The Main Aspects Of Financial Literacy

The 2018 Household, Income and Labour Dynamics in Australia (HILDA) Survey asked 17, 500 people in 9, 500 households five questions on basic financial literacy, which covered a question each on numeracy, inflation, diversification, risk-return and money illusion. Despite having better access to more tools, results showed that only 42. 5 per cent of respondents received perfect scores and that 2. 3 per cent were unable to correctly answer any of the questions. Specifically, 49. 9 per cent of men and only 35. 4 per cent of women answered all questions correctly while the 15-24 age group were the least financially literate. The report released on July 31, 2018 revealed that many Australians still have inadequate financial knowledge.

Financial literacy is crucial when it comes to acquiring the skills and tools an individual needs to gain financial independence, but it’s only recently that financial literacy programs are implemented in schools while adults are normally left to their own devices. However, there are simple ways to increasing financial literacy, and the knowledge in the following topics should serve as the foundation:

Retirement planning

People try to save as much as they can but most find that, without a proper goal and plan, their efforts often fly out the window. When it comes to retirement, creating an achievable long-term retirement plan is necessary. Likewise, it’s also important to learn the skills that will enable an individual to grow their retirement nest egg — from creating a plan to investing and everything in between.

How to save money

Saving money requires at least a simple strategy that takes into consideration the individual’s income, expenses, budget and savings goals. There are many strategies that individuals can employ to save money according to their specific purpose and without sacrificing their quality of life. In fact, small changes and developing a savings habit may improve their lifestyle and wellbeing.

But the key to saving more money is for the individual to spend less than their income and find ways to protect the saved money from devaluation — and the best way is by investing.

Investing

Saving may be the foundation of your nest egg but the value of your money would erode due to inflation. The best way to prevent this from happening is to make properly placed investments that can outstrip the effects of inflation. It’s true that individuals will expose their money to varying levels of risk when they enter the investment market, however, there are two reasons why people should invest in spite of risks: compound interest and time value of money (TVM).

Compound interest is when the interest earned is reinvested along with the principal amount so that the next interest payment is computed against the accumulated amount. This results in a bigger interest payout each period.

Time value of money (TVM) asserts time is an important factor in determining the future value of money. TVM states that the value of money invested today is higher than the same amount invested at a later time because it can benefit from interest payments.

Superannuation

Australia’s superannuation is a tax-effective system created for the sole purpose of providing retirement benefits to its members. Super contributions are composed of the compulsory 9. 5 per cent salary guarantee on top of ordinary time earnings from employers, voluntary salary sacrifice from the member and government co-contributions (if applicable) for eligible low-income earners. Employed individuals who are at least 18 years old, work over 30 hours per week and earn at least $450 before tax are eligible for super and their employers must allow them to choose their preferred managed super fund and pay the salary guarantee. Up to four individuals may also establish a self-managed super fund (SMSF) structured as an individual or corporate trust.

Taxation

Income from employment, investments and any other means come with applicable taxes that individuals must take into consideration because not paying taxes can result in fines and/or jail time. According to the Australian Taxation Office (ATO), individuals 18 years old and over who receive an income of at least $18, 200 annually may need to pay tax on their assessable income. Investors also need to pay tax on dividend and/or distribution payments and capital gains on their assets. However, individuals may also be eligible for tax deductions, exemptions and offsets.

Effects of inflation

Inflation is the phenomenon that erodes the purchasing power of currencies as the price of goods and services continue to increase. This phenomenon is the main reason why simply saving money in a deposit account may be inadequate when saving for the long-term. Inflation also affects how investments are offered and the future value of investment assets.

Debt management

Most Australian households have experience with debt, but there are some instances wherein debt reaches unmanageable levels. According to the Household Income and Wealth report released by the Australian Bureau of Statistics on July 26, 2018, about 29 per cent or three-in-ten households have been classified as over-indebted in 2015-16. Sydney and Melbourne households took the top spots with 407, 000 and 419, 600 households in debt, respectively. Finder’s “2018 State of the credit card market report” revealed that the average credit card debt is at $4, 268, but the amount also goes up as income increases. However, the same report found that even Aussies with no income have an average credit card debt of $3, 774.

The Australian Financial Security Authority (AFSA) reported that a total of 31, 859 Australians declared personal insolvency in FY2017-18, with debt agreements increasing by 9. 1 per cent from the previous year to 14, 834 — the highest annual number on record. The debt records above emphasises the need to strengthen financial literacy programs to give Australians the financial skills they need to avoid accumulating debt from unnecessary spending.