What is Financial Literacy?

Financial literacy is often described as the ability to understand money, but in practice, it is much broader than knowing how to save or stick to a budget.

According to the OECD, financial literacy refers to the awareness, knowledge, skills, attitudes, and behaviours needed to make sound financial decisions and ultimately achieve individual financial wellbeing. In other words, financial literacy is not just about what people know about money, it is about how they use that knowledge in everyday life.

This might include understanding concepts such as saving, budgeting, inflation, taxation, interest, debt, investing, risk, consumer rights, and long-term planning. But financial literacy also involves confidence, judgement, and the ability to apply these concepts in real-world situations.

For children and young people, financial literacy may begin with simple decisions, such as choosing between spending and saving, comparing prices, or recognising the difference between needs and wants. Over time, those early experiences can grow into more complex decisions about work, income, borrowing, investing, retirement, and financial independence.

Financial Literacy vs Financial Capability

These terms are often used interchangeably, but they are not exactly the same.

Financial literacy focuses on what a person knows and understands about money, along with their ability to apply that knowledge.

Financial capability goes a step further. It includes not only knowledge and skills, but also the confidence, motivation, opportunity, and real-world behaviours needed to act on that knowledge.

A student may understand how compound interest works (financial literacy), but financial capability is demonstrated when they can apply that understanding to make thoughtful choices about saving, borrowing, or investing.

Financial Capability vs Financial Inclusion

Financial inclusion refers to whether people have access to useful, affordable, and appropriate financial products and services, such as bank accounts, payment systems, savings products, credit, insurance, or digital financial tools.

Inclusion matters because people cannot fully participate in modern economic life if they are excluded from financial systems.

However, access alone is not enough. A person may have a bank account, debit card, or budgeting app, but still struggle to make informed financial decisions.

That’s why financial inclusion and financial capability often work together. The OECD increasingly measures financial literacy, inclusion, and wellbeing as connected, but distinct, dimensions of financial health. 

Financial Wellbeing: The bigger goal

If financial literacy is the knowledge, and financial capability is the ability to act, then financial wellbeing is often the long-term outcome.

The OECD describes financial wellbeing as being able to feel secure, remain in control of day-to-day finances, handle unexpected financial shocks, and have the freedom to make choices that support life goals. 

Financial wellbeing is not simply about being wealthy. It is about having enough knowledge, resources, resilience, and confidence to manage life’s financial challenges and opportunities.

That is why financial education matters so much, especially in childhood, when many money attitudes and habits are first being formed.

Why Financial Literacy Matters

Money influences many of the decisions we make throughout life; what we buy, where we live, how we learn, the work we choose, the risks we take, and the goals we pursue. Yet for many young people, financial decision-making begins long before they receive their first pay or open their first bank account.

Young people are exposed to money every day. They see digital payments, online advertising, subscription services, gaming purchases, social media influencers, family budgeting decisions, and conversations about work, bills, and rising living costs. These experiences help shape early beliefs, attitudes, and behaviours about money, often before formal financial education ever begins.

That is why financial literacy matters.

Financial literacy helps young people build the knowledge, skills, confidence, and habits needed to navigate an increasingly complex financial world. It supports learners to ask questions, compare choices, weigh trade-offs, recognise risk, and think critically about short-term decisions and long-term consequences.

Strong financial literacy can support:

  • more confident decision-making
  • healthier saving and spending habits
  • stronger Mathematics Education and problem-solving skills
  • understanding of Economics and consumer systems
  • greater awareness of scams, deceptive design, and digital risks
  • improved goal setting, planning, and future readiness
  • increased participation in financial and economic life

Financial literacy also supports broader life outcomes. Research shows that financial capability is connected to confidence, resilience, opportunity, and long-term wellbeing. When young people understand how money works, they are often better equipped to manage uncertainty, adapt to change, and make informed choices throughout adulthood.

Financial Literacy Policy in Australia

Australia has recognised the importance of financial literacy for more than a decade through national policy, regulatory leadership, and cross-sector collaboration.

In 2011, the Australian Securities and Investments Commission launched Australia’s first National Financial Literacy Strategy, helping establish financial literacy as a shared responsibility across government, schools, community organisations, researchers, and industry. The strategy focused on building knowledge, improving access to trusted information, encouraging behavioural change, and supporting partnerships across sectors.

Over time, Australia’s policy language evolved from financial literacy toward financial capability; recognising that knowledge alone is not enough. Financial capability includes confidence, motivation, access to support, and the ability to apply financial knowledge in real-world situations.

