About the episode

When did you last give your finances a proper health check? If the answer is “I’m not sure”, you’re not alone.

A staggering 45% of Australian adults lack the basic financial literacy needed to navigate today’s economic and financial world. Millions of Australians aren’t confident in managing savings, tackling debt, or understanding how shifting interest rates impact them. Gaining a clear picture of the economy as a whole is essential to making the best possible choices with your own money.

We’ve entered an era of "frictionless" spending, where digital taps and "buy now, pay later" tools make money feel invisible. UNSW Economics Professor Isabella Dobrescu breaks down why this convenience could be working against you, and how you can get a handle on your finances.

Need to sharpen your financial literacy? Access evidence-based learning through RBA Education Resources or visit Moneysmart, a free, independent site managed by ASIC to help you make informed financial decisions.

Want to hear more about the future of money? Listen to our episode with UNSW Vice Chancellor’s Professor, Richard Holden.

The Business Of podcast is brought to you by the University of New South Wales Business School, produced with Deadset Studios and hosted by Dr Juliet Bourke.

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Edited transcript

Dr Juliet Bourke  00:03
If I asked you to clearly explain what's driving our economy: inflation, GDP, interest rate cycles, or how monopolies impact the market, how confident would you be in your answer? Recent research shows that nearly half of all Australians fail basic economic literacy tests.

Prof. Isabella Dobrescu  00:23
8.5 million adult Australians are financially illiterate. That's about 45% of our adult population. This means that millions of people lack the basic knowledge to confidently decide how much to save and how much to borrow. Financial literacy is not a me problem, but it's a society problem.

Dr Juliet Bourke  00:49
The economy is complex, but it always has been. Understanding how our economy affects the way you view and manage your finances is crucial. The tools you use to build your life and your business have fundamentally changed. We've swapped physical wallets for apps; cash is outdated, and you can now pay bills automatically. It's frictionless, invisible, and easier than ever to ignore. In an economy that's constantly evolving, is your financial knowledge keeping pace?

Dr Juliet Bourke  01:31
I'm Dr Juliet Bourke, Adjunct Professor at the School of Management and Governance, and this is The Business Of, a podcast by the UNSW Business School. Professor Isabella Debrescu is Head of the School of Economics at UNSW Business School. She says, it's never too late to get a handle on your finances. Isabella, could you explain the difference between economic literacy and financial literacy?

Prof. Isabella Dobrescu  02:03
So I think when people hear "financial literacy", they usually think of investing and the stock market. But at the basic level, it's way more fundamental than that. It's about understanding how to budget, and how to save and how much to borrow, and what's your appetite for risk, how to make financial decisions with your money way broader than just the stock market. On the other hand, economic literacy is even broader than that. So economics, at its core, is about understanding incentives and trade-offs, how markets move, and how prices are set. Where is that demand and supply intersecting, and why certain economic policies make sense more for some people and for others, and when to tax an activity and subsidise another. So, overall, this is how decision-making at the level of individual businesses and the government interacts. That's why we're thinking these two things in tandem, because without the economic literacy, you do not understand the decision making, and why it's important to understand the decision making is because we live in a world of constraints, we have limited everything, limited money, limited time, limited information, limited attention. If you understand, if you are economically literate, you understand how to make decisions in this constrained world, aka the real world.

Dr Juliet Bourke  03:29
Do you have a specific example where someone doesn't seem to understand the difference between finances and economics?

Prof. Isabella Dobrescu  03:37
Yes, unfortunately, I do, and it's very close to home. So this is a highly educated person on a local council who, at the same time, had a significant amount of savings in their low-interest-rate normal bank account, at about 4%. So, if you leave the money there, it will earn about 4% interest. At the same time, they were spending a lot on their credit card, so they were carrying a lot of debt. And when you have debt, you also need to pay interest, and on the credit card, at that time, I think it was roughly 20%. So just by moving the savings and paying from the low-interest-rate account, the credit card debt is paid off. They would have saved that difference in interest rate, which would have stopped the 20% interest rate. This is why it's important to have economic literacy. It starts with financial literacy, and in the end, what you want to have is, you know, individuals, at the individual level, at the community level, at the society level, who understand the incentives that are moving behaviours. How are these behaviours moving, and in the end, what's the opportunity cost of every choice that they're making?

Dr Juliet Bourke  04:55
And how do you think Australians are going with that in general? Do you think we are both economically and financially literate, or better at one than the other, or both bad?

