20for%20Women_discussion_FINAL.pdf">https://www.ncoss.org.au/sites/default/files/public/campaign/New%20Year%20for%20Women_discussion_FINAL.pdf</a>.</p>
<p>While the pay gap is considerable, the “super gap” is even greater. On average women will <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Economic_security_for_women_in_retirement/Report">accumulate 46.6% less in superannuation than men, and one in three women</a> retire with no super at all. Superannuation is the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Economic_security_for_women_in_retirement/Report">second largest asset</a> for most Australian households, (second only to housing) and contributes significantly to economic security and savings at retirement. </p>
<p>Insufficient superannuation and savings at retirement have also been linked to high rates of homelessness experience by older women – a point that has been emphasised by <a href="http://www.homelessnessaustralia.org.au/images/publications/Fact_Sheets/Homelessness_and_Women.pdf">Homelessness Australia</a>. While there are many factors that contribute to homelessness, from drug and alcohol abuse, lack of affordable housing and domestic violence, a <a href="http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1449&context=aabfj">2013 study by Adam Steen and David MacKenzie suggests</a> that the little research done is this area indicates poor financial literacy is also a contributing factor. </p>
<p>Difference in superannuation savings between women and men are driven by <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Economic_security_for_women_in_retirement/Report">interrelated factors</a> including: the gender pay gap, more frequent participation of women in lower paid industries and jobs, disproportionate participation of women in part-time and casual positions. Also influencing this trend are the fragmented work patterns as a result of time taken off for unpaid care and pregnancy related workplace discrimination. Women also typically <a href="http://www.industrysuperaustralia.com/campaigns/closing-the-gender-superannuation-gap/#sthash.r9axCHkb.dpuf">retire earlier and live longer</a> than men - up to 4.4 years longer for a female born today.</p>
<p>In addition to these structural and social factors, our data suggests that women are ill-equipped to manage long-term financial investments. </p>
<p>Reduced financial literacy amongst women in comparison to men was acknowledged by the <a href="http://www.financialliteracy.gov.au/media/209296/women-understanding-money.pdf">Australian government in 2008</a> and again by the <a href="https://www.ncoss.org.au/sites/default/files/public/campaign/New%20Year%20for%20Women_discussion_FINAL.pdf">NSW Council of Social Services in 2016</a>. Likewise it has been acknowledged in the <a href="http://blogs.wsj.com/experts/2015/11/02/whats-behind-the-financial-literacy-gender-gap/">United States and further afield</a>. Our data suggests little has changed.</p><img src="https://counter.theconversation.com/content/70735/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Arvanitakis receives funding from the Australian Research Council and the former Office of Learning and Teaching. He is a board member of the Australian Public Education Foundation, a member of the Australian Research Council: Excellence in Research for Australia 2015 Evaluation Committee, Office of Learning and Teaching (OLT): Committee Member: Awards Committee, a member of the panel of experts for the Tertiary Education Quality and Standards Agency (TEQSA), on the committee of the Australian Human Rights Education Council, the Chair of Diversity Arts Australia and a research fellow at The Centre for Policy Development.
</span></em></p><p class="fine-print"><em><span>Lauren Stanley is on the NSW Council of Social Service's Young Women's Advisory Round table, co-convener of the Parramatta branch of the Western Sydney Women's Collective, and Policy Officer for Taylor Street Advisory.</span></em></p><p class="fine-print"><em><span>Trina Jorre de St Jorre does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Young women are are confident in implementing budgeting and savings strategies, but lack the knowledge and confidence required to implement long-term financial strategies, a new pilot study finds.James Arvanitakis, Professor in Cultural and Social Analysis, Western Sydney UniversityLauren Stanley, Research assistant, Western Sydney UniversityTrina Jorre de St Jorre, Lecturer in Graduate Employability, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/677752016-10-31T18:59:52Z2016-10-31T18:59:52ZShould banks play a role in teaching kids about how to manage money effectively?<figure><img src="https://images.theconversation.com/files/143611/original/image-20161028-11239-1o2n6is.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian schoolchildren are being taught financial literacy through programs often run by big banks.</span> <span class="attribution"><span class="source">from www.shutterstock.com</span></span></figcaption></figure><p>The Commonwealth Bank has long been active in the space of financial literacy - that is, educating young people about the importance of managing money effectively. </p>
<p>Just recently it announced an overhaul to its “<a href="http://www.startsmart.com.au/home/startsmart-programs/">Start Smart</a>” financial literacy programs, which aim to teach children about money. </p>
<p>The program <a href="http://www.theage.com.au/business/workplace-relations/commonwealth-bank-to-teach-female-students-a-man-is-not-a-plan-20161020-gs6iat.html">reportedly includes</a> showing children that “a man is not a plan” by discussing financial inequality and offering <a href="https://www.commbank.com.au/guidance/newsroom/our-watch-start-smart-review-201610.html">positive representations of women</a> managing money. </p>
<p>The catch phrase seems progressive but is loaded with assumptions about women, men, their relationships, and their financial choices. This downplays the economic and social reasons why women’s financial opportunities and experiences tend to differ from men’s. </p>
<h2>Pay gap in the workplace</h2>
<p>It’s a bold ambition when you consider the broader context. According to the <a href="https://www.wgea.gov.au/sites/default/files/Gender_Pay_Gap_Factsheet_final.pdf">Workplace Gender Equality Agency</a>, the highest gender pay gap actually occurs in the financial and insurance services industry, where senior management positions continue to be male dominated and the difference between women’s and men’s earnings is 30.2%. </p>
<p>Further, when comparing Indigenous females to non-Indigenous male workers with median incomes, the reported <a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12154/full">superannuation gap</a> is 39%.</p>
<p>Such programs, like the one Commonwealth Bank is offering, are based on the assumption that a combination of guest speakers visiting schools and downloadable resources hold the key to improving financial literacy teaching and learning. </p>
<h2>Why are banks getting involved?</h2>
<p>The federal government has invested millions of dollars and entrusted the Australian Securities and Investments Commission (ASIC) to lead initiatives intended to help children understand finance. </p>
<p>We have a <a href="http://www.curriculum.edu.au/verve/_resources/National_Consumer_Financial_Literacy_Framework_FINAL.pdf">National Consumer and Financial Literacy Framework</a>, which foreshadowed the development of the <a href="http://www.australiancurriculum.edu.au/">Australian Curriculum</a>. </p>
<p>We also have consecutive <a href="http://www.financialliteracy.gov.au/media/546585/report-403_national-financial-literacy-strategy-2014-17.pdf">National Financial Literacy Strategies</a> led by ASIC, that are intended to drive improvements in the way financial literacy is taught and learned in schools. </p>
<p>Consumer and financial literacy has an elevated status across the Australian curriculum, signalling opportunities for interdisciplinary approaches, particularly in mathematics and economics and business.</p>
<p>Financial literacy projects are big business for consultancies. And for banks, manoeuvring under the guises of corporate social responsibility serves to position brands favourably. </p>
<p>The ANZ bank, for example, conducts its <a href="https://www.anz.com/resources/5/4/54720a2d-a540-49f0-b0a7-62f1ffb922e6/adult-financial-literacy-survey-summary.pdf?MOD=AJPERES">Survey of Adult Financial Literacy</a> every three years. This is considered the leading measure of adult financial literacy in Australia. </p>
<p>And the <a href="http://www.csi.edu.au/media/uploads/Financial_Resilience_in_Australia_-_Full_Report.pdf">National Australia Bank</a> (NAB) recently released research claiming to measure <a href="http://www.tandfonline.com/doi/abs/10.1080/10253866.2014.1000315">financial resilience</a> - weaving socioeconomics and psychology. </p>
<p>These strategies are important to them since their houses are not in order. The <a href="https://theconversation.com/big-four-bank-chiefs-face-parliamentary-committee-experts-react-66400">recent parliamentary inquiry</a> confirmed that the big four banks are troubled by bad behaviour and more effective regulation is needed.</p>
<h2>How do children learn about money management?</h2>
<p>Children tend to learn about money within their <a href="http://www.ingentaconnect.com/content/aea/jel/2014/00000052/00000001/art00001">homes</a> in different ways – and those teaching around this area need to be sensitively attuned to this learning.</p>
