Almost half of Australian adults lack the financial literacy needed to manage their own money, a gap that is costing businesses through lost productivity and putting leaders – both current and future ones – at risk of making decisions without understanding the basics of business.

The 2020 HILDA (Household, Income and Labour Dynamics in Australia) survey found that some 8.5 million adult Australians (about 45 per cent of the adult population) fall short of the financial literacy needed to make decisions about saving, borrowing and managing risk with confidence.

“This means that millions of people are actually not having the bare minimum knowledge to make, confidently, decisions about how much they save, how much they borrow,” said Professor Isabella Dobrescu, Head of the School of Economics at UNSW Business School. “Financial literacy is not a me problem, but it's a society problem."

This shortfall is not confined to any single household type or education level; it extends into workplaces, where financial stress reduced concentration and resilience, and shifted costs onto employers and government, according to Prof. Dobrescu, who was recently interviewed by Dr Juliet Bourke, Adjunct Professor in the School of Management and Governance at UNSW Business School for The Business Of, a UNSW Business School podcast.

Financial stress becomes a productivity problem

The consequences of financial illiteracy are not just constrained to household budgets, observed Prof. Dobrescu, who said someone will usually step in to help before things collapse entirely, but that safety net is itself part of the problem when a person falls into financial distress.

“They are stressed, they have lower wellbeing, they are less resilient to shocks at work, they can have trouble concentrating. That's productivity loss,” she said. “Now the cost is transferred to the business… losing productivity, and finally, eventually the cost is being transferred to the government.”

Learn more: Financial illiteracy: The hidden threat to Australia’s economic future

The problem is amplified at leadership levels, because a business leader needs to understand market pricing, regulatory settings and workforce motivation – while managing their own finances, she affirmed.

The literacy gap reaches leadership

Seniority is often assumed to come with financial and economic fluency, but Prof. Dobrescu said this assumption did not hold up in practice. A misconception, she said, was that reaching an executive or founder role automatically meant a person understood inflation, cash flow and interest rates well enough to run a business as conditions changed.

In the podcast conversation, Dr Bourke recounted an exchange with a business owner who could not answer a question about the business' performance. "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," Dr Bourke recalled. "He couldn't tell me whether his business was profitable."

"You'd be surprised how few people understand compounding interest”

ISABELLA DOBRESCU

Prof. Dobrescu said this kind of example is not an isolated one, and that it reflected neither intelligence nor business acumen. While some leaders build businesses on instinct rather than training, reading widely to teach themselves, she said the gap in financial literacy is a surprisingly common shortfall among some leadership ranks.

Economic literacy differs from financial literacy

Prof. Dobrescu drew a distinction between two terms that are often used interchangeably. Financial literacy covers budgeting, saving, borrowing, and risk appetite at the individual level, while economic literacy extends to incentives, trade-offs, pricing, and policy that shape how markets and governments behave.

"Economics at its core, it's about understanding incentives and trade-offs, and how the markets are moving, and how the prices get created: Where is that demand and supply intersecting? And why do certain economic policies make sense more for some people and for others? And when to tax an activity and subsidise another?" she explained.

However, the two concepts need to be understood together because decisions made by individuals, businesses and government affect one another – and operating in a world where money, time, information, and attention are all limited requires both forms of literacy to navigate well.

To illustrate the practical cost of the gap, Prof. Dobrescu described the experience of an acquaintance who held savings in an account paying about 4 per cent interest, while carrying credit card debt charged at roughly 20 per cent. She explained how something as simple as using some savings to pay down the credit card debt would have saved future expenditure by reducing hefty interest payments (a step the person had not previously taken).

Compounding interest reshapes retirement outcomes

Another concept that many do not understand is compounding interest, despite its relevance to both debt and retirement savings, according to Prof. Dobrescu. The same principle that drove up the cost of credit card debt over time also explained how a one-percentage-point fee difference could negatively impact retirement savings.

"You'd be surprised how few people understand compounding interest,” she said. “And that is 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."

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Many people did not understand superannuation well, despite it being (for most) the second-largest asset after their home. Few people could say with confidence what type of investment allocation their savings were in, how much they were contributing, whether the plan included insurance, or whether they were paying fees across multiple unconsolidated accounts, observed Prof. Dobrescu.

On the rise in the use of artificial intelligence for financial advice in place of a financial adviser, Prof. Dobrescu said the evidence was not yet settled. Updates from regulators and government remained the most reliable way to get correct information, even as AI tools draw on a wider range of perspectives when generating advice, she noted.

Gender gap narrows the leadership pipeline

The literacy gap is an uneven one. Prof. Dobrescu said that some 63 per cent of Australian men had an adequate level of financial literacy, compared with 48 per cent of women, and that the disparity began well before adulthood.

"If we look at just teenagers, we have about 28% of teenage boys having some form of financial literacy [compared to] 15% of teenage girls," said Prof. Dobrescu, who linked the gap to a narrowing pipeline into economics education in Australian high schools. In the early 1990s, for example, boys and girls studied economics at roughly the same rate. But that balance has since shifted.

Learn more: What financial know-how is required to run a successful SME?

"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,” she said. “And then you go into business, finance, 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, is getting less representative."

This imbalance stemmed from education rather than aptitude, and Prof. Dobrescu affirmed that this could be closed if schools and universities expanded access to economics teaching.

Digital payments have removed the pain of spending

The shift from cash to digital payments has added another layer of complexity to financial literacy (or lack thereof). Prof. Dobrescu said tap-and-go transactions, subscription services, and buy-now, pay-later products all make spending feel “less real” than handing over physical notes and coins.

"The biggest behavioural change, probably in the 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,” she said. “Those transactions were visceral, were real. Now we spend our time and our life tapping."

Behavioural economics research has long shown that friction changes spending behaviour, and that even a small pause before a purchase gives a person a moment to evaluate whether they genuinely want the good or service. Without that pause, she said that tracking expenses became a deliberate exercise rather than something that happened automatically – as it once did when an empty wallet provided an immediate signal to stop.

Prof. Dobrescu suggested that people need to deliberately schedule the habit, such as setting aside at least one hour a month to review their expenses. “It's harder to do, because it's you having to force yourself rather than looking at your wallet and say, ‘Okay, oops, now it's empty… that's it,” she said. “And of course, the more we rely on the digital economy, the stronger the financial literacy needs to be.”

Building the skill through education, not entertainment

The fastest way to close the financial literacy gap is education, explained Prof. Dobrescu, who asserted that governments and institutions could and should act on this immediately. She pointed to a UNSW Business School initiative in the form of a high school outreach program called Step Up, built around a video game, Playconomics, which helps students make budgeting, saving and borrowing decisions and see the consequences play out without real financial risk.

Prof. Dobrescu also commented on the growing volume of financial content on social media from the likes of ‘finfluencers’. While some of it is genuinely useful, she warned against treating influencers as a substitute for primary sources such as the Reserve Bank, Treasury, Moneysmart or a financial adviser.

She observed that social media often rewarded entertainment value over accuracy and underscored the importance of not making financial decisions based on how confident or charismatic a person appeared online.

Asked what single habit she wished all Australians might adopt, Prof. Dobrescu said the answer was an interest in financial literacy. People should want to improve their financial literacy before they need to do so out of necessity, because by the time a decision becomes urgent, it is often too late to make it well, she concluded.