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When academic researchers talk about financial literacy, they often use what’s referred to as the “Big Three” questions[1] to assess whether people understand the basic money concepts needed for everyday decisions – from choosing a savings account to evaluating an investment or understanding the real cost of a loan.
Yet Australian teens are struggling with them. The government’s HILDA (Household, Income and Labour Dynamics in Australia) survey data[2] highlights just how wide the gap is:
Only 28% of teenage boys and 15% of teenage girls could correctly answer all three of these questions.
This compares to the Australian average of 55%.
Why is this important?
Strong financial literacy is associated with a range of positive outcomes later in life – the HILDA Survey[2] shows that people with strong financial literacy are more likely to be able to raise $3,000 for an emergency, be better prepared for retirement, and rate themselves as more satisfied with their finances.
Test yourself
Question 1: Suppose you had $100 in a no-fee savings account and the interest rate was 2% per year. You don't make any further payments into this account and you don't withdraw any money. After 5 years, how much do you think you would have in the account if you left the money to grow?
Question 2: Imagine that the interest rate on your savings account was 1% p.a. and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in the account?
Question 3: True or false? Buying a single company stock usually provides a safer return than a diversified mutual fund.
Your Score: 0/3
What this means for parents and guardians: Bridge theory & real life
The experiences and attitudes children grow up with have a profound impact on their relationship with money, and influence how they spend and save. Caregivers play a role in building and role-modelling positive money attitudes and habits and enabling children to ‘learn by doing’. Here are three things you can do:
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Learn & teach the concepts, not just the rules
There’s nothing wrong with not being able to answer all three questions correctly yourself, but work to understand them so you can teach your children. Moneysmart.gov.au has a range of articles that are a great starting point – compound interest, inflation, diversification.
Explain why compound interest matters (both for savings and debt), how inflation erodes how much you can buy, and why diversification reduces investment risk. Lusardi’s research shows that even modest increases in understanding these fundamentals lead to better financial behaviours later in life.
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Use real money and repeat often
Pocket money, part-time earnings, and small family budgeting moments are ideal practice fields. Let teens make low-stakes decisions and talk through the outcomes. ASIC’s Young People & Money research[3] finds that young people learn more from hands-on experience and family conversations than from formal lessons alone.
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Translate school into real life
Schools introduce concepts, but parents give them meaning. Invite your child to compare two savings options, work towards savings goals with them, estimate how inflation changes prices over time, or consider why an investment split across companies is safer than putting everything into one.
How Kit can help
At Kit, we design practical, bite-sized financial education and behavioural nudges to help take the headache out of financial education for parents. Money Quests and stories teach children the “Big Three” in an engaging and interactive way, while children can put these lessons to use in real-life by earning interest on their pocket money in a linked CommBank Youthsaver.
Kit is here to make those conversations easier, and to help young Australians build a stronger financial future.
^ Lusardi and Mitchell have recently expanded the ‘Big Three’ to the ‘Big Five’ as part of the US Financial Capability Study. https://gflec.org/education/questions-that-indicate-financial-literacy/ The additional two questions are:
4) If Interest rates rise, what will happen to bond prices? (Rise (correct), fall, stay the same, there is no relationship between interest rates and bond prices, don't know, refuse to answer).
5) A 15-year mortgage typically requires higher repayments than a 30-year mortgage, but the total interest paid over the life of the loan will be less (True (correct), false, don’t know, refuse to answer)
References
[1] Lusardi, A. and Mitchell, O., 2011. ‘Financial literacy around the world: an overview’, Journal of Pension Economics and Finance, 10(4): 497-508.
[2] Preston, A. (2020). Financial literacy Brief: Financial Literacy in Australia - Insights from HILDA. UWA Public Policy Institute. https://api.research-repository.uwa.edu.au/ws/portalfiles/portal/73668586/Financial_Literacy_in_Australia.pdf
[3] ASIC, Young People and Money, December 2021. https://files.moneysmart.gov.au/media/kjvjabp5/young-people-and-money-survey-snapshot.pdf