<p>Children become socialised and oriented to consumer, economic and financial issues through a series of conversations, observations, and experiences – consciously and unconsciously.</p>
<p>Even primary-aged students make <a href="https://www.merga.net.au/publications/counter.php?pub=pub_conf&id=2148">surprising, insightful comments</a> that show mature understandings about earning, spending, saving, and sharing money. This is particularly true in disadvantaged communities.</p>
<h2>How is financial literacy taught?</h2>
<p>Research into financial literacy education in schools – how it is taught and learned – is an emerging field, typically characterised by <a href="https://www120.secure.griffith.edu.au/research/file/e1d4703a-afbe-40f8-9414-cb3f84121c04/1/2013-05-financial-literacy-and-financial-literacy-programs-in-australia.pdf">program trials and evaluations</a>. </p>
<p>Program evaluations tell short term success stories – the rubber really hits the road when students need to apply their learning in the real world down the track.</p>
<p>In 2012, the OECD and Programme for International Student Assessment (PISA) included a Financial Literacy Assessment for 15-year-old students. Australia ranked fifth out of the 18 participating countries and economies.</p>
<p><a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwj8g6Ti6_nPAhUBw5QKHVnBD9IQFgghMAE&url=https%3A%2F%2Fwww.acer.edu.au%2Fdocuments%2FPISA-2012-Report.pdf&usg=AFQjCNHbzr3TFbLzzXJiOPdoLwtAM6V_7A">The findings</a> showed that students in city schools achieved higher scores than students in provincial and remote schools; and non-Indigenous students significantly outperformed their Indigenous counterparts.</p>
<p>Teaching kids about managing money is most effective when classroom tasks are <a href="http://link.springer.com/article/10.1057/fsm.2013.16">tailored</a> to meet students’ family backgrounds and interests, and occurs at the <a href="http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2013.1849">point of need</a>.</p>
<p>Students enjoy financial problem solving and decision-making experiences that captivate their imagination, challenge them to think, and prepare them for the real world.</p>
<p>Devising financial literacy lessons that create connections between students’ financial literacy learning at home and at school is hard to do without really knowing the <a href="http://cse.sagepub.com/content/11/3/177.short">local context and students</a>. </p>
<p>Because Australian classrooms are diverse, this stuff rarely comes together “off the shelf”. </p>
<h2>Not reaching the most vulnerable communities</h2>
<p>The uncomfortable truth is that workshops by so-called finance literacy experts and downloadable teaching and learning resources may not reach and resonate with Australia’s most vulnerable communities.</p>
<p>Planning for financial literacy learning requires an understanding of the school community, interdisciplinary navigation of the Australian Curriculum, and skilful <a href="http://s3.amazonaws.com/academia.edu.documents/37597949/Makar_-_in_Gillies__ed__revised_FINAL.pdf?AWSAccessKeyId=AKIAJ56TQJRTWSMTNPEA&Expires=1477620245&Signature=NMd%2F%2BQ9KnvNwi3XO86j2ndQYkLs%3D&response-content-disposition=inline%3B%20filename%3DThe_pedagogy_of_mathematical_inquiry.pdf">inquiry approaches</a>). </p>
<p>This is what teachers are trained to do, although they need and crave quality professional learning to hone their craft. </p>
<p>This is where funding and support are needed.</p>
<p>The <a href="http://www.aqf.edu.au/">Australian Qualifications Framework</a> and <a href="http://www.aitsl.edu.au/australian-professional-standards-for-teachers/standards/list">Professional Standards for Teachers</a> mean teachers have never been more scrutinised and accountable. </p>
<p>When it comes to meeting students’ academic, social and emotional needs on any issue, let’s invest in schools and trust teachers to do what they’re qualified to do.</p><img src="https://counter.theconversation.com/content/67775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government has heavily invested in initiatives intended to help children understand finance. But should this be taught by school teachers instead who are sensitive to kid’s backgrounds?Carly Sawatzki, Lecturer, Monash UniversityLevon Ellen Blue, Research fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/672282016-10-18T19:13:54Z2016-10-18T19:13:54ZYoung people don’t expect to rely on the ‘bank of mum and dad’: study<p>Despite the stereotypes of young people as a generation focused on <a href="http://www.theaustralian.com.au/life/weekend-australian-magazine/moralisers-we-need-you/news-story/6bdb24f77572be68330bd306c14ee8a3">spending with no consequences</a>, young people actually see their money decisions (as well as their mistakes) as their responsibility, <a href="http://soc.sagepub.com/content/early/2016/10/19/0038038516668125.full.pdf+html">our research shows</a>. They aren’t reliant on the “bank of mum and dad”.</p>
<p>We spoke to 123 Australians aged between 16-26 across a variety of socioeconomic groups. We asked them about their beliefs, perceptions when it comes to finance and how they made, spent and saved money. </p>
<p>Although parents “helping out” was mentioned - whether through direct money allowances or indirect support such as staying at home and paying marginal rent – it was clear young people saw their financial security as their responsibility.</p>
<p>However, many spoke of the desire to help out their families, particularly if their parents were struggling financially themselves. As a result, some young people chose to forego opportunities such as further study or training in favour of earning money in the present. </p>
<p>This has longer term consequences for their earning power. For example, they may be stuck in occupations characterised by precarious working conditions, low superannuation contributions and limited opportunities for promotion. </p>
<p>Many participants picked up on the gloomy sentiments around their generations’ prospects of home ownership, increasing precariousness of the labour market and the inevitability of working into their older age. </p>
<p>Young people faced a range of challenges, including lower wages in line with their age, unpaid overtime, delayed wages as casual part-time workers and exposure to exploitation and the cash economy. These all could undermine their attempts to save money and control their cash flow. </p>
<p>However, while focused on youthful consumption, many realise the need to balance this with achieving other medium and longer-term objectives - such as buying a car, or home ownership - and were optimistic of their ability to increase their earning power.</p>
<p>Our research also shows our squeamishness at talking about money has significant consequences for young people. The way we undertake financial literacy education often misses the mark.</p>
<h2>Why we need to talk about money</h2>
<p>In Australia we often think about money-talk as uncomfortable, boastful or even vulgar, even with intimate partners or close friends. Our study suggests this has significant consequences for future generations’ financial practices. </p>
<p>Although we may like to think our own positive money practices transmit to our children through a process of osmosis where they automatically model good financial practices, this was not the case for our participants. </p>
<p>Many found it difficult to articulate how their parents had been successful in saving, planning and spending beyond very general impressions. </p>
<p>However, others did describe how witnessing their parents deal with financial struggles influenced their own behaviours, particularly if they had made significant money mistakes. For these young people, early experiences of their family having no money for food, or memories of the electricity cut off due to late payment of bills influenced them in the long run. They had thought about strategies for budgeting and were clear about prioritising essentials such as rent. </p>
<p>But the cultural hangover of a hesitance to talk about money meant young people rarely reported discussing salaries, savings or longer term financial goals with their friends. Although they felt pressure to conform or keep up with activities or new products, many were perplexed that friends could afford something and they couldn’t, despite perceiving themselves to be in similar financial positions. </p>
<p>This may of course have dangerous consequences in terms of setting expectations about lifestyle or consumption choices that do not correlate with their financial practices. </p>
<h2>Translating financial literacy into action</h2>
<p>Our research suggests the current focus on financial literacy, which favours intervention and education at the individual level, only partially helps to support young people. Unlike previous generations, they face a complex terrain of financial decisions around superannuation, <a href="https://www.uq.edu.au/swahs/news/CaughtShortFinalReport.pdf">predatory lending practices</a> (such as payday loans) and new, poorly regulated financial products on the market.</p>
<p>Among financial literacy initiatives, clear information is needed about the medium to long-term management of investments, <a href="https://theconversation.com/students-low-financial-literacy-makes-understanding-fees-loans-debt-difficult-45088">the implications of debt</a> and the importance of discussing their money decisions with others. </p>
