How secure do you feel about your finances?
If you experience some stress and insecurity about your money, you are not alone. It is estimated that about two-thirds of Australians are facing some level of financial vulnerability and stress. It could be worries about repaying debts or covering expenses, or fears that you just don’t know enough about finance and financial products.
According to an industry survey, finance is the number one concern among Australians aged under 55, just behind climate change.
This isn’t surprising given that a person’s financial situation is a significant determinant of their overall wellbeing, affecting physical wellbeing, mental health, relationships and job performance. Overall, how we feel about our finances has about the same influence on our wellbeing as the combined influence of our physical health, job satisfaction and relationship happiness.
If we were talking about a major health problem, like breast or bowel cancer, we would be urging people to fully understand the risks to their health, and proactively reaching out to people with health checks and testing. The problem is, when it comes to money, many people just don’t know enough about their finances and financial products, and the system too often leaves them on their own.
Which is why in our new white paper ‘FinFuture – The future of personal finance in Australia’, a multi-disciplinary team of researchers are proposing compulsory, nationwide, evidence-based financial literacy training in schools as an important step to improve individual financial capabilities. Financial literacy training should also be offered at TAFE and in universities.
But at the same time we argue that financial health checks and counselling needs to be provided to all Australians who need it.
There are a number of barriers stopping people from improving their financial knowledge and situation. In a nationally representative survey commissioned by the University of Melbourne, the most common reason given was ‘I don’t trust financial institutions or advisors’.
People also reported that they find thinking about finance whelming and that they don’t have the skills to improve their financial capabilities.
Financial capabilities can be defined as an individual’s opportunity and ability to maintain and improve his or her financial wellbeing, taking into account relevant personal characteristics and external factors.
Importantly, freedom of choice is an important aspect of financial wellbeing, meaning that financial capability shouldn’t be defined purely in terms of outcomes.
It needs to be recognised, however, that low levels of financial wellbeing are often not primarily caused not by a person’s own behaviour but by a lack of opportunities, in particular, a lack of income and wealth (for example, intergenerational poverty and unpaid caring commitments).
Financial literacy is considered key to making better financial decisions. Higher financial literacy has been associated with higher stock market participation, better financial preparedness for retirement and lower debt.
However, there is a limit to the development of individual financial capabilities — it would be wholly unrealistic to train every Australian to the level of a finance professional.
Improving individual financial capabilities therefore needs to go beyond simply building individual knowledge and skills. We need to design the financial system so that it can be used well by people with limited knowledge and skills. We need to give people easier choices.
That is why financial literacy measures need to be complemented by the introduction, for example, of free basic financial health checks and advice to all Australians at critical points in their life.
The primary purpose of free basic financial health checks and advice would be to better avoid shocks to a person’s or a household’s financial wellbeing. In other words, its primary role would be preventative.
The provision of basic financial advice could be supported and scaled by the use of technology, like robo-advice (automated online financial advice).
We also propose that free financial counselling should be available to all Australians.
At present, financial counselling is usually provided by not-for-profit community organisations and about 250,000 Australian are assisted by financial counsellors every year. It is considered highly effective and hugely beneficial.
However, demand for financial counselling in Australia far exceeds supply, largely due to a lack of funding. Expanding it as a free service could be co-funded by government and an industry levy.
In our white paper, we further propose that research on how existing and emerging technologies can be used to improve financial capabilities should be conducted on an ongoing basis.
We believe that at present, technology is heavily under-utilised in the area of financial wellbeing, including the provision of advice. There is tremendous potential to harness existing and emerging technologies to augment financial capabilities, for example, to provide guidance in financial decision-making.
The individual and community benefits of these technologies could be substantial.
However, it will be important that the ethical consequences of innovation be considered and debated, any policy measure regarding financial capability should be evidence-based and road-tested during the design stage, well before implementation.
The economic benefits alone of improving the financial capabilities and financial wellbeing of Australians is substantial. The combined costs to households over the past five years stemming from the problems Australians have encountered with the financial services industry, including misconduct, is estimated at $A201 billion.
Improving the financial wellbeing of Australians can also be expected to have positive effects on overall wellbeing, not only for individuals but also for their families.
Government, industry, regulators, everyday Australians and other stakeholders will need to work together if we want to sustainably improve the financial wellbeing of Australians, rather than just have so many of us being worried about our finances.
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