This shift was reflected in Australia’s National Financial Capability Strategy, which broadened the national conversation from understanding money to supporting financial resilience, inclusion, and wellbeing across different life stages.

However, Australia’s national financial capability agenda is currently relatively dormant. While many organisations continue important work in financial education, consumer protection, financial inclusion, and wellbeing, there is currently no highly visible national implementation framework, refreshed action plan, or coordinated public roadmap driving the next phase of capability-building at a national level.

See Australia’s Strategies here:

At the same time, other countries are actively renewing or launching national strategies.

For example, Ireland launched its first national financial literacy strategy in 2025, built around multi-stakeholder governance, annual action plans, stronger school engagement, and targeted support for vulnerable populations. Importantly, Ireland’s policy review found that financial education should begin earlier in childhood, with stronger curriculum integration across the school years.

Likewise, New Zealand updated their Strategy in 2025, and continues to embed financial capability within early education, community learning, and life-stage transitions, recognising that financial decisions begin long before adulthood.

These newer strategies often share common features:

  • Earlier introduction of financial education in school curricula
  • Greater focus on vulnerable and under-served populations
  • Stronger links between financial literacy, digital literacy, and scam prevention
  • Increased attention to behavioural insights and real-world decision-making
  • Integration with financial inclusion, consumer protection, and wellbeing policies
  • Annual action plans, measurement frameworks, and public accountability mechanisms

Much of this global policy development is supported by the Organisation for Economic Co-operation and Development and its International Network on Financial Education (OECD/INFE), which provide governments with policy recommendations, implementation guidance, international benchmarks, and technical support for developing national financial literacy strategies.

In some countries, policy attention is now moving beyond strategy development toward curriculum implementation at scale. In the United States, for example, policy momentum has increasingly shifted from voluntary school curriculum guidance toward mandatory personal finance education. According to NGPF’s 2026 State of Financial Education Report, 30 U.S. states now require students to complete a standalone Personal Finance course before graduation, compared with just eight states in 2020. Once recently adopted policies are fully implemented, more than three-quarters of U.S. public high school students in the graduating class of 2031 are expected to complete a dedicated personal finance course.

Together, these developments suggest that internationally, financial education policy is increasingly moving beyond awareness and advocacy toward earlier intervention, stronger implementation, and measurable system-level accountability, raising important questions about Australia’s next chapter in financial capability policy.

Measuring Financial Literacy

If we want to improve financial literacy, financial capability, and financial wellbeing, we first need to understand how these concepts are measured.

Around the world, researchers, governments, educators, and international organisations use a range of tools to assess what people know about money, how they behave financially, how confident they feel making decisions, and whether they have the financial resilience to cope with everyday life.

These measures help answer important questions:

  • Do people understand core financial concepts?
  • Can they apply financial knowledge in real-world situations?
  • Are they making informed financial decisions?
  • Do they have access to safe and appropriate financial products?
  • Do they feel financially secure and resilient?

There is no single measure of financial wellbeing. Instead, researchers often combine indicators of Financial Literacy, Financial Capability, Financial Inclusion, and Financial Wellbeing.

The Big Five Financial Literacy Questions

One of the most widely used quick measures of financial literacy was developed by Annamaria Lusardi and Olivia S. Mitchell. Known as the Big Three, and later expanded into the Big Five, these questions provide a simple but powerful snapshot of a person’s understanding of core financial concepts. They have been used in dozens of countries and form the foundation of many financial literacy studies worldwide.

The Big Five assess understanding of concepts such as:

  • Interest and compound growth
  • Inflation and purchasing power
  • Risk and diversification
  • Borrowing and debt
  • Basic investment decision-making

Because the questions are short and easy to administer, they are often used in academic research, national capability surveys, and public education initiatives.You can take the Big Five quiz here:

Big Five Financial Literacy Quiz

A high score does not guarantee good financial outcomes, but research consistently shows that people who correctly answer more of these questions often demonstrate stronger long-term financial behaviours, including saving, planning, and managing debt.  

In Australia, the Big Five financial literacy questions were adapted for the Household, Income and Labour Dynamics in Australia (HILDA) Survey and administered in 2016, 2020 and 2024. The HILDA Survey is a nationally representative longitudinal study that follows thousands of Australians over time, making it one of the country's most valuable sources of information on financial literacy and financial capability.

Analysis of the HILDA data shows that financial literacy is generally high across the Australian population, but important differences exist across age, gender, education, geographic location and socioeconomic circumstances. Higher levels of financial literacy are also associated with greater financial preparedness, financial resilience and financial wellbeing.

