The library of research into financial capability got a boost in July when the annual Household, Income and Labour Dynamics in Australia survey included data on attitudes and behaviour around money for the first time.
The researchers measured respondents’ numeracy skills using the five-question survey developed by Lusardi and Mitchell and cross-tabulated the results against scores for a questionnaire on attitudes to money and a separate questionnaire on motivation traits taken from the World Bank Survey of Financial Capability, developed by Professor Elaine Kempson.
Personal finance management improves with age
When the respondents were asked to rate their money management skills on a scale of one to seven, using the World Bank questions, the averages showed levels of self-reported capability improve with age (with a couple of exceptions).
Highest levels of confidence were expressed for individuals’ efforts to understand financial contracts, for all ages from the 25-34 group and older.
Respondents younger than 24 admitted contracts were not a strong point, however, claiming instead their greatest skill was keeping close personal watch on their money matters.
The willingness to set financial goals and make efforts to achieve them – an important compass setting on the road to securing a comfortable life in retirement – rated last for almost all age brackets.
Attitudes to money: appetite for risk
When the new HILDA questions on attitudes about money were cross-tabulated against the results for the five numeracy questions, the results showed a clear correlation between respondents’ numeracy skills and their willingness to take risk.
More than 70% of those who got less than half the numeracy answers right indicated they would not take a risk with their “spare cash”. However, of the group with a perfect score in the five-question financial literacy survey less than 40% were completely risk-averse.
Attitudes to money: planning ahead
Those who score better in a test primarily based on understanding how the value of money is affected by time can be expected to be the type who plan ahead, and the results show medium-to-long-term planning becomes more of a priority as numeracy skill levels rise.
Even for the top-scorers, however, it’s more common to be thinking about next week or next month than it is to be thinking beyond five years ahead. Those who scored five out of five were the most likely to be planning at least one year ahead.
The researchers suggest for people with low financial literacy this may be more about their economic situation dictating a focus on the short term.
Lower financial literacy is associated with greater impulsiveness and a predisposition to be more “present-oriented”, the authors wrote.
Those who scored higher also were shown to have higher median equivalised income and may be more likely to be able to afford to think ahead.
A new benchmark
If the questions are included in the survey again, which may happen when interviews take place in 2020 for the Wave 20 report released in 2022, researchers will have a new benchmark to track aggregate levels of money skills and attitudes to finances around the country.
This will give the financial capability community another chance to measure the effectiveness of its work, where it already draws on studies such as the ANZ Wellbeing Survey and ASIC’s Australian Financial Attitudes and Behaviour Tracker.
The HILDA study began in 2001 and follows the same group of around 17,000 Australians over the course of their lives, adding new respondents to the sample as necessary.
The survey, which is the work of the Melbourne Institute at the University of Melbourne and is funded through the Department of Social Services, is used by government as a guide when deciding policy in areas such as health, education and social services.