45% of Australians lack basic financial literacy. Why does it matter?

Financial literacy is less about expertise than knowing how to spend, save and borrow, says a UNSW economist. Here’s what you need to know.

8.5 million Australian adults lack basic financial literacy, representing about 45% of the adult population. While Australia ranks among the top 10 countries globally for financial literacy, many people still struggle to confidently make informed decisions about saving, borrowing and managing financial risk.

Professor Isabella Dobrescu, Head of the School of Economics at UNSW Business School, says that a lack of financial literacy can leave people more vulnerable to debt, financial stress and financial abuse, and less prepared for how changes in economic conditions can affect living costs or their personal circumstances.

“Millions of people do not have the basic knowledge needed to confidently decide how much to save, how much to borrow or how to manage financial risk. Financial literacy is not just an individual problem; it is a societal problem, and we need to start building the national capability on this,” she says.

Being financially literate does not mean becoming a money expert. It starts with understanding how everyday financial decisions affect your present and future circumstances, and understanding the economics of your life. 

What does it mean to be financially literate?

The term financial literacy can be intimidating, with people often assuming it means having deep knowledge of investing and the stock market. But Prof. Dobrescu says it is much broader and begins with everyday decisions about money.

The estimate that 45% of Australian adults lack basic financial literacy comes from an analysis of the 2016 Household, Income and Labour Dynamics in Australia (HILDA) Survey. In the analysis, respondents were considered financially literate if they correctly answered all three questions about interest, inflation and investment diversification.

“It is about understanding how to budget, how to save, how much to borrow and how to manage risk. It is about how you make decisions with your money, and so much broader than the stock market,” she says.

Financial literacy helps people manage their own money, but these decisions do not happen in isolation. They are shaped by broader economic conditions, including changes in interest rates, inflation and the cost of living. Prof. Dobrescu says economic literacy helps people understand this wider context, as well as the incentives and trade-offs involved in their choices. 

“We live in a world of constraints. We have limited money, limited time, limited information and limited attention,” she says. “Being economically literate helps you make the best in this constrained world, which is the real world.” 

On The Business Of Financial Literacy podcast, Prof. Dobrescu says even highly educated people can make costly financial decisions if they do not pause to understand the trade-offs involved. She gives the example of a person who had significant savings in a bank account earning about 4% interest while carrying credit card debt, attracting roughly 20% interest.

“By using those savings to pay off the credit card debt, they could have avoided paying the higher interest rate,” she says. “It shows why it is important to understand the opportunity cost of the choices you make.”

Is digital spending contributing to financial illiteracy?

The way people interact with money has changed. Tap-and-go payments, digital wallets and online subscriptions have made transactions faster and more convenient, and they can also make people less aware of their spending.

“The biggest behavioural change has been removing the pain of paying,” Prof. Dobrescu says. “When we used cash, we saw the coins and notes leaving our wallets. Now we tap with a card, tap with a phone or click on a subscribe button.”

While digital payments do not necessarily make people financially illiterate, Prof. Dobrescu says the lack of friction can make it harder to recognise how much money is leaving an account, particularly when small payments and recurring subscriptions accumulate over time.

“Transactions happen so quickly that we do not always stop and think about the money leaving our account. When spending becomes less visible, it becomes harder to understand where our money is going and make informed decisions about how much to spend and save,” she says. 

To make spending more visible, Prof. Dobrescu recommends setting aside time each month to review expenses and identify recurring payments that are no longer needed.

“Take an hour, look at your expenses and understand where your money is going,” she says. “It is about bringing some of that friction back and becoming more aware of the decisions you are making. It’s a time cost, but it will pay off in the medium to long-term.”

When did you last give your finances a health check? 

Financial literacy requires ongoing attention as people’s circumstances and priorities change.

“Financial literacy is not a destination. You have to keep checking the information available and learning because your circumstances change, the financial products available to you change, and the economy changes,” Prof. Dobrescu says.

She says a financial health check should begin with some basic questions: Do you know where your money is going? Do you have an emergency buffer? Are you carrying high-interest debt? And do you understand your superannuation? 

“Superannuation is a black box for many people. They know money is going into it, but they may not know how much they have, where it is invested, what insurance is included or whether it will be enough for retirement,” she says.

“The questions people should ask also depend on their stage of life”, Prof. Dobrescu says.

“In your 30s, you should be building the foundations. That means managing debt, establishing an emergency buffer and starting to take your superannuation seriously,” she says.

“Your 40s are a balancing act. You may have a mortgage, children or other caring responsibilities, while also needing to start thinking more seriously about retirement.” 

By their 50s, Prof. Dobrescu says people should have a clearer understanding of whether their retirement savings will be sufficient and how future healthcare or aged care costs may affect them.

“The foundations you put in place earlier in life matter, but it is never too late to become more engaged with your finances,” she says.

Education plays an important role

Prof. Dobrescu says education has an important role in closing Australia’s financial literacy gap. She is involved in STEP UP, UNSW’s economic and financial literacy outreach program for high school students, which uses the Playconomics video game to teach economic and financial concepts through live experiences. 

“Students can experiment with different choices, see their consequences and then go back and try again,” she says. “They can see in real time how changing one decision can affect a whole range of outcomes.”

Through the simulated economy, students make decisions about budgeting and spending, how much to save and how much debt to take on, how to deal with taxes, whether to invest in private or public goods and how to respond to market cycles. Prof. Dobrescu says the experience also helps them understand their appetite for risk and willingness to delay spending for a future benefit.

“It is like living your life on fast forward, but without the real-world consequences,” she says. “You can make mistakes, try again and learn how your decisions affect your financial position.”