To explore these findings in more detail, including national trends between 2016 and 2024 and the groups most likely to experience lower levels of financial literacy, see my report:

Financial Literacy and Financial Capability in Australia: Evidence from the HILDA Survey 2016–2024

OECD Adult Financial Literacy Surveys

The OECD and its International Network on Financial Education (OECD/INFE) have developed one of the world’s most widely used financial literacy measurement frameworks.

Unlike short quizzes, the OECD/INFE International Survey of Adult Financial Literacy measure multiple dimensions of financial capability, including:

  • Knowledge: understanding concepts such as inflation, interest, risk, and diversification
  • Behaviour: budgeting, saving, planning ahead, shopping around, and managing debt
  • Attitudes: patience, future orientation, and willingness to plan ahead
  • Financial inclusion: access to accounts, payment systems, savings products, and formal financial services
  • Financial wellbeing: resilience, confidence, and ability to cope with financial shocks

This broader approach recognises that knowing financial facts is only one part of financial capability. The OECD survey toolkit is now used across dozens of economies to benchmark national performance and inform policy. 

Australia last participated in the 2017 OECD/INFE International Survey of Adult Financial Literacy and performed relatively strongly on several behavioural indicators. Around 74% of households reported using a budget, 71% of adults reported saving in the previous 12 months, and 94% reported taking responsibility for financial decisions within their household. Australians were less likely than the G20 average to borrow money to cover unexpected expenses (15% compared with 22% across G20 countries). In addition, 58% of Australians demonstrated a longer-term financial orientation, suggesting positive attitudes toward planning ahead.

However, the survey also identified areas for improvement. Only 22% of Australians reported actively comparing or choosing a financial product in the previous six months, suggesting that while many Australians demonstrate strong everyday financial behaviours, there may still be opportunities to strengthen consumer confidence and engagement when making more complex financial decisions.

PISA and Financial Literacy in Schools

The OECD also measures youth financial literacy through a module of the Programme for International Student Assessment (PISA).

PISA tests how well 15-year-old students can apply financial knowledge to realistic situations they may encounter in everyday life, such as interpreting bank statements, comparing financial products, recognising risk, understanding contracts, or making spending decisions.

Importantly, PISA does not simply test memorisation.

Instead, students are assessed on whether they can:

  • Interpret financial information
  • Apply financial concepts to unfamiliar situations
  • Compare alternatives and weigh trade-offs
  • Recognise risk, consequences, and long-term outcomes
  • Make reasoned financial decisions

Students who perform at higher proficiency levels can typically:

  • Analyse complex financial products or multi-step scenarios
  • Identify hidden costs, incentives, or risks
  • Compare competing options using evidence
  • Explain long-term financial consequences of decisions

Students at lower proficiency levels may still recognise everyday money concepts, but often struggle to:

  • Transfer knowledge to new situations
  • Interpret unfamiliar financial language
  • Evaluate trade-offs or hidden costs
  • Understand longer-term consequences of decisions

Australia participated in the PISA financial literacy assessment in 2012, 2015, and 2018, but did not participate in the 2022 cycle. In 2018, around 13% of Australian students performed at the highest proficiency levels (Levels 5 or 6), demonstrating the ability to analyse complex financial products, understand less obvious costs, and apply financial reasoning in unfamiliar situations. At the same time, approximately 20% of students performed below the baseline level of financial proficiency, meaning they may struggle with everyday money decisions such as reading bills, comparing prices, or understanding basic financial documents.

The results also revealed important equity patterns. Students from higher socioeconomic backgrounds generally performed better, and unlike many participating countries, Australian girls significantly outperformed boys in financial literacy. These findings reinforce that financial capability is shaped not only by knowledge, but also by opportunity, family context, and access to meaningful learning experiences.

One of the most important insights from Australia’s PISA financial literacy results is that financial literacy does not exist in isolation from other core learning areas. Australian analysis found that around 70% of variation in student financial literacy performance could be explained by reading and mathematical proficiency, highlighting the critical role of literacy and numeracy in understanding financial information, interpreting scenarios, and performing financial calculations. However, the remaining variation appears to reflect skills and knowledge that are unique to financial literacy itself, including familiarity with financial language, exposure to money-related situations, and the ability to apply knowledge in authentic consumer and economic contexts. This may also help explain why, in Australia, girls significantly outperformed boys in financial literacy, despite gender differences in mathematics being much smaller. Financial literacy is therefore not simply about maths; it is about learning to apply literacy, numeracy, judgement, and real-world experience in financial situations.

Measuring Financial Wellbeing

While financial literacy measures what people know about money, and financial capability explores how people apply that knowledge, financial wellbeing focuses on something broader:

How well is a person able to live, cope, and plan financially?