Prof. Isabella Dobrescu  05:05
We're both bad. Now, unfortunately, way fewer than we would like in a country like Australia are economically or financially literate. So, the general statistic that gets sent out there in the media is like, oh, and it's absolutely true. So, Australia ranks among the top 10 countries in the world for economic and financial literacy. And that's a great headline, right? But that masks a domestic crisis. So, if I were to tell you that 8.5 million adult Australians are financially illiterate. That's about 45% of our adult population. You would not be that excited about the top 10. And now let me pile on that by saying that there is a substantial gap between women and men. So about 63% of men are considered to have an adequate level of financial literacy, 48% of women. Now we take a step back, and again I'm piling up on that. If we look just at teenagers, about 28% of teenage boys have some form of financial literacy, and 15% of teenage girls, right? So, it's, you know, I'm an economist, don't get me wrong, I like my statistics, but this means that millions of people are actually not having the bare minimum knowledge to make, confidently, decisions about how much they save, how they save, how much they borrow, how they manage risk, how they manage their own credit. What does it mean for them that interest rates go up and down? What is this doing on the market that they choose to be active on? How do they understand wage growth? How do they understand the standard of living and the cost of living, right? To that, you would say, well, shouldn't education take care of it? And to that, I said, "Sure, economics education does take care of it. But for that, you would have to get a Bachelor of Economics, and then you have all these wonderful tools to understand how you make decisions in the world around you.” But not everybody wants to do, or can do, a Bachelor of Economics. Is there another point where we can catch everybody? And sure, there's high school. Now, the problem in high school is that the economics education pipeline is weak and getting weaker. So in the early 90s, boys and girls were studying economics roughly at the same rate. Now, male students, boys are outpacing, outnumbering girls at the rate of two to one. Now, that's dangerous, because usually economics education, particularly in high school, is creating a pathway into economic decision making, and then you go into business and finance and public policy and leadership. If that pipeline is getting narrower and less representative, then the discipline, and ultimately the people who are making public policy decisions for all of us, are getting less representative.

Prof. Isabella Dobrescu  05:05
It's both, and the bigger of the two is education. And that's good news, because we can't stop progress, but we can actually ramp up our education. So that's good, because one, we do have a gap; two, we can close the gap; three, education, which is something that we can immediately do something about, seems to be the biggest avenue that we have at our disposal to move the needle.

Dr Juliet Bourke  05:52
So, do you think it's about this issue of less education and early education, high school education, or is it also about the fact that maybe the world is more complex in terms of economics? I mean, it's an assumption I'm making, maybe it's not more complex?

Dr Juliet Bourke  05:59
How do I know if I am financially or economically literate?

Prof. Isabella Dobrescu  06:49
Financial literacy is not a destination. It's about finding things both about yourself, your preferences, what drives your behaviour, your internal incentives, and about the world around you. And all the time adjusting your behaviour to those external or internal factors. Because, I mean, think about it, not even yourself stayed the same from one day to the next, let alone the world around you, right? Changing all the time. The economy is changing; the types of financial products out there are changing; regulation is changing; and technology is changing. And you yourself, your cognitive ability is changing all the time, so it's playing the long game. For instance, take superannuation, and you know, the black box of superannuation. Do you know what plan type you're in? Do you know how much you're contributing? Do you know whether your plan includes insurance? Do you have multiple accounts? This is a pitfall that many people are falling into. Have you consolidated, right? So this is just one example of, look, how many questions I've asked, just about one single thing. And then, of course, you can go into bigger things. Do you know what inflation does to you? Do you know how, for instance, when the RBA announces interest rates go up or go down, it's not just going to impact the housing market? How is that trickling down? Because whatever happens in the market, in the housing market, is going to impact the second largest asset in your portfolio, after your house, which is your super, right? And how is that going to impact the money you put aside for your kids, to send them to school, or how you are prepared in the end, in terms of aged care, your will, your estate planning? So it's all interconnected, and this is why you have to look at it as all interconnected for you, financial literacy, and it's all then interconnected for all the people that are around you, whether they're, you know, it's the family, it's the community, and in the end, it's society.

Dr Juliet Bourke  08:13
And it seems we're transitioning into a very different financial environment. If you think about it, going from cash, for example, to now digital wallets, and we've got investing apps. How have those things changed our understanding of money?

Prof. Isabella Dobrescu  08:59
The biggest behavioural change, probably in more than 20 years, has been this: removing the pain of paying. You have your wallet, and back in the cash times, your coins and your notes flying off your wallet, and eventually your wallet would be empty, and those transactions were visceral, were real. Now we spend our time and our life tapping, right? You tap with your card, you tap with your phone, you tap on the subscribe button, you click on the subscribe button. We have the buy now, pay later, and those transactions are not real, because if you do not have it, you do not feel that transaction. And don't get me wrong, having these other alternative tools is very convenient. But it changes your spending habits, and behavioural economists have long said frictions matter, so putting even a small hurdle in front of the spending impulse of a person is going to just make them pause for a nanosecond, but that nanosecond is enough for them to evaluate whether they really want that good and service or not. Sure, convenience is great, but not when it works against you. So, I think our problem is that payment technology hasn't kept pace with our spending habits.