<p>Most importantly, more needs to be done to ensure systems and practices around spending and financial commitments are accessible and transparent. This includes making it easy for people to <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443256">“read the fine print”</a> in agreements, and being clear about the longer-term consequences of financial decisions.</p>
<p>Young people have a clear idea what they want their futures to look like and they know it requires significant financial compromises and sacrifices in the short and medium term. The least we can do is provide enabling structures to support this.</p><img src="https://counter.theconversation.com/content/67228/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deanna Grant-Smith receives funding from National Centre for Student Equity in Higher Education.</span></em></p><p class="fine-print"><em><span>Paula McDonald receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Kathleen Riach does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Young people actually take responsibility for their own financial decisions but they fail to learn from their parents about how to handle money, new research shows.Kathleen Riach, Associate Professor in Management, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/649712016-09-14T03:45:56Z2016-09-14T03:45:56ZGoing bankrupt is a life changing decision – so why is the process to do it so easy?<p>The process to go bankrupt is too easy and does not allow for the debtor to explore all their options. </p>
<p>As part of my research I interviewed 29 people who had recently declared bankruptcy. We discussed the process. I found that at least half of the people interviewed did not have to go bankrupt.</p>
<p>Going bankrupt still carries great stigma in Australia. The participants in the research reported experiencing feelings of shame, embarrassment and guilt. The decision to go bankrupt should only be made after careful consideration and taking the time to weigh up all the options. </p>
<p>So why is the process to go bankrupt as simple as downloading forms from the official <a href="https://www.afsa.gov.au">government website</a>, completing and submitting them via email the same day without the need to have received any advice or assistance to avoid the bankruptcy?</p>
<p>In 2015/16 just over 17,200 Australians <a href="https://www.afsa.gov.au/resources/statistics/provisional-bankruptcy-and-personal-insolvency-statistics/annual-statistics">declared themselves bankrupt</a>. Added to this figure were around 12,500 Australians who declared themselves insolvent and entered into an agreement with their creditors. Going bankrupt does have short-term advantages such as ceasing debt collection activity but also has many long-term consequences such as affecting certain career choices, future borrowing and even being allowed to privately rent a home. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=315&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=315&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=315&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=396&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=396&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137386/original/image-20160912-3763-guf5hl.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=396&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual personal insolvency activity in Australia.</span>
<span class="attribution"><a class="source" href="https://www.afsa.gov.au/resources/statistics/provisional-bankruptcy-and-personal-insolvency-statistics/2015-16-images-and-files/annual-personal-insolvency-activity-in-australia">Author provided</a></span>
</figcaption>
</figure>
<p>My research found that bankruptcies are the result of many interacting factors such as peer pressure, advertising tactics, commission-driven loan selling, and relationship breakdown.</p>
<p>Debtors struggling to repay their debts are often not aware of sources of assistance, their rights and options such as accessing free and impartial <a href="https://www.moneysmart.gov.au/managing-your-money/managing-debts/financial-counselling">financial counselling agencies.</a> These could assist them to negotiate with their creditors and present a range of options such as challenging the debt, utilising financial hardship options such as a moratorium for 90 days, or using the free and independent Ombudsman services. </p>
<p>Despite a big investment by the Australian government in <a href="https://www.moneysmart.gov.au/managing-your-money/managing-debts">promoting these options</a> they are not well known nor easily grasped. The forms and processes can be difficult. They are very difficult for those with additional challenges such as low levels of literacy, English as a second language, and not having access to a support network.</p>
<p>The act of falling behind with payments increases stress levels creating a cycle of making wrong decisions that further perpetuates debt. Against this complex maze of options and faced with ongoing contact from debt collectors, the research participants took the option of going bankrupt.</p>
<p>One bankrupt who participated in the research told how me how she paid A$1000 to a for profit <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-011mr-asic-releases-report-on-debt-management-firms/">debt management firm</a> to help her complete the bankruptcy papers. In her emotional and stressed state of dealing with demands of debt collectors she was not aware that there was no fee to go to a financial counsellor who could have assisted her to complete the paperwork at no cost. </p>
<p>This participant was one of many who did not have to go bankrupt as she qualified to have her debts assessed for write off under the <a href="https://www.nhr.org.au">national hardship scheme</a>. She did not have $1000 spare. She was advised by the debt management firm to stop paying her creditors and to direct the funds towards their firm.</p>
<p>This guaranteed the debts fell behind, making it harder for the debtor to change her mind. I asked her about the impact of going bankrupt. She said:</p>
<blockquote>
<p>“The impact is huge with this, to the point where psychologically, you’re a bit of a mess actually. There were times there I could’ve gone close, you just take your life over it.”</p>
</blockquote>
<p>The Australian government is proposing to reduce the term of bankruptcy from <a href="http://www.innovation.gov.au/page/insolvency-laws-reform">three years to one</a>.The aim is to encourage entrepreneurs to take a risk without the fear of being locked out of the business and credit sector if it all goes wrong.</p>
<p>However only around 25% of current bankruptcies are <a href="https://www.afsa.gov.au/resources/statistics/provisional-business-and-non-business-personal-insolvency-statistics">business-related</a>. Ordinary consumers are needlessly going bankrupt.</p>
<p>Reducing the term of bankruptcy does not reduce the <a href="http://www.austlii.edu.au/au/journals/UNSWLawJl/2015/58.html">stigma</a> of having to actually go bankrupt. What does need to be reviewed is the system. It has few barriers to enter, is usually free and quick, but leaves lasting trauma for the participants.</p><img src="https://counter.theconversation.com/content/64971/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Mowle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research shows people are needlessly declaring bankruptcy because they don’t know about the help available to manage their debts.Gregory Mowle, Lecturer in Finance, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/643672016-08-26T02:17:28Z2016-08-26T02:17:28ZTwo million Aussies are experiencing high financial stress<p>A new study shows two million Australians are experiencing high financial stress which prevents them from coping in difficult situations, for example, in paying unexpected expenses such as a big mobile phone bill or the fridge breaking down. </p>
<p>Adults face these sorts of scenarios frequently. When they arise, people usually turn to savings, a credit card, or a friend or family member to help out. </p>
<p>Our report, <a href="http://www.nab.com.au/about-us/corporate-responsibility/our-programs-and-initiatives/social-and-financial-inclusion/financial-exclusion-research?own_cid=shortURL:financialresilience">Financial Resilience in Australia</a>, funded by the National Australia Bank, quantifies the amount of Australians: experiencing problems paying debts; meeting the costs of living; and accessing appropriate, affordable and acceptable financial products and services. </p>
<p>It also shows some Australians have trouble accessing social support in times of crisis and may have low levels of financial knowledge.</p>
<p>Our research measured financial resilience by the four key resources that support it: personal economic resources (such as savings), financial products and services (such as insurance), financial knowledge and behaviour (including financial literacy), and social capital (having social support in times of crisis, including friends and families). </p>
<p>Many Australians simply don’t have the resources to bounce back. For example, around:</p>
<ul>
<li>One in two adults have limited to no savings</li>
<li>One in two only have a “basic understanding” of financial products and services </li>
<li>One in ten have unmet need for credit and/or insurance</li>
<li>One in five have limited or no social connections</li>
<li>One in 30 stated they needed but did not have access to any form of government or community support. </li>
</ul>
