Australia is one of the wealthiest countries in the world, yet more than four in 10 people (42 per cent) don’t feel confident managing their money, the corporate regulator states. It’s a contradiction that the next wave of the Australian Securities and Investments Commission’s National Financial Capability Strategy, which is set to be released shortly, can help eliminate.
In my career as a financial adviser and, before that, an accountant, I experienced firsthand the challenge of helping people become more adept at managing their money. Long before goals-based advice became a core element of the financial planning profession, I saw the difference goals made to my clients in developing the confidence and resilience to change their financial situation.
Goals are essential for motivation
Knowledge and skills have long been the cornerstone of financial literacy. But as the global conversation evolves to focus on the behaviours that contribute to financial capability, there’s an equally critical element that is often overlooked.
Building lasting financial wellbeing requires goals. Without tangible personal goals, sustaining behavioural change will remain a struggle. Goals are central to transforming theoretical knowledge into practical strategies for success.
There’s a big difference between simply setting a goal and having a meaningful connection with it. Advisers have a key role to play in developing the latter. Using a combination of coaching, tools and advice, they can increase people’s self-awareness of their financial behaviour and boost their motivation. By combining this influence with their expertise in crafting robust financial plans, planners can help people develop all the essential elements of financial wellbeing.
Understanding needs to start early
Building financial capability isn’t a ‘one-and-done’ process. While it centres on how we accumulate money and how we spend it, our choices and circumstances throughout life make the reality of financial capability at different ages and stages vary.
Again and again, research shows that it’s easier to become proficient at new skills when we start young.
That might begin with children saving up pocket money for a special purchase, or accompanying parents on a visit to their financial adviser. Kids learn that their financial health needs to be looked after, just like they need regular medical check-ups.
Technology offers new opportunities to engage with young children and teenagers and help them build financial capability. Interactive tools such as Banqer, a financial education platform the Financial Planning Association of Australia and Netwealth support, use practical real-world examples and let children earn rewards in a safe environment. Outside the classroom, apps such as Spriggy and Pennybox can help children earn pocket money and practise safe spending and saving in an increasingly cashless economy.
No matter how many tools and lessons we give children, however, watching what the adults in their lives do is still one of the most powerful influences. That’s one more reason it’s never too late for clients to make a change for the better.
Behavioural change takes time
Even if we set out on the right foot, making perfect financial decisions all the time is impossible. Everything from rocketing property markets to ill health or unemployment can derail the best-laid plans. Under increased pressure, people can revert to bad habits or the path of least resistance.
Technology has made it easier than ever to spend what we have – and haven’t – got. From contactless payments to online buy-now, pay-later systems like AfterPay and instant online micro-loans, a wave of new businesses has been created out of getting consumers to part with more of their hard-earned money with less friction.
Our financial behaviour is often hampered by strong emotions and our personal biases. Small nudges in the right direction are the place to start making a change. But they need to be given time.
Incremental changes accompanied by positive reinforcement have been proven to influence behaviour effectively. They are easier to keep up than sweeping shifts, and successfully maintaining them provides a boost in motivation that drives further change. Behavioural economist Richard Thaler was awarded a Nobel prize in 2017, in recognition of his pioneering work developing this concept.
Technology offers a hand
Just as technology has accelerated spending, it also offers solutions to reduce the pain points we face in establishing healthy financial habits.
Technology has created powerful connections between people through social media platforms. Equally, it has heightened the immediacy of those connections, enabling people to interact instantly at any time of day, from virtually anywhere in the world. It has the same ability to develop powerful connections between people and their finances, along with greater convenience and real-time behaviour.
It offers the potential to build stronger relationships between people and their financial goals. Regular visual reminders, alerts and updates indicate progress or gently nudge people back on track. That’s partly because it increases the visibility of their actual behaviour, which can differ markedly from what they think they’re doing.
The current propensity to take on high levels of debt is one behaviour regulators are increasingly keen to rein in. Australian Prudential Regulation Authority chairman Wayne Byres said at the Australian Securitisation Forum in November that “household indebtedness is high; perhaps more importantly, the trajectory is clearly for it to rise further”.
Given the risks inherent in high debt, this helps show how crucial it is that advisers help increase the public’s financial capabilities. If official interest rates increased by just 2 per cent today, it would have the same impact as when rates were 18 per cent in 1989, Frontier Advisors states.
Developing financial capability delivers both personal and broad economic benefits. When industry collaborates with consumers, regulators and innovators, the outcomes can improve our collective wellbeing.
Peter Malekas is founder and managing director of Moneysoft.