Dr Juliet Bourke  13:14
I'm curious about that because my daughter always pushes back on me, saying that cash doesn't feel real to her. Cash feels like paper and nothing, whereas she thinks when she sees the electronic transaction, that's real. I am wondering if this is a generational thing?

Prof. Isabella Dobrescu  13:33
What I am saying is that the warning signals with cash, when we had cash, were there, and you could catch them earlier compared to digital. Because with digital, you know, there's always the next thing to do. So, unless I don't know, you put it on your calendar for at least one hour a month, and you sit down, and take stock of your expenses. It's harder to do, because it's you having to force yourself rather than looking at your wallet and saying, "Okay, oops, now it's empty, that's type hit my budget constraint,” right? Of course, the more we rely on the digital economy, the stronger the need for financial literacy is.

Dr Juliet Bourke  14:17
You've used a lot of economic terms in this discussion, and I was wondering if you could break them down for people?

Prof. Isabella Dobrescu  14:27
They're all interconnected, so of course I mean the easier is the interest rate, right? If you borrow something, then, and I've had this question from one of my students, like, if I borrow something, then I get that money, and I get to spend it, and it's like, yes, but you also have to give it back. And you have to give it back with interest. So you'd be surprised how few people understand compounding interest. That's not just for loans; for instance, going back to super, a 1% difference in fees at the start of your life can compound to an incredible amount by the time you retire in 30 years. So we're going back to the triad in economics, individual, businesses and society, right? A common misconception among people is that seniority, and you know, being a business leader, founder, a big shot executive, automatically means high economic and financial literacy, means understanding what inflation is going to do to your business and to your employees and to your customers. Understanding very well how cash flow is different from value creation, understanding very well, of course, interest rates, and so on, and that's actually not true.

Dr Juliet Bourke  15:51
It's not true. You know what, I remember this time, I was speaking to someone, and he had a very large business. And I asked him what his profit margin was, and he said to me, "What's a profit margin"? And I was so surprised. He couldn't tell me whether his business was profitable. Is that common?

Prof. Isabella Dobrescu  16:13
It is. It is common. You know, it's again, not a matter of intelligence, not a matter of business acumen.

Dr Juliet Bourke  16:21
Isn't it a matter of business acumen? Isn't that fundamental to understanding business? If it's profitable or not.

Prof. Isabella Dobrescu  16:27
I think acumen is understood as instinct, right? There is a bit of this glow when someone comes out of nowhere, takes the market by surprise, and has very little knowledge but a lot of instinct. And usually, those people are the ones who read a lot, so they might not have all the degrees to prove it, but they are self-taught. But yes, unfortunately, it's common and dangerous, because, you know, if I don't understand my budget, I go bust. There will always be someone to catch me, and that is the problem with being in financial distress. They are stressed, have lower wellbeing, are less resilient to workplace shocks, and can have trouble concentrating. That's productivity loss. Now the cost is borne by the business, which is losing productivity, and eventually it is transferred to the government. Both because the economy is losing overall productivity and because they need to step in with support services. So, to some extent, someone will catch the individual. But the problem is much bigger when you're dealing with the business, because the leader needs to understand the market, how prices are fluctuating, and then everything that has to do with regulation, why the government is taxing some activities, subsidising others. Also, they need to understand their workers and what motivates them, and how to support their productivity and that of the customers.

Dr Juliet Bourke  18:14
I think you've been experimenting with some new ways to teach complex economic concepts. Can you tell me about the STEP UP and Playconomics initiatives that you've been working on at UNSW?

Prof. Isabella Dobrescu  18:25
Yes, so Step Up is the UNSW financial literacy outreach programme for high school kids, and the engine of the entire programme is Playconomics, a video game that lets students experience economics rather than being talked at about economic facts and concepts. What drives the success is that people and students can actually experiment with things. They see the consequences, then they go back and redo those decisions, and they see how the effects change. And this way they can actually see in real time what the mechanism is behind, and how, you know, you change one thing here, and then an entire suite of things are changing, not just one, the most obvious one. So, in the game, they make decisions about budgeting and spending, how much to save, how much debt to take on, and they learn about their own appetite, about, you know, risk and delayed gratification, and all that. They can see all that in real time, and all of a sudden, it becomes a lived experience. It's like living their life in fast-forward, with no consequences, so you can make as many mistakes and do as many retakes as you want.

Dr Juliet Bourke  19:44
I want to do that.

Prof. Isabella Dobrescu  19:45
We're going to sign you up.

Dr Juliet Bourke  19:48
I'm thinking about our listeners, and maybe some of them are in their 30s. What advice would you give them to make sure their finances are in order?