<p>This has implications for the short and long-term impact on individuals and their families.</p>
<h2>Who is most at risk?</h2>
<p>Our research found secure housing, steady income, education, being employed and good mental health are strongly associated with financial resilience. </p>
<p>On average, financial resilience is significantly lower among people who are homeless, living in social housing, are short-term renters or live in student accommodation. </p>
<p>Financial resilience increases with the level of education and, unsurprisingly, people with very low personal incomes fare poorly. </p>
<p>Employment status is a key marker. People who are unemployed, underemployed, not in the labour force and those who only work odd jobs are more likely than their full-time employed counterparts to have lower levels of financial resilience.</p>
<p>People with a serious mental illness are significantly more likely to be in severe or high financial stress, are less likely to be financially secure and fare worse on each of the individual resource groups than people without mental illness. </p>
<p>The gender split in financial resilience is fairly even overall. However, the four components of financial resilience are influenced by gender. Women have lower general levels of economic resources than men, but men have lower levels of social capital than women. </p>
<p>People who were born overseas in a non-English speaking country have lower levels of resilience than those who were born in Australia. Finally, the influence of age on financial resilience varies and is often affected by other factors. </p>
<p>One in four study participants reported difficulties accessing financial services. The barriers are varied, but include cost, trust, poor and inadequate services, and (for a few) language, disability and discrimination. </p>
<p>This underscores the importance of making financial information, products and services more user-friendly and accessible. This will ensure these resources are available and accessible to everyone who needs and wants them in society. </p>
<p>The factors influencing financial security are not surprising. People who own their own homes, have a university-level education and have a personal yearly income of more than A$100,000, for example, have higher levels of financial resilience. However, only 35.7% of Australians are financially secure.</p>
<p>The prevailing attitude around financial problems is that individuals are solely responsible for their situation. Our research challenges this ideas as it shows multiple aspects to financial resilience, some out of the individual’s control. </p>
<p>The below shows how interlocked the different components of financial resilience are and when pieces of the puzzle are removed, the most vulnerable people are at risk.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=495&fit=crop&dpr=1 754w, https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=495&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/135575/original/image-20160826-11150-bc398a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=495&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The jigsaw of financial resilience.</span>
<span class="attribution"><span class="source">The Centre for Social Impact</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>At the moment social sector leaders are lobbying the government to scrap proposed budget cuts that <a href="http://www.acoss.org.au/media-releases/?media_release=unemployed-and-pensioners-collateral-damage-in-budget-fight">will reduce the amount of certain welfare payments</a>. Our research shows these same people have the least resilience to bounce back if they were to lose some financial support. </p>
<p>This is an example of how the government needs to play a more active role in understanding financial resilience and where support is needed. By understanding the often interrelated elements of financial resilience, tipping points and who is most at risk, prevention and intervention can be better tailored.</p><img src="https://counter.theconversation.com/content/64367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Rebecca Reeve was part of the research team funded to complete this research by National Australia Bank (NAB) at the Centre for Social Impact (CSI) based at UNSW Australia. In addition to her role at CSI, Rebecca is also Senior Research and Advocacy Officer at The Smith Family. </span></em></p><p class="fine-print"><em><span>Professor Kristy Muir received funding from National Australia Bank to undertaken this research at the Centre for Social Impact (CSI) based at UNSW Australia. Kristy Muir represents CSI on the Financial Inclusion Action Plan leadership group with the Australian Government, Good Shepherd Microfinance and EY. Kristy Muir is a member of the NSW Premier's Council on Homelessness and on the committee for Opportunity Child.</span></em></p>A new report finds two million Australians lack the resources to bounce back when difficult circumstances arise.Rebecca Reeve, Senior Research Fellow, Centre for Social Impact, UNSW SydneyKristy Muir, Professor of Social Policy / Research Director, Centre for Social Impact, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/617242016-06-30T14:22:35Z2016-06-30T14:22:35ZSchools don’t give voters tools to challenge politicians’ economic claims<figure><img src="https://images.theconversation.com/files/128656/original/image-20160629-15271-10gbjkz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">I've no idea. </span> <span class="attribution"><span class="source">pathdoc/www.shutterstock.com</span></span></figcaption></figure><p>During the UK’s EU referendum campaign, the economy was reported to be an <a href="http://www.independent.co.uk/news/uk/politics/eu-referendum-new-poll-shows-one-in-three-think-immigration-is-more-important-than-the-economy-a7075351.html">important</a> topic for the electorate. Yet voters said they <a href="http://electoral-reform.org.uk/press-release/just-one-four-feel-well-informed-about-eu-ref-warn-campaigners">were not being told enough</a> to get a clear view of the economic consequences of their choice. </p>
<p>Politicians from both sides offered assertions and simple rebuttals but rarely any solid arguments to justify their positions. </p>
<p>Was this because none of them had even a rudimentary grasp of the economic arguments, or because they believed that voters would be bored or confused by anything more than a soundbite? Or was it because they also relied rather heavily on communicating via news and social media and these media prefer quick and simple opinions? A standard reporting format used by BBC TV news was: “Smith says X is true and Jones says X is not true and we have no way of judging between them”.</p>
<figure>
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</figure>
<p>It is difficult to see how this level of public discourse offers much promise for a healthy democracy. Of course, there are <a href="http://www.cato.org/publications/policy-analysis/myth-rational-voter-why-democracies-choose-bad-policies?print">those</a> who argue that the economic ignorance of the median voter means that we would all be much better off if we allowed markets to get on with their job without any disturbance from democracy. </p>
<p>But this misses the connections between globalisation, alienation and chaos. It also ignores the connections between alienation and lack of knowledge. The point is not that the alienated should understand their situation as economically inevitable. The point is that an economically literate electorate should increase the demand on politicians and journalists to offer and examine reasoned argument in support of economic claims. </p>
<p>It might even narrow the scope for politicians to make sweeping, <a href="http://www.newstatesman.com/politics/uk/2016/06/watch-brexit-lies-unravel-nigel-farage-calls-350m-week-promise-nhs-mistake">non-credible claims</a> in the belief that enough people will be taken in. Voters have a right to be able to see when politicians and journalists say stupid things about the economy. </p>
<h2>No time on the curriculum</h2>
<p>Schools in England play a negligible role in educating young people to understand their economy. A brief flirtation with “economic awareness” in the early days of the national curriculum was dumped by the <a href="http://www.educationengland.org.uk/documents/dearing1994/">Dearing review</a> in 1994. A <a href="http://webarchive.nationalarchives.gov.uk/20130401151715/http:/www.education.gov.uk/publications/eOrderingDownload/QCA-04-1374.pdf">ludicrous one-liner</a> was left in the non-statutory citizenship curriculum for 14- to 16-year-olds, who were to be taught “how the economy functions”. </p>
<p>Teachers <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413567/Economics_business_and_enterprise_education.pdf">with no training in economics</a> were expected to achieve this objective in a couple of hours. The impact of this shortcoming is indicated by a <a href="http://www.tandfonline.com/doi/pdf/10.1080/09585170210136859">2002 survey</a> which reported that roughly three-quarters of 15- to 17-year-olds mistakenly thought that:</p>
<ol>
<li>The government was responsible for providing water to their homes </li>
<li>They paid no tax – they were unaware of VAT</li>
</ol>
<p>Less surprisingly, a large majority believed the government should spend more and that people should pay less tax. </p>
