Financial literacy

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Financial Literacy

  • Retirement planning
  • How to save money
  • Investing
  • Superannuation
  • Taxation
  • Effects of inflation
  • Debt management
Financial literacy

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5-step guide to improving financial literacy

Retirement planning

People try to save as much as they can for retirement. However, most find that their efforts often fly out the window without a proper goal and plan.

Creating an achievable long-term retirement plan is absolutely necessary. Likewise, it’s also important to learn the skills that will enable an individual to grow their retirement nest egg—from creating a plan to investing and everything in between.

How to save money

Saving money requires a simple strategy that takes the individual’s income, expenses, budget and savings goals into consideration. There are many strategies that individuals can employ to save money according to their specific purpose without sacrificing their quality of life. In fact, small changes in their lifestyle and developing a saving habit may improve their financial wellbeing.

The key to saving more money is for the individual to spend less than their income and find ways to protect the saved money from devaluation through investing.


Saving may be the foundation of your nest egg but the value of your money can erode due to inflation. The best way to prevent this from happening is to make properly placed investments that can outstrip the effects of inflation.

While doing so exposes the individual’s money to varying levels of risk when they enter the investment market, there are two reasons why people should invest in spite of risks: compound interest and time value of money (TVM).

Compound interest is when the interest earned is reinvested along with the principal amount so that the next interest payment is computed against the accumulated amount. This results in a bigger interest payout each period.

Time value of money (TVM) asserts that time is an important factor in determining the future value of money. TVM states that the value of money invested today is higher than the same amount invested at a later time because it can benefit from interest payments.


Australia’s superannuation is a tax-effective system created for the sole purpose of providing retirement benefits to its members.

Super contributions are composed of the compulsory 9.5 per cent salary guarantee on top of ordinary time earnings from employers, voluntary salary sacrifice from the member and government co-contributions (if applicable) for eligible low-income earners.

Employed individuals who are at least 18 years old, work over 30 hours per week and earn at least $450 before tax are eligible for super. Employers must allow their employees to choose their preferred managed super fund and pay the salary guarantee.

Up to four individuals may also establish a self-managed super fund (SMSF) structured as an individual or corporate trust.


Income from employment, investments and any other means come with applicable taxes that individuals must take into consideration. Failure to pay taxes can result in fines and/or jail time.

According to the Australian Taxation Office (ATO), individuals 18 years old and over who earn income above $18,200 annually need to pay tax on their assessable income. Investors also need to pay tax on dividend and/or distribution payments and capital gains on their assets.

Some may also be eligible for tax deductions, exemptions and offsets.

Effects of inflation

Inflation is the phenomenon that erodes the purchasing power of currencies as the price of goods and services increase.

This phenomenon is the main reason why simply saving money in a deposit account may be inadequate when saving for the long-term.

Inflation also affects the future value of investment assets and how investments are issued.

Debt management

Most Australian households have experience with debt, but there are some instances wherein debt can reach unmanageable levels.

According to the Household Income and Wealth report released by the Australian Bureau of Statistics (ABS) on July 26, 2018, about 29 per cent or three-in-ten households have been classified as over-indebted in 2015-16. Sydney and Melbourne households took the top spots with 407,000 and 419,600 households in debt, respectively.

Based on a Finder survey of 2,085 Australians, the average credit card debt is at $4,268, but the amount goes up as income increases. However, the same report also found that Aussies with no income have an average credit card debt of $3,774.

The Australian Financial Security Authority (AFSA) reported that a total of 31,859 Australians declared personal insolvency in FY2017-18, with debt agreements increasing by 9.1 per cent from the previous year to 14,834—the highest annual number on record.

The debt records above emphasises the need to strengthen financial literacy programs and give Australians the financial skills they need to avoid accumulating debt from unnecessary spending.