Many Australians struggle to manage their money, and one in three people find dealing with money stressful and overwhelming. Increasingly complex financial choices and products require people to have ever greater knowledge about financial matters and understand the consequences of their financial decisions. But what exactly do we need to know to achieve this threshold of knowledge, and who do we learn from?
One way to better understand where the threshold might lie is to rank people’s level of financial literacy by responses to a series of five questions (see below) on compound interest, inflation, and risk diversification. Not surprisingly, researchers using these questions have found that people with higher financial literacy scores save regularly, engage in long-term planning, are willing to take appropriate financial risks and ensure they have emergency savings.
Unfortunately, evidence consistently shows that being a woman increases the likelihood of lower financial literacy scores. This gender gap widens over time, painting a concerning picture for aging single women. Addressing this gap is a matter of equality and a critical step towards empowering women to take control of their financial futures.
Closing the gender gap in financial literacy is not just a moral imperative; it’s an economic necessity. Financial literacy equips women with the knowledge and confidence to build wealth and achieve long-term financial goals. By rethinking traditional approaches to learning about financial concepts at school, providing financial education resources in the workplace, and harnessing the expertise of experienced investors, we can find new ways to close the gender gap in financial literacy. Delivered alongside structural change to equal pay and childcare affordability, women’s full potential can be reached as investors, savers and contributors to economic growth.
Understanding the gender gap
The gender gap in financial literacy is a multifaceted issue influenced by various societal, cultural and economic factors. Historically, women have been less involved in financial decision-making, leading to less exposure and experience in managing money and investments. This disparity is further exacerbated by differences in educational opportunities, workplace dynamics, and cultural norms surrounding money and finance.
The significant impact of the ability to generate income on an individual’s financial well-being should not be underestimated. Participation in adequately paid work makes it easier to cover expenses, acquire assets and accumulate emergency savings. It is also associated with a greater sense of personal satisfaction, choice, and control over their financial situations.
It is well-documented that women, on average, earn less than men for the same work. Several factors, including gender stereotypes, lower wages for female-dominated industries, inflexible working conditions, time out of the workforce due to caring roles, and gender discrimination, contribute to this difference. Having lower incomes and experiencing barriers to workforce participation, such as childcare costs and availability, significantly impact women’s current and future financial circumstances.
Another issue is that gender stereotyping regarding work and pay can start surprisingly early. In the home, boys are paid more pocket money while girls are expected to do more inside chores without pay. Research also shows parents starting money conversations with boys at a younger age is important because more frequent parent-child discussions correlate to more favourable financial attitudes. Moreover, men are more likely to be the primary decision-makers on saving, investing, and borrowing. Watching their fathers take a more dominant role in financial decisions, and mothers take a lesser role reinforces and perpetuates gendered roles in households and has consequences for girls as they mature and enter romantic partnerships.
Another distinctly inherent female trait is to avoid risk-taking. For financial decisions, this means that women may not participate in share investing and benefit from potentially higher returns. Taking calculated financial risks increases the probability of achieving greater wealth, but people perceive the risk differently. Risk perceptions may be linked to a person’s status and control over their circumstances. Emerging research shows that people with high incomes, high levels of education, and high levels of trust in authorities have the lowest perceptions of risk, and these people are more likely to be white males. Accordingly, reducing women’s discomfort with taking financial risks is an important undertaking, and good solutions are likely found in socialising stock investing with other women and female mentors.
Finally, critiques of the financial knowledge questions outlined above include issues like reliance on self-assessment, potential for random guessing, and misunderstanding due to question framing. Research indicates that gender differences in decision-making under uncertainty exist, and as such, multiple-choice questions favour men. The questions also include numerical components, as numeracy skills are essential for financial decision-making.
However, studies show women have higher math anxiety, leading to more skipped questions or choosing the non-response ‘Do not know’ answer options. Therefore, the question framing may be disadvantageous for women, and unfortunately, the findings perpetuate the stereotyping that women lack financial knowledge. However, it also highlights that women lack confidence in answering these questions and need further support. Whether that is in deconstructing the question, understanding the context, or disentangling the knowledge from mathematics is yet to be well understood. Researchers have raised concerns that the reliance on mathematics for teaching financial concepts in school may disengage many girls.
Bridging the gap: Strategies for improvement
Closing the gender gap in financial literacy requires a concerted effort.
Firstly, there is a need to improve current approaches to building financial knowledge at school. The gold standard would be to mandate a standalone personal finance course in high school, as now occurs in 25 American states. In the absence of a standalone course, a change in approach to the delivery of financial literacy within mathematics would be effective. The exclusive focus on formulae to derive a correct answer does not represent real-world problem-solving. Using stories to help deliver content and assessment that elaborates context would help girls seek the support needed to complete the task and build confidence.
Secondly, experienced investors can share their knowledge and expertise by taking up or creating mentorship opportunities, which may include facilitating discussions at schools, workplaces or with community groups. Fostering peer learning and support networks where women can share experiences, knowledge and best practices related to personal finance and investing is beneficial. Initiatives that target women in under-served communities are also vital to addressing the gap and the intergenerational transmission of low financial literacy.
Third, workplaces can extend their existing employee assistance programs to include financial well-being objectives and provide members with financial education resources, seminars, and access to financial advisors. Furthermore, workplaces can promote equal pay and career advancement opportunities for women.
Finally, raising mothers' financial literacy and economic empowerment will significantly benefit daughters. Achieving this requires a collective effort to remove structural barriers and shift social norms and stereotypes.
Dr Tracey West manages Talk Money, a school financial education program. Talk Money is funded by Ecstra Foundation, an independent charitable foundation committed to building the financial well-being of Australians within a fair financial system.
The five financial literacy questions
1. Suppose you had $100 in a savings account, and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102 | Exactly $102 | Less than $102 | Do not know | Refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
More than today | Exactly the same | Less than today | Do not know | Refuse to answer
3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund”.
True | False | Do not know | Refuse to answer
4. If interest rates rise, what will typically happen to bond prices?
They will rise | They will fall | They will stay the same | There is no relationship between bond prices and the interest rate | Don’t know | Prefer not to say
5. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
True | False | Don’t know | Prefer not to say
Notes: These questions were included in Lusardi, A. and Mitchell, O.S. (2011) Financial literacy around the world: an overview, Journal of Pension Economics & Finance, 10(4), 497-508; correct response below.
1.More than $102
2.Less than today
3.False
4.They will fall
5.True