<p>Experience of adult life does little to improve this worrying picture. Evidence from <a href="http://www.sciencedirect.com/science/article/pii/016748709500033X">Australia</a>, the <a href="http://opus.bath.ac.uk/19127/">UK</a> and the <a href="http://econpapers.repec.org/bookchap/elgeechap/15538_5f16.htm">US</a> has found that adults display economic understanding little better than that of young people. There is widespread belief that there is no contradiction between wanting governments to increase total spending and decrease total taxation.</p>
<h2>Push for economic literacy</h2>
<p>Economics has long been a subject option – it is not compulsory – for 16- to 18-year-olds, and two decades ago it was one of the most popular advanced level subjects. But the <a href="http://www.tandfonline.com/doi/full/10.1080/03054980802643298">proportion of schools offering the subject slid to little over 10% by the mid-2000s</a> as schools preferred to offer psychology and business studies. </p>
<p>Economics is still a popular choice for undergraduates, but take-up is <a href="http://www.tandfonline.com/doi/full/10.1080/00220485.2010.510400">heavily skewed</a> towards high-achieving boys from professional and managerial families who study at elite universities. By 2008, the subject was reported as at risk of dying out in schools since only three new teachers of economics had been <a href="http://news.bbc.co.uk/1/hi/education/7525170.stm">trained for the whole of the country</a>.</p>
<p>The prospects for changing this state of affairs are, frankly, not great. There is little incentive for politicians to do anything that would enable the electorate to be more critical of the claims they make. It is true that in the last few years a <a href="https://www.pfeg.org/policy-campaigning/pfeg-and-parliament">large and energetic group of MPs</a> has lobbied for the inclusion of financial education in the curriculum and succeeded in getting a mention for financial education in the mathematics and computing curriculum. </p>
<p>But their recent <a href="https://www.pfeg.org/policy-campaigning/pfeg-and-parliament/appg-financial-education-young-people">follow-up report</a> lamented the lack of progress in implantation. In any case, the version of financial education being promoted neglected scrutiny of government finances.</p>
<p>Current government policy is transferring responsibility for the curriculum to schools, but only in the context of an accountability and examination regime which fiercely encourages a focus on a few traditional academic subjects. When secondary schools really did have a strong influence over the curriculum, this was largely driven by the interests of <a href="https://books.google.co.uk/books?hl=en&lr=&id=aXGJzqLXSZEC&oi=fnd&pg=PA18&dq=School+subjects+and+curriculum+change&ots=aWX7ipSpQk&sig=g9nFoiO3xrFpSG30XXk4P94WqLE#v=onepage&q=School%20subjects%20and%20curriculum%20change&f=false">strong professional subject teacher groups</a>. Economics teachers in schools have been a dwindling and marginalised group for some time.</p>
<p>Shortly before the general election in 2015 the <a href="http://www.telegraph.co.uk/finance/comment/jeremy-warner/11509865/If-voters-dont-believe-that-its-the-economy-stupid-were-all-doomed.html">Daily Telegraph ran an article</a> with the title “If voters don’t believe that ‘it’s the economy, stupid’, we’re all doomed”. On the morning after the referendum the value of UK companies <a href="http://www.telegraph.co.uk/business/2016/06/27/george-osborne-to-speak-in-attempt-to-calm-markets-following-bre/">was marked down</a> by £140 billion and the UK’s credit rating was <a href="http://www.bbc.co.uk/news/business-36644934">downgraded</a>. We are more likely to be doomed by politicians and journalists thinking that voters can’t understand anything about how an economy works in a globalised world.</p><img src="https://counter.theconversation.com/content/61724/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Davies has received funding from the Economic and Social Research Council and the Nuffield Foundation to investigate patterns of subject choice.</span></em></p>Not enough time is set aside in the curriculum to teach young people economic literacy.Peter Davies, Professor of Education Policy Research and Director of Research, School of Education, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/592402016-05-17T00:24:09Z2016-05-17T00:24:09ZCutting through political spin requires a new approach to financial literacy<p>When Prime Minister Malcolm Turnbull attempted to defend <a href="https://theconversation.com/au/topics/negative-gearing">negative gearing</a> by explaining that it had allowed a baby to enter the housing market, he <a href="http://www.dailymail.co.uk/news/article-3558726/Malcolm-Turnbull-gives-example-couple-bought-home-one-year-old-daughter-Australia-needs-negative-gearing.html">triggered a debate</a> still raging on the facts of the issue.</p>
<p>The minutiae of negative gearing, once largely confined to discussion among policy experts, became mainstream news. </p>
<p>The Project’s Waleed Aly joined in, giving a compelling analysis of the need for tax reform for a more equitable Australia. Cutting to the chase, Waleed described a situation where “the cost of the average house is roughly 4.3 times household income.” </p>
<figure>
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<figcaption><span class="caption">Waleed Aly explains why negative gearing should be abolished.</span></figcaption>
</figure>
<p>Aly’s well-executed explanation reminds us that making sense of policy requires motivation, economic and financial knowledge, and a range of capabilities. </p>
<p>Aly demonstrates this motivation in an accessible way. He shows that he has read and watched others’ analysis of economic issues. He is curious and asks questions, including “What does this mean for me?”. He can apply financial mathematics. He demonstrates critical thinking about political spin. He shows skillful communication about his experiences and views. Further, he demonstrates that he is ethically oriented to a more equitable Australia.</p>
<p>Most of us know changes being made to tax and super are important. But let’s face it, this stuff makes our eyes glaze over. And sometimes our financial literacy is tested.</p>
<h2>The role of financial literacy</h2>
<p>In Australia, low socioeconomic status and low financial literacy tend to go hand in hand - among both <a href="http://www.financialliteracy.gov.au/media/558752/research-anz-adultfinancialliteracysurvey2014-fullreport.pdf">adults</a> and <a href="https://www.acer.edu.au/files/PISA_2012_Financial_Literacy.pdf">teenagers</a>. Those who struggle with financial literacy surveys are typically cast as needing more financial knowledge.</p>
<p>But having a limited level of education doesn’t necessarily mean someone has a low financial literacy. Take father of two <a href="http://www.abc.net.au/tv/qanda/txt/s4432624.htm">Duncan Storrar who appeared on Q&A</a> last week and introduced himself as having “a disability and a low education”. Storrar questioned the government’s move to lift the upper end of the 32.5 cent tax bracket from $80,000 to $87,000. But when Innes Willox from the Australian Industry Group said those on the minimum wage don’t pay much tax, Storrar quickly replied, “I pay tax every time I go to the supermarket”.</p>
<p>Behavioural economists tell us that financial problem-solving and decision-making may depend as much on values, expectations, emotions and notions of control and confidence about money than knowledge. This means that your family and socioeconomic background is powerfully influential and teaching and learning about money can be values-laden. So it doesn’t matter how old those needing to improve their financial literacy are - crafting relevant and meaningful financial literacy lessons is by no means easy.</p>
<p>So, what is the best approach?</p>
<p>The answer depends on who you ask. Financial experts generally suggest teaching responsible money management, including budgeting and saving. Going back to Malcolm Turnbull and Waleed Aly, Turnbull wants us to believe that with the right parents, financial advice and greater discipline, we might all have not one, but two or more properties. Akin to the weight-loss movement, this plays on our emotional attachment to a particular dream and provides an incentive to do more to keep track of our money.</p>
<p>By contrast, educational experts tend to see things differently. Aly seems to have knowledge and capabilities that are desirable, teachable, and transferable to a range of “real world” problems. He embodies what it means to be financially literate to the extent that he brings a range of capabilities to making sense of his everyday financial reality within a complex financial system.</p>
<h2>What should be taught in schools</h2>
<p>Australia’s <a href="http://www.financialliteracy.gov.au/media/546585/report-403_national-financial-literacy-strategy-2014-17.pdf">National Financial Literacy Strategy</a>, led by the Australian Securities and Investments Commission, identifies formal education as a priority. </p>
<p>If Australian schooling is to achieve its <a href="http://www.curriculum.edu.au/verve/_resources/National_Declaration_on_the_Educational_Goals_for_Young_Australians.pdf">goals</a> of promoting equity and active and informed citizenship, there needs to be a rethink of what it means to be financially literate. This means bringing social justice to the conversation and shifting the emphasis from “responsibility” to “capability”.</p>
<p>Consider this starting point for a lesson:</p>
<blockquote>
<p>Jason and Jane are twins. Both start working at McDonald’s at the age of 15.