One of the most influential frameworks in this area was developed by Elaine Kempson and colleagues through research into household financial behaviour and consumer outcomes.

Kempson’s work helped shift the conversation away from income alone and toward a more practical understanding of what it means to be financially well.

According to this model, financial wellbeing often includes four interconnected dimensions:

1. Meeting Everyday Commitments

Can a person manage day-to-day expenses such as food, housing, transport, utilities, childcare, or education costs?

This includes:

·       Paying bills on time

·       Managing cash flow

·       Avoiding persistent shortfalls

·       Feeling in control of day-to-day finances

A person may have a reasonable income but still experience low financial wellbeing if their expenses consistently exceed what they can comfortably manage.

2. Resilience and Financial Security

Can a person cope when life becomes unpredictable?

This includes:

·           Having emergency savings

·           Accessing funds in a crisis

·           Managing income disruption

·           Recovering from unexpected expenses

A person may have a steady income or access to financial services but still experience low financial wellbeing if they are unable to make ends meet or raise money quickly when unexpected expenses arise.

3. Feeling in Control

Financial wellbeing is not just objective, it is also psychological.

This includes:

·           Feeling confident making money decisions

·           Understanding financial products and obligations

·           Feeling able to plan ahead

·           Experiencing lower financial stress or overwhelm

Two people with similar incomes may report very different levels of financial wellbeing depending on their confidence, support systems, debt levels, and life circumstances.

4. Freedom to Make Choices

Financial wellbeing also includes the ability to pursue goals and opportunities.

This may include:

·           Saving for education, travel, or a home

·           Investing in skills or career development

·           Taking time away from work when needed

·           Supporting family or community goals

·           Making choices that align with personal values

This dimension recognises that financial wellbeing is not just about surviving, it is about having options, agency, and future opportunity.

 Why Financial Wellbeing Matters

Modern financial education is increasingly moving beyond simply teaching budgeting, saving, or interest calculations.

Governments, regulators, banks, employers, researchers, and educators are increasingly asking a bigger question:

Are people financially well?

This means looking not only at what people know, but also whether they:

  • can make ends meet
  • have access to safe and appropriate financial systems
  • feel confident and in control
  • can recover from setbacks
  • have the freedom to pursue long-term goals

Australia is beginning to track broader indicators of financial wellbeing through national wellbeing reporting.

Under the Australian Government’s Measuring What Matters framework, financial security is monitored through indicators such as:

  • Ability to make ends meet in day-to-day life
  • Capacity to raise emergency money quickly
  • Household financial stress and cash flow pressure
  • Broader economic security and resilience

These measures recognise that financial wellbeing is not just about income or wealth. 

It also includes whether people feel financially secure, can manage unexpected expenses, and have the resources to participate fully in society. Data published by the Australian Bureau of Statistics helps policymakers track these trends over time. 

Financial Literacy is only part of the solution

Financial education plays an important role in helping people build knowledge, confidence, and decision-making skills. But education alone cannot solve every financial challenge.

Many financial outcomes are shaped not only by individual choices, but also by the systems, products, policies, and institutions that surround those choices.

For example, a person may understand budgeting, saving, or borrowing, but still experience financial harm if they are exposed to misleading advertising, harmful credit products, scam activity, complex contracts, digital manipulation, or systems that become difficult to navigate during times of financial stress.

That is why improving financial wellbeing often requires systems change as well as education.

Systems change may include:

  • stronger consumer protections and product regulation
  • restricting harmful lending or exploitative credit practices
  • improving disclosure and reducing deceptive design in digital environments
  • strengthening scam prevention and digital safety protections
  • making financial products simpler, safer, and easier to compare
  • improving access to fair hardship assistance, repayment flexibility, and customer support
  • designing public services and financial systems that are more inclusive and easier to navigate 

In Australia, governments, regulators, financial institutions, researchers, educators, and community organisations all play a role in shaping these systems.

At Marshmallow Money, we believe students should not only learn how to make informed financial decisions, they should also learn how to recognise when financial systems, products, or institutions fail to protect people.

That is why our books include age-appropriate characters, scenarios, and case studies based on real-world examples where systems have let people down; whether through scams, misleading marketing, harmful credit, unfair contracts, barriers to hardship support, or gaps in consumer protection.

These stories help young people build not only financial capability, but also critical consumer awareness, ethical reasoning, and the confidence to ask questions about fairness, responsibility, and accountability.

Financial literacy helps individuals make better decisions. Systems change helps ensure those decisions happen in fairer, safer, and more supportive environments.