What is financial capability?

Financial capability refers not only to the knowledge needed to make sound financial decisions, but to a combination of financial knowledge, skills, attitudes, and confidence that leads to positive financial behaviours and money management decisions that fit the circumstances of one’s life.

  • Financial knowledge is an individual’s awareness and understanding of money and financial concepts, products and services, and their own financial situation.
    • Examples of financial knowledge include understanding financial concepts such as inflation, interest and risk, as well as knowing where to get advice and support.
  • Financial skills are hard and soft skills that give an individual the ability to use relevant knowledge to manage financial risks and opportunities. Financial skills are supported by general skills such as literacy, numeracy, problem‑solving, communication and critical thinking.
    • Relevant skills include an individual’s ability to compare financial products and avoid financial pitfalls such as scams.
  • Financial attitudes refer to an individual’s mindset and opinions about finances.
    • Examples include an individual’s motivation to engage with their finances, financial impulsivity and their levels of stress associated with making financial decisions.
  • Financial confidence is the belief an individual has in their own abilities to access and use financial products and services, make financial decisions and accomplish financial goals.[1]
    • For example, being comfortable talking about money and being comfortable managing their own finances.
  • Positive financial behaviours refers to actions that an individual takes to improve their financial outcomes, and can be broadly divided into those involving managing money day‑to‑day and those related to planning for the future.
    • Some positive financial behaviours include managing debt and credit use, making savings goals and tracking spending.

An improvement in each one of these elements improves an individual’s financial capability. They also build upon each other: knowledge enables skills, skills enable better attitudes and confidence, and they all may lead to the ultimate goal of behavioural change. There is a feedback loop in the development of these attributes – the development of each positively reinforces the others.

Why is financial capability important? 

Financial capability is linked to better individual outcomes, by equipping individuals to be able to make choices that suit their personal circumstances and act towards their goals. A range of positive financial behaviours, attitudes and capabilities are associated with improved financial wellbeing and less financial stress. For example, the 2021 National Financial Capability Survey found that people who report keeping a close watch on their financial affairs are less likely to report experiencing stress when thinking about money (29 per cent), compared with those who do not keep an eye on their finances (48 per cent). It also found that people with a three‑to‑five year financial plan are more likely to report that they are either ‘doing alright’ or ‘living comfortably’ (83 per cent) compared with those without one (64 per cent).

However, in many specific situations, the most appropriate decisions and behaviours will be highly contextual to the individual, guided by the choices available to that individual and their financial circumstances.

Empowering individuals with sufficient knowledge, skills, timely and trusted sources of information, and the right tools at the right time, can encourage attitudes and behaviours in line with one’s own best financial interests. Enhancing financial capability can enable individuals to better understand the risks involved in financial decisions, information asymmetries and the incentives of financial providers. It also enables individuals to be more adept at identifying scams or financial products which are not appropriate for their individual circumstances. Financial capability is also essential to enable Australians to respond and adapt to new challenges and opportunities presented from social, economic and technological change.

Drivers of financial capability

The complementary and enabling factors which can impact individual capability are relevant in considering how to build individual financial capability through targeted initiatives. The primary focus of this Strategy, as outlined in the objectives, is the attributes of an individual which drive their financial decision making. Broader complementary factors, including issues of financial access, consumer protection or financial system regulation are not the primary focus of this Strategy.

Financial capability and its complementary and enabling factors

Figure 1: Treasury 2022, Financial capability and its complementary and enabling factors

A range of factors can influence an individual’s financial capability both directly and indirectly. Some of these are captured in Figure 1 as enabling factors. For example, an individual’s education, community, access to support and personal financial circumstances will all have an impact on an individual’s level of financial capability. Many of these same factors can also separately affect an individual’s outcomes. For example, someone’s access to education will affect their financial capability, but also impact other factors such as their employment potential which have an overall effect on individual outcomes.

It is important to recognise the impact that broader social and cultural factors have on individual financial behaviours and decision making. Observations of families, peers, community norms and values all naturally shape an individual’s financial values and goals[2]. Social, cultural, legal and economic factors can also result in financial exclusion and reduce individual opportunity to access financial education, all of which can have a direct impact on a person’s ability and willingness to engage with their finances.

Specific factors will affect the components of financial capability differently and understanding these relationships will help to effectively target initiatives. For example, financial knowledge will be affected by education and access to financial advice and support. Financial attitudes may be most affected by an individual’s community, including their friends and family.


[1] Financial confidence is only effective if supported by proficiency in the other aspects of financial capability. Over‑confidence can reduce financial capability, for, by example, leading people to invest in products they do not understand or become susceptible to scams.

[2] Russell, R., Kutin, J. & Marriner, T. (2020) Financial Capability Research in Australia. RMIT University.