Both graduate from University and pursue professional careers. While their careers progress at a similar rate, Jason’s average annual income of $100,000 is 10% higher than Jane’s. Jane’s career is interrupted by 3 x 12-month periods of maternity leave and a total of 10 years working only 3 days per week. Jason works full-time continuously throughout his career. Both retire at the age of 65.
Evaluate the financial decisions Jane and Jason must make, and the impact on their lives.</p>
</blockquote>
<p><a href="https://theconversation.com/kids-prefer-maths-when-you-let-them-figure-out-the-answer-for-themselves-44016">This approach</a> has been researched - we know it works. Looking at the <a href="http://www.australiancurriculum.edu.au/">Australian Curriculum</a>, Economics & Business and Mathematics are important learning areas to apply to this problem-based lesson. But it is the seven <a href="http://www.australiancurriculum.edu.au/generalcapabilities/overview/introduction">general capabilities</a> that are central. These capabilities include: literacy; numeracy; information and communication technology; critical and creative thinking; personal and social capability; ethical understanding; and intercultural understanding.</p>
<p>The key to preparing students for life beyond school is identifying “real world” financial problems and teaching through issues, as opposed to topics.</p>
<p>For example, a good teacher might plan a provocative lesson about the information gap between a bank or insurer and the customer by discussing the <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">CommInsure life insurance scandal.</a></p><img src="https://counter.theconversation.com/content/59240/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carly Sawatzki does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Financial literacy is not just about knowledge, so it would help if we taught it using day-to-day issues.Carly Sawatzki, Lecturer , Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/568022016-03-29T03:37:00Z2016-03-29T03:37:00ZFour reasons payday lending will still flourish despite Nimble’s $1.5m penalty<figure><img src="https://images.theconversation.com/files/116550/original/image-20160328-17838-1muob0h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Access to small loans is getting easier, but not everyone is resilient enough to manage their finances.</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p>The payday lending sector is under scrutiny again after the Australian Securities and Investment Commission’s investigation into Nimble.</p>
<p>After failing to meet responsible lending obligations, Nimble must refund <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-089mr-payday-lender-nimble-to-refund-15-million-following-asic-probe/">more than 7,000 customers, at a cost of more than A$1.5 million</a>. Aside from the refunds, Nimble must also pay A$50,000 to Financial Counselling Australia. Are these penalties enough to change the practices of Nimble and similar lenders? </p>
<p>It’s very unlikely, given these refunds represent a very small proportion of Nimble’s small loan business - <a href="http://www.abc.net.au/news/2016-03-23/nimble-pay-day-lender-to-refund-customers-asic/7269832">1.2% of its approximately 600,000 loans</a> over two years (1 July 2013 – 22 July 2015). </p>
<p>The <a href="http://asic.gov.au/regulatory-resources/credit/">National Consumer Credit Protection Act 2009</a> and <a href="http://download.asic.gov.au/media/3038267/rep-426-published-17-march-2015.pdf">small amount lending provisions</a> play a critical role in protecting vulnerable consumers. Credit licensees, for example, are required to “take reasonable steps to verify the consumer’s financial situation” and the suitability of the credit product. That means a consumer who is unlikely to be able to afford to repay a loan should be deemed “unsuitable”. </p>
<p>The problem is, regulation is just one piece of a complex puzzle in protecting consumers. </p>
<ol>
<li><p>It’s going to be difficult for the regulator to keep pace with a booming supply. </p>
<p>Nimble ranked 55th in the <a href="http://www.afr.com/leadership/brw-lists/fast-100/brw-fast-100-2014-20160303-gn9jdv">BRW Fast 100 2014 list</a> with revenue of almost A$37 million and growth of 63%. In just six months in 2014, <a href="http://www.smh.com.au/business/consumer-affairs/cash-converters-cashes-in-on-online-payday-loans-20160229-gn6esx.html">Cash Converters’ online lending increased by 42% to A$44.6 million</a>. And in February 2016, <a href="http://www.smh.com.au/business/consumer-affairs/cash-converters-cashes-in-on-online-payday-loans-20160229-gn6esx.html">Money3 reported a A$7 million increase</a> in revenue after purchasing the online lender Cash Train.</p></li>
<li><p>Consumers need to have high levels of <a href="http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=10201947&fulltextType=RA&fileId=S0047279415000677">financial literacy</a> to identify and access appropriate and affordable financial products and services.</p>
<p>The <a href="http://www.financialliteracy.gov.au/">National Financial Literacy Strategy</a>, <a href="https://www.moneysmart.gov.au/borrowing-and-credit/payday-loans">Money Smart</a> and <a href="http://www.financialcounsellingaustralia.org.au/Corporate/Home">Financial Counselling Australia</a>, among other providers and initiatives, aim to improve the financial literacy of Australians, but as a country we still have significant progress to make. According to the <a href="http://media.mhfi.com/documents/2015-Finlit_paper_17_F3_SINGLES.pdf">Financial Literacy Around the World</a> report, 36% of adults in Australia are not financially literate.</p></li>
<li><p>The demand for small loans is high and yet there are <a href="https://theconversation.com/payday-lending-trap-requires-a-credit-supply-rethink-39311">insufficient supply alternatives to payday lending in the market</a>.</p>
<p>The payday loan sector dominates supply. Other options, such as the Good Shepherd Microfinance No Interest Loan Scheme (NILS) or StepUP loans, are relatively small in scale. As <a href="https://theconversation.com/payday-lending-trap-requires-a-credit-supply-rethink-39311">we’ve noted previously</a>, to seriously challenge the market, realistic alternatives must be available and be accessible, appropriate and affordable. </p></li>
<li><p>Demand is not likely to decrease. People who face financial adversity but cannot access other credit alternatives will continue to seek out payday loans. </p>
<p>ACOSS’s <a href="http://acoss.org.au/images/uploads/ACOSS_Poverty_in_Australia_2014.pdf">Poverty in Australia Report 2014</a> found that 2.5 million Australians live in poverty. Having access to credit alone is not going to help financially vulnerable Australians if they experience an economic shock and need to borrow money, but lack the economic capacity to meet their financial obligations. </p>
<p>Social capital can be an important resource in these situations. For example, having family or friends to reach out to. This can help when an unexpected bill, such as a fridge, washing machine or car repair, is beyond immediate financial means. Yet, according to the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/4159.0">Australian Bureau of Statistics General Social Survey</a>, more than one in eight (13.1%) people are unable to raise A$2,000 within a week for something important. </p></li>
</ol>
<p>Coupled with regulation, these different puzzle pieces all play an important role in influencing the entire picture: regulators and regulation; the supply of accessible, affordable and appropriate financial products; the financial literacy and capacity of consumers; people’s economic circumstances; and people’s social capital. </p>
<p>Previous responses to financial vulnerability have often focused on financial inclusion (being able to access appropriate and affordable financial products and services), financial literacy (addressing knowledge and behaviour), providing emergency relief, or regulating the credit market. Dealing with these aspects in silos is insufficient to support vulnerable consumers. </p>
<p>A more holistic response is needed: one that puts the individual at the centre and understands and addresses people’s personal, economic and social contexts. At the same time, it must factor in the role of legislation, the market and technology. </p>
