What is Financial Literacy and Why is it Important?

What is Financial Literacy and Why is it Important?

As our population ages, the ability of our growing youth population to participate in, contribute to, and shape our economy will be crucial in delivering quality of life for all of us.

FYA’s The New Basics report has found that demand for enterprise skills – otherwise known as generic, soft, or 21st century skills – is rising and this will be essential for jobs of the future, with a 70% increase in job advertisements asking for these skills over the last 3 years.

Not only this, but jobs that advertise for enterprise skills often pay more, with job ads seeking financial literacy skills offering, on average, an additional $5,224 in a yearly salary.

But FYA’s report card on How Young People Are Faring in the transition from school to work has shown us that, despite the demand, young Australians are not prepared with key enterprise skills; close to a third of Australian 15 year olds have low proficiency in both financial literacy and problem solving, as well as a quarter demonstrating low proficiency in digital literacy.

The Australian Securities and Investment Commission’s latest report on Australian Financial Attitudes and Behaviour found that young people under 35 are more likely to “have difficulty understanding financial matters” with 33% agreeing with this statement (up from 24% in the previous survey).

So with a clear issue in our sight, a key step forward is educating the next generation in financial literacy skills to better prepare them for the future. The Australian Government has attempted this through their National Financial Literacy Strategy.

But what does it actually mean to be financially literate and why is central to our collective future?  

We spoke to FYA’s Management Accountant, Nicky Kandiah, to find out.

Nicky says that financial literacy has a dual meaning. Firstly, it is a combination of the skills and knowledge needed to be able to make informed decisions about a person’s financial resources on a day to day basis. This could include elements such as knowing how to live on a weekly budget, understanding why and how to lodge a tax return, and knowing what to ask a bank with regards to accounts and loans. But secondly, Nicky says financial literacy is about having a broader understanding of the financial system itself; how it works on a global scale and how banks or the stock market can affect people on an individual level.   

With these two definitions of financial literacy in mind, Nicky explains that when we think of financial literacy in the workplace, we can often cast our minds to payroll and accounts. But financial literacy is used in all realms of a business or organisation.

“Even if your job isn’t accounting, chances are you will be involved somehow in the financial operations of the organisation. For example, a team leader that has to manage and report their credit card purchases and their department budget, a sales representative that gets paid incentives based on performance, or an event planner that needs to get different quotes, select the best value option and arrange for it to be paid in a timely manner for their event.”

Nicky explains that the reason this enterprise skill is important, and why employers are willing to pay more for it, is because regardless of whether you work in for profit or not for profit organisations, financial management is a significant measure of success.

“For companies or organisations to succeed, they need to be financially viable – which requires having staff members who know what that means. If employees can make informed financial decisions, those companies or organisations are more likely to be successful.”

“Technology as well has definitely changed how we interact with financial systems so you need digital literacy to really take your financial literacy to the next level.”

Nicky adds that regardless of whether we continue to operate in a financial system like the current one, or if we transition to universal basic incomes and a relationship-based economy, financial literacy will help anyone navigate hurdles in their personal and professional financial situations, and lead to a better capacity to maintain financial security, leaving more time for things they care about.

To find out more about enterprise skills, and how they will impact job-readiness in the future, read FYA’s New Basics report here.