Prof. Isabella Dobrescu  19:57
Okay, so what I'm seeing, at least, you know, from my point of view, is that the 30's are where you built your foundations, and they need to be solid. The 40's is your balancing act, you're balancing multiple responsibilities, right? And the 50s are when you prepare to sail into the sunset, and, you know, you're trying to make it the most glorious sunset you can, really enjoy it, and be productive in your retirement. So in the 30s, things that you might look at are: am I building an emergency buffer, do I have too much debt on my credit card, high-interest debt, am I contributing, or have I started contributing seriously to super. In general, I think the 30s are about building good habits, good economic and financial habits, and then trying to avoid expensive mistakes, and you're going to be fine. As I said, the 40's are about the balancing act, children are coming in, caring responsibilities are coming in, right, so it's more about, am I managing at my best, my mortgage, am I saving enough for retirement? I should have already started, but is this enough to get me there? Career risk, what happens? Do I have enough buffer in case something goes wrong with my job, right? AI, for instance. And then the 50s are when you prepare for retirement, so am I going to have enough money? Obviously, but also, how would I draw down? How do I take out that money? And, of course, the aged care, the health care, the insurance, is this, you know, enough? And if it's not, how do I make those last-minute decisions to allow me to retire comfortably and spend the next 30, 40 years in a comfortable state?

Dr Juliet Bourke  20:43
You mentioned before this idea that economic literacy, even financial literacy, is like going to the gym, and you've got to build it up and then keep it up. So if I want to make sure that I'm staying up to date in the financial world and I'm not operating on outdated assumptions, how do I actually do that? How do I put the gym analogy into practice?

Prof. Isabella Dobrescu  22:12
Remember that when you go to the gym, you have to put in the effort, and sometimes it hurts. So you know, the easy way out is all these influencers, right? There's been an explosion of financial content, and it's everywhere: TikTok, Instagram, podcasts, newsletters. But some of it is really excellent, and it can make financial decisions accessible, practical and engaging. Remember, what we want is not perfection but engagement, right? Some of it is not, and the problem is that social media is really rewarding entertainment. And it's, you know, it's rewarding the wow factor over accuracy. So, the way to look at all these influencers is that they complement your learning, but do not substitute for evidence. So, something sparks your interest, you know that that might apply to you, go and dig deeper, and go to the gym, and the gym is not necessarily always pleasant, right? So, dig into the RBA materials, the treasury materials, Money Smart, or just go and talk to a financial advisor. So, don't mistake entertainment and ease for evidence. The two are really not the same, and definitely do not make financial decisions, minor or major, based on how charismatic an influencer is or how confident someone looks online.

Dr Juliet Bourke  23:46
It seems like a lot of people are using AI for financial advice instead of going to a financial advisor, who can be expensive. Do you have a view on that?

Prof. Isabella Dobrescu  23:55
Well, the jury is still out because these days, AI is getting so good. I think you cannot get around the fact that, for the most accurate information, you have to read the official materials. And those are not necessarily page-turners, but they're where you're going to get absolutely the most accurate information. But given how fast AI is advancing, and how comprehensive, how many points of view they're taking into account when they are giving you whatever advice they're printing on the screen. It's not immediately clear to me that that's bad.

Dr Juliet Bourke  24:39
If you had a magic wand and wanted Australians to adopt one financial habit or principle to become more financially or economically literate, what would you do? What would it be?

Prof. Isabella Dobrescu  24:51
I think I would go to the root, wave the magic wand, and get everyone interested. There is no way around it. You have to be able to learn it, and the best time to learn it is when you want to, not when you need to. Because when you need to learn it, it might actually be that it's a little bit too late. The good news is that there are tools out there to make the switch. The world is not going to get simpler, unfortunately. So it's up to us to just take control, and nobody said it's going to be easy. So this is not a matter of ease, but I think the faster we, I can, when you know, wave my wand and get people to realise that financial literacy is not a me problem, but it's a society problem. And becoming financially literate is not an add-on but the core skill; even though it can get a little bit hardcore, the better we are, the better we will be.

Dr Juliet Bourke  26:04
That's Prof. Isabella Dobrescu, Head of the School of Economics at UNSW's Business School. If you want to hear more about the future of money, listen to our episode on the digital economy with UNSW Vice Chancellor's Professor Richard Holden.

Prof. Richard Holden  26:20
Thinking more about what the kind of innovation ecosystem in digital payments looks like is really important. So, there is essentially no blockage to somebody inventing or creating an app in Australia, and you know, the banks could do it with their payments apps, and give people a better version of the kind of old school technology of cash in envelopes and talking to their banks about how the customer experience can be improved, is really important.

Dr Juliet Bourke  26:50
The Business Of is brought to you by the University of New South Wales Business School, produced with Deadset Studios.

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