<p>The <a href="http://sjm.ministers.treasury.gov.au/media-release/032-2016/">Turnbull government</a> recently committed to “creat[ing] an environment for Australia’s FinTech sector where it can be internationally competitive”. </p>
<p>With more online lenders coming, it’s important we work towards strengthening people’s <a href="http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=10201947&fulltextType=RA&fileId=S0047279415000677">financial resilience</a>. </p>
<p>Improving the financial resilience of the population, coupled with strong reinforced regulation, will help to protect financially vulnerable Australians from predatory lenders.</p><img src="https://counter.theconversation.com/content/56802/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kristy Muir receives funding from the Australian Research Council, Australian Charities and Not-for-profits Commission, Australian Government Department of Employment, the NSW Department of Family and Community Services, National Australia Bank, ten20 Foundation and First Nations Foundation. Kristy is leading the research on conceptualising and measuring financial resilience in Australia (funded by the National Australia Bank) and is affiliated with Good Shepherd Microfinance through the Financial Inclusion Action Plan. </span></em></p><p class="fine-print"><em><span>Fanny Salignac receives funding from National Australia Bank and First Nations Foundation. </span></em></p><p class="fine-print"><em><span>Rebecca Reeve receives funding from the Australian Charities and Not-for-profits Commission, National Australia Bank and First Nations Foundation. Rebecca is affiliated with Good Shepherd Microfinance through the Financial Inclusion Action Plan.</span></em></p>The payday lending sector is under scrutiny again after the Australian Securities and Investment Commission’s investigation into Nimble. After failing to meet responsible lending obligations, Nimble must…Kristy Muir, Professor of Social Policy / Research Director, Centre for Social Impact, UNSW SydneyFanny Salignac, Research Fellow - Centre for Social Impact, UNSW SydneyRebecca Reeve, Senior Research Fellow, Centre for Social Impact, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/396862015-04-21T20:10:31Z2015-04-21T20:10:31ZWhat should we tell our children about money?<figure><img src="https://images.theconversation.com/files/77866/original/image-20150414-24627-bbref.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Kids need to know money doesn't just come from a machine.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/downloading_tips.mhtml?code=&id=137305268&size=medium&image_format=jpg&method=download&super_url=http%3A%2F%2Fdownload.shutterstock.com%2Fgatekeeper%2FW3siZSI6MTQyOTAxNDUxNCwiYyI6Il9waG90b19zZXNzaW9uX2lkIiwiZGMiOiJpZGxfMTM3MzA1MjY4IiwicCI6InYxfDEwMTI3NTg4fDEzNzMwNTI2OCIsImsiOiJwaG90by8xMzczMDUyNjgvbWVkaXVtLmpwZyIsIm0iOiIxIiwiZCI6InNodXR0ZXJzdG9jay1tZWRpYSJ9LCJhQUIwOXJLaTYyZXNtdWJiK3NuaWpRRVE5ODgiXQ%2Fshutterstock_137305268.jpg&racksite_id=ny&chosen_subscription=1&license=standard&src=caOSlEsNCcVLMjDhQO2QwQ-1-1">from www.shutterstock.com.au</a></span></figcaption></figure><p>Being a parent presents us with daily challenges, including decisions about what things to expose our children to. One of the questions I am constantly asked by parents is what should they teach their children about money, and at what age.</p>
<p>Talking about money is no different to talking about how to keep healthy or how to keep safe when using the internet. If your child thinks money is something that “mum and dad get from a machine”, then they don’t know how hard their parents work to generate an income for the family and meet all of their expenses.</p>
<p>Moving money from an abstract concept to something tangible that is earned and saved before it is spent is an important step for children to understand. Children are more intelligent than we often give them credit for. They are also more understanding and resilient – if there are tough financial situations to explain, what children appreciate most is honesty, consistency and facts.</p>
<p>So, if you don’t have enough money to buy something your child has asked for, be honest and put the facts in front of them. Explain the difference between things the family <strong>needs</strong> and the things they <strong>want</strong>. </p>
<p>Tell them that all the “need items” must be purchased first, and then you will see if there is enough money left in the budget to buy what they want. And if there isn’t, tell them how the item can be budgeted for – and how you can all work towards saving for it over time.</p>
<h2>What is the right age to start having these discussions?</h2>
<p>You should be open with your children about money as soon as they are able to understand. However, what your child needs to know at the age of four or five is very different to what they need to know at the age of 10, 15 or older.</p>
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<img alt="" src="https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/78335/original/image-20150417-20740-1tma4zk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Let the kids take over the shopping list and budget.</span>
<span class="attribution"><span class="source">from www.shutterstock.com.au</span></span>
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<p><a href="http://www.massey.ac.nz/massey/fms/Colleges/College%20of%20Business/School%20of%20Economics%20&%20Finance/FinEd/documents/FinanceStudyWEBv2.pdf?7B7DE79F6F2FC1A47A247B28528D8E4C">Research by the Westpac Massey Fin-Ed Centre</a> shows that most young people get their financial information from their parents so it is important that parents provide a good foundation for future financial well-being from an early age. </p>
<p>The initial conversation with a four to five-year-old does not have to be about money. Start with the concept of “delayed gratification”. It is a powerful way of teaching children there are benefits in waiting for things. They also need to know that not every demand they make is going to be fulfilled instantly. Every family has a limit to its available resources, even the very rich need to have plans for their money. </p>
<p>For children aged 6-10, involve them in preparing a household budget and allocating money to different parts of your budget. Let them help you prepare a shopping/grocery list and then allocate to them an amount as per your agreed budget. </p>
<p>Take them grocery shopping with you, hand them the list that they have prepared along with a calculator. Give them the responsibility of staying within the allocated budget and be strict with this. The incentive for the child could be that if they manage to get all the items on the list for less than the allocated amount, they get to decide how to spend the surplus.</p>
<p>When you get home, this can become a conversation about money: the benefits of staying within the allocated amount and how to make tough decisions about what items are priority.</p>
<p>For children aged 10 – 15, give them the responsibility of setting the household budget under your supervision. Discuss the different components of budgets: expenses that occur weekly/fortnightly/monthly/annually so they can see how important it is to have a better understanding of how and where the money is being spent.</p>
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<a href="https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/78336/original/image-20150417-20743-aom2ba.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Encourage them to save for things they want.</span>
<span class="attribution"><span class="source">from www.shutterstock.com</span></span>
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<p>They may have a goal of buying something new for themselves – so help them to work out whether it is a need or a want and how they plan to pay for it. Discussions about short, medium and long-term goals can be useful.</p>
<p>For those age 15 and over, start having discussions about their goals for their future – beyond high school. Encourage them to start saving for their future, whether that be higher education, travel, or buying a house. </p>
<p>At this stage they also need to start learning about their rights as a consumer, signing agreements, the difference between debit cards and credit cards, and saving for things you want instead of borrowing.</p>
