Impacts of Financial Literacy and Confidence on the Severity of Financial Hardship in Australia

Abstract

Consumers in Australia and other developed countries are increasingly required to interact with providers of complex financial products and services, and to estimate, mitigate or absorb the risks that flow from their financial decisions. A range of debt-related problems in Australia have been attributed to low levels of financial literacy in the population. However, there has been limited research exploring the relationship between low financial literacy and the problem of financial hardship, where a consumer takes on payment obligations under a contract, but then becomes unable to meet them when they fall due. Drawing on a survey of Australians who recently experienced debt problems, this article examines the impact of financial literacy levels and levels of confidence in managing day-today spending on severity of financial hardship. The article also examines the impacts of financial literacy and confidence levels on the strategies employed to get by financially while in debt. The article shows that while there is no straightforward relationship between low financial literacy and severity of financial hardship, lower levels of financial literacy may reduce consumers' ability to avoid some of the more serious consequences of default, particularly if coupled with overconfidence about their ability to manage spending.

Understanding financial literacy and associated factors among adult population in a low-middle income country

“…Low financial knowledge can lead to poor financial decisions ( Jacob, 2000 ), affecting an individual's ability to achieve long-term goals ( Ergün, 2018 ). Besides, poor financial literacy might cause unsecured personal loans ( Wang et al., 2021 ), financial hardship, and possibly bankruptcy ( Bourova et al., 2018 ). Individuals with high literacy might invest in stocks, bringing a higher return on investments ( Van Rooij et al., 2011 ).…”

Financial literacy and financial well-being of Australian consumers: a moderated mediation model of impulsivity and financial capability

“…Researchers examine the relationship between financial literacy and different concepts related to financial decisions. Financial literacy is associated with improved financial behavior (Barbi c et al, 2019), better basic money management and financial planning skills (Ali et al, 2015), the development of the ability to avoid consequences of default (Bourova et al, 2018) and retirement planning (van Rooij et al, 2011).…”

“…Prior studies report that those who plan for the future and set long-term goals are more likely to be financially satisfied (Xiao and O'Neill, 2018). Similarly, high financial literacy skills are often related to the high quality of financial decisions that improve consumers' financial well-being (Bourova et al, 2018;Lusardi and Mitchell, 2014;Limbu and Sato, 2019). However, consumers' impulsive behavior could have an adverse effect on financial decisions Vandone, 2011, 2018), deteriorating their financial well-being.…”

Analysing the behavioural, psychological, and demographic determinants of financial decision making of household investors

“…The rational information processing models in finance show an inclination towards an intuition system where the well informed and financially literate investors make rational and quality financial decision making (FDM) [ 1 ] whilst enhancing their economic security and well-being [ 2 , 3 ]. FDM is based on the premise that individuals weigh costs and benefits of a decision (also known as reflective process), which has financial implications and components associated with it.…”