What is financial literacy?

In 2009 and 2011, Americans and Australians respectively were asked five ‘basic’ financial literacy questions. Only 43.8% of the Americans and 36.5% of the Australians managed to get all five correct. And it’s not only ‘average’ Americans and Australians – a 2002 survey of 530 online investors, who we might expect to be more financially savvy also found that half could not pass a simple financial literacy test.

But what is financial literacy?

Scott Kehiaian lists two definitions of financial literacy:

  • the ability to make informed judgements and effective decisions regarding the use and management of money (Noctor, Stoney and Stradling, 1992).
  • the ability to read, analyze, manage, and communicate about personal financial conditions that [affect] well-being (LOMA, 2004).

Author of How to Speak Money, John Lanchester, describes the ‘huge gap between the people who understand economics and the rest of us’. A large part of this gap, he says, ‘is almost embarrassingly simple: it’s to do with knowing what the money people are talking about’. Importantly, part of this is intentional. Banks and financial institutions, loan sharks, and others can benefit by obscuring details and outcomes via unfamiliar language.

Finance ‘is a whole other language’

Despite the buzz surrounding ‘financial literacy’, little academic attention has been paid to the development of personal financial literacy in comparison with corporate financial decision making.

In the next post, Why Can’t We Talk About Money?, we’ll explore the reasons for the relative silence when it comes to personal financial literacy.

Test your own ‘financial literacy’

Financial Literacy Quiz

Based on questions modified from Hazel Bateman, Christine Eckert, John Geweke, Jordan Louviere, Susan Thorp and Stephen Satchell, and Julie Agnew, Hazel Bateman and Susan Thorp.

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15 thoughts on “What is financial literacy?

  1. Hola, Aly checking in. I stuffed up question 5.
    If you’re earning double and the prices are double wouldn’t you be able to buy less by virtue of being in a higher tax bracket? (I guess this is why all the lecturers always say – don’t invent additional facts).

    1. Good question Aly – and thanks for stopping by. You’re quite right that this is probably a case of thinking too much about it! (Something I’m very guilty of myself!)
      Tax brackets are generally adjusted over the years to account for inflation, so a longer version of this same question might have specified that the tax-free threshold has doubled too, and the other brackets increased similarly.
      You’re correct that if this did not occur, you would indeed be able to buy less.
      Give yourself a bonus point! ✨?

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