How shock-resistant is Australia in financial hardship?

By Kristy Muir

Wednesday August 24, 2016

Unsurprisingly, money matters.

It can determine where we live, who we live with, our standard of living, what we do with our free time, and our futures. It’s also of vital importance when we get hit with a financial shock. An unexpected need to raise significant funds can suddenly become a pivotal moment in a person’s life. For the one in eight Australians who can’t raise $2000 in an emergency, a huge mobile phone bill, a car repair, the need to suddenly have to find bond money can all be the most sinister catalysts towards a path of disadvantage.

How a person deals with that financial shock — their financial resilience — is crucial. In a report released today, Financial Resilience in Australia, we look at this in detail.

Can Australians bounce back?

There are solutions to financial shocks, of course. Savings, affordable credit, friends and family can all play an important role in ensuring an individual can bounce back relatively unscathed.

The good news is that more than 50% of Australians have moderate to significant savings, and 80% have access to credit. But we now know that 10% of Australians have no savings. 1.7% of Australians have limited to no access to a bank account. Nearly 4% have an unmet need for credit. And around one in 30 (3.7%) Australians say they need support but have no access to any form of community or government support.

At this point, it may seem like turning to fringe lenders for access to a small credit loan or a rent-to-buy-scheme may appear the easiest solutions. The problem is that you then become one of 1.3 million Australians in the $667 million fringe lending industry’s grasp of high interest rates, or a $300 tumble dryer could cost up to $3000 as ASIC observed.

At the Centre for Social Impact we’ve redefined how we consider financial exclusion, and it’s not just about the money, it’s about resilience. In the past, an inability to manage financial situations has been partly viewed as a deficit in individuals. For example, someone doesn’t have enough financial literacy to understand which products and services they can or should access or how to manage money. Of course knowledge, skills and behaviour are important pieces of the puzzle. But looking at these alone is insufficient. We need to take a broader view; we need to consider financial resilience.

What is financial resilience?

Today, we have released our report, commissioned by NAB, called Financial Resilience in Australia and we take a meaningful first step in addressing financial inclusion in Australia. We are exploding the traditional measure of “access to financial products and services” and rebuilding it to include four components:

  1. Economic resources: that includes income, savings, debt management and an ability to meet the costs of living
  2. Knowledge and behaviour: the skills to understand and manage money and financial products and services. Almost one in 10 Australians don’t have this knowledge.
  3. Access to financial products and services: one in four people report having experienced difficulties accessing financial services in the last 12 months.
  4. Social capital: having relationships with family and friends and being able to access support services in the community to increase the likelihood of having support where and when you need it.

These components don’t stand alone, they intersect. In understanding these intersections, it provides us with a better roadmap produce better financial solutions for those most at risk.

So what now?

Understanding financial resilience makes sense when we think about it in terms of people’s lives, but we’ve got to get better at intervening to help and provide the right support at the right time.

People who receive low financial resilience scores are likely to experiencing a range of challenges. They may have difficulty raising funds in an emergency, have limited access to mainstream financial services, have poor financial knowledge and sometimes display poor financial behaviour, have a greater reliance on fringe and informal products, and may experience social isolation. There are very real concerns for the wellbeing of 11.1% of the adult population: more than two million people in severe or high financial stress or vulnerability.

Too often, support services or businesses or individuals provide well-meaning support but it doesn’t always match what people actually need. It also implies that there are simple solutions to some very complex problems.

At the Centre for Social Impact, we’re using financial resilience as a concept for the first time so that socially conscious businesses, financial providers, social purpose organisations and government agencies and policy makers can consider the right interventions at the right time and under the right circumstances. So that people can bounce.

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