<h2>They need to know they will sometimes go without</h2>
<p>Children also need to be made aware that they will sometimes have to go without things they want. They need to understand that, as a parent, it is your moral, legal, social and ethical responsibility to look after their needs, but that you are not obliged to pay for all their wants. But explain that you are happy to work with them to help them save for the things they want.</p>
<p>Another common question is, how much should you tell your children. Should you tell them how much you earn, how much debt you have and what, if any, savings you have in the bank?</p>
<p>There are varied opinions on this. Some parents feel that they should be totally transparent with their children, while others feel that they don’t need to know that level of detail. Either way, children should have a general idea about the household’s income and expenditure.</p>
<p>Children need to know from an early age that money is not an endless resource and there are times when you may not have enough money for the things they want to buy. It is a good idea to discuss options in such cases. You will be surprised at some of the creative solutions children come up with.</p>
<p>The main thing is to involve children in money discussions; give them some responsibility and an opportunity to manage money from an early age so they understand its value.</p><img src="https://counter.theconversation.com/content/39686/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pushpa Wood has received funding from the Ministry of Youth Development, NZ, Auckland SKYCITY Community Trust and Westpac Bank.</span></em></p>Should we shelter our children from our money woes, or do they need to know about money from an early age?Pushpa Wood, Director, Westpac Massey Fin-Ed Centre, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/313212014-09-09T10:22:11Z2014-09-09T10:22:11ZFinancial literacy is shockingly low and the academy must do more<figure><img src="https://images.theconversation.com/files/58483/original/yq8z8gwm-1410192862.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Confused?</span> <span class="attribution"><span class="source">Kemal Taner via Shutterstock</span></span></figcaption></figure><p>The latest survey on the basic understanding of financial terms like “loan”, “interest rate” and “budget” makes for shocking reading. The <a href="https://www.moneyadviceservice.org.uk/en">Money Advice Service</a> surveyed 3,000 adults and found that 32% did not understand the meaning of interest and a further 32% did not understand the meaning of budget. </p>
<p>The survey also found that half the people who took out a <a href="https://theconversation.com/uk/topics/payday-lending">Payday Loan</a> do not understand the meaning of loan, with one in five believing that they are not obliged to pay it back. Plus, a majority of people do not read the terms and conditions of a financial contract. All this confusion cost the UK £21 billion last year. And this doesn’t take into account the <a href="http://financesonline.com/payday-loans-debt-and-death/">consequential costs</a> of family break-up, depression and mental health breakdown which follow.</p>
<p>These are all basic concepts for university finance teaching and courses – the courses that many of those creating these financial instruments take. But finance taught in business schools rarely attempts to address the huge inequality that exists in the knowledge and understanding of finance across the general public – nor the consequences this can have. It also tends to focus primarily on corporate finance, a subject which concentrates on the financial issues facing companies and on complex financial products and markets. </p>
<p>If Britain is one of the highly developed nations of the world, then this level of illiteracy should be a matter of significant concern for the finance academy. We must act now to ensure that finance education doesn’t lose touch with real people, as it runs the risk of being centred around corporate interests. Finance should be about service to the economy and society for sustainable development and growth. Instead too much of talent is focused on profit and wealth maximisation at any cost.</p>
<h2>Complexity and jargon</h2>
<p>The <a href="http://www.bloomberg.com/news/2012-07-05/made-in-london-scandals-risk-city-s-reputation-as-finance-center.html">large number of scandals</a> that have emerged recently, relating to the mis-selling of mortgages, payment protection insurance, pensions and savings products, shows that banks actively exploit the financial illiteracy of the general public. Complexity and jargon have been used to deceive rather than to be fair and transparent. </p>
<p>This raises a number of questions for the teaching of finance in universities. Take banks, for example: are they using complex mechanisms to disguise the truth about finance and make it appear scholarly and objective? Is modern finance teaching and research a party to the exploitation of financial illiteracy and unconcerned about its own ethics and social responsibility? Does the finance academy operate in its own bubble?</p>
<p>The 2008 banking crisis and follow-up parliamentary enquiries raised serious concerns about the [culture and ethics of the banking industry](](https://theconversation.com/bankers-should-look-eastwards-for-ethical-guidance-27747). The public cost of the crisis was to the tune of hundreds of billions for Britain alone. And the same ordinary people who were exploited by banks had to bail them out even though they were not at fault. </p>
<p>Regulators are now requiring banks to transform their ethics and culture from the inside out. I think the same should apply to teaching and research in finance. And, in turn, by having a more informed public of the way that finance works, bankers and businesses can be better held to account.</p>
<p><a href="http://www.pbs.org/now/enterprisingideas/Muhammad-Yunus.html">Nobel Prize winner Mohammed Yunus</a> achieved huge success in alleviating poverty in Bangladesh through “micro-finance” – providing small loans to householders to provide basic goods and at the same time, giving them basic training and education about finance and accounting, including budgeting. He argues that credit is a human right, and through the Grameen Bank, he has lifted millions of people out of poverty and into self-sufficiency and self-esteem.</p>
<h2>Encouraging a literacy revolution</h2>
<p>We need a similar grassroots financial literacy drive if we want families to be truly independent and financially stable. Websites like <a href="http://www.moneysavingexpert.com/">Money Saving Expert</a> started by Martin Lewis are huge assets to financial literacy, but not sufficient. I believe it is a public duty of the finance academy to encourage a more widespread literacy revolution. </p>
<p>If complexity is used to confuse and exploit, then the role of these experts becomes questionable. Bankers and their customer finance advisers are experts of a kind, though often biased by the desire to make profits for their employers. Instead, their expertise should be used to promote a fair, ethical and sustainable society where there is equality of opportunity. Bankers should never forget that they are servants to business and enterprise, not masters of them.</p>
<p>In the pursuit of high finance we have forgotten the fundamental role and purpose of our profession and its wider impact on the economy and society. Rather than questioning corporate behaviour, we have become party to its tax avoidance, labour and environmental abuse, and other deliberate exploitation schemes that increase inequality in society. For me, these are matters of huge concern and require urgent action. The start can be made by changing the finance syllabus, and critically reforming the academy’s ethical values.</p><img src="https://counter.theconversation.com/content/31321/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Atul K. Shah does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest survey on the basic understanding of financial terms like “loan”, “interest rate” and “budget” makes for shocking reading. The Money Advice Service surveyed 3,000 adults and found that 32% did…Atul K. Shah, Senior Lecturer - Accounting & Finance, University of SuffolkLicensed as Creative Commons – attribution, no derivatives.