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Why women are most hurt by financial pandemic

The impact of COVID-19 has shone a light on a weakness in household finances. Whilst it would have been difficult to anticipate the pandemic and the subsequent government response of a nationwide shutdown, many lack emergency funds to manage through a disruption to their income.

People were living pay cheque to pay cheque and perhaps not expecting to need something for a rainy day. It's understandable, given Australia had just experienced a long period of economic prosperity. However, with financial stress a leading cause of anxiety, not being in control of your finances can harm your health and well-being.

Our health and our finances are interrelated, providing additional compelling reasons why we need to get on top of our personal budget. 

Is it a knowledge gap or an implementation gap?

How do we solve this? It is both an education issue and an action issue. It is like dieting. If we want to lose weight it is conceptually quite simple: eat less and move more. Most people know this yet struggle to lose weight. Why? It's not a knowledge issue, it is the implementation that's the hard part.

It's the same with finances. Conceptually it is not really that hard: spend less, save more and pay down debts; but like dieting, it is the implementation that is difficult.

From little things big things grow

The positive message is implementing changes requires no monumental shift in behaviour. The key is to make some small changes. Incremental changes can add up and make big impacts in the long term.

My grandmother used to say, "save your pennies and your pounds will look after themselves". Skip buying that extra cup of coffee, don't pay for parking, walk more and make your lunch rather than buying it. All of these little changes will save money, which can add up to a lot over time.

Edward Lorenz, who discovered Chaos Theory, posed this question “Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?”. This neatly captures his discovery that one small action can cause a powerful reaction. Chaos Theory is sometimes described as the science of surprise as it captures those non-linear, unpredictable outcomes that are complex and chaotic because of the many moving parts within an ecosystem. This resonates in many aspects of life including investment markets. The butterfly effect is applicable to your personal finances, including the small changes you make can add up to really big changes in the future.

There was a great study recently undertaken by behavioural economists Shlomo Benartzi, Hal Hershfield and Stephen Shu titled Temporal Reframing and Participation in a Savings Program: A Field Experiment. The study found that people were four times more likely to save if the saving was presented, or in economics terms, 'framed' as a smaller amount of $5 a day rather than $150 a month. These dollar amounts are the same, but to the participants in the survey, $5 a day seemed a more achievable undertaking versus $150 a month. That is a lot of money to many people.

So simple things like breaking your savings goal into bite-sized chunks are more likely to garner success. It reminds me of the quote: "What’s the best way to eat an elephant? One bite at a time." Framing it in a way that shows that it's doable encourages people to just get started. To save successfully doesn't require big amounts, it doesn't have to be thousands of dollars. The key is to just get going and you can build from there. There is an old Chinese proverb that says, "When is the best time to plant a tree? Twenty years ago. When is the second-best time? Now."

Financial literacy is low and women are most affected

Studies have shown there is a financial literacy knowledge gap in Australia. Melbourne University’s Household Income and Labour Dynamics in Australia survey (HILDA) surveys 17,500 people or 9,500 households. They ask basic questions around financial concepts such as interest, diversification and inflation to gauge the level of financial literacy in the community. They found that while half of male participants could answer basic financial questions, only 35% of women could answer the same questions correctly.

Women are at a disadvantage not only from a financial literacy perspective but also because of wage inequality and higher instances of career breaks to have and care for children. And then because they're not earning as much, they're less willing to take as much investment risk, and there's a link between risk and return in investing. To generate a higher return you typically need to take on higher risk, facing a loss along the way. Because women have less to start with and earn less, if they do experience a loss it has a much bigger impact as it takes longer to recoup that loss than if they were earning more. So they are more cautious.

Lower income means lower appetite for risk. Additionally, women's superannuation savings are lower because their income is lower and because of the career breaks. Women also have a higher propensity to work part time.

It's a perpetual circle of disadvantage for women.

Sure, education is part of the problem but it's also a structural issue relating to access to affordable childcare, equal wages, workplace flexibility and unconscious bias. It's a policy issue since workplaces and superannuation are set up for full-time employees who don't take career breaks.

The good news is the superannuation sector is well represented by women in senior management and they recognise the shortcomings of the current system and are lobbying for change to make it fairer for women. KPMG has also highlighted that the current retirement income policy needs some structural changes to help women better navigate retirement. This is crucial as older women are becoming homeless at a faster rate than any other cohort.

Australia has a financial literacy pandemic; women are more adversely affected than men; and encouraging people to make small changes can have surprisingly large future impacts.

 

Erica Hall is a Senior Manager Adviser Solutions at Morningstar Investment Management. This material has been prepared for educational purposes only, without reference to your objectives, financial situation or needs. 


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9 Comments
Chris
July 06, 2020

Erica, I agree; my mum experienced financial abuse and I was never taught anything about mortgages or finance by my dad, so I made a conscious decision to learn for myself. I went to the library and read everything they had under Dewey number 332.

When I got married, I taught my wife what I knew and made sure she had assets in her name as well. Together, we have carved out a really good future for ourselves already and we are only in our early 40s.

Now I have a young daughter, I have replicated this and made sure that she has her own portfolio and an insurance bond ticking away in the background. When she gets old enough, I will teach her more, but right now, I say "would you rather buy a book or a toy ?", to which she says "A book, because if I buy a book, I can buy a house".

Erica Hall
July 06, 2020

Wow sorry to hear about your mum’s situation Chris.You provide great examples of how the implementation of financial knowledge can transform lives. Thanks for sharing. 

Lachlan
July 05, 2020

Great article. Very nicely summarises a range of systemic regions need improvement. I believe financial education among all groups should be elevated in importance. The question is, how does this occur? How would you suggest spreading greater financial education and ensuring our communities are educated in this field?

Erica Hall
July 06, 2020

Thanks for your comment Lachlan. I agree the research suggests financial education needs addressing among all groups. In relation to your question I do think it requires a multifaceted response, but in my response I'll focus on 2 things
1. Would be great to see financial literacy as part of a core curriculum of study at school as understanding basic financial concepts are essential life skills. The importance is amplified when you consider financial stress is a leading cause of anxiety.
2. Behavioural economics can help people make better decisions. Knowledge is one thing but it is the implementation of knowledge when the rubber hits the road. The study referenced provides just 1 example of this; same $ amounts presented in a daily savings regime instead of monthly resulted in participants being 4X more likely to save.

Anna
July 02, 2020

What a great article Erica. I was recently talking with my life long friend about how I must have been the only girl of our generation (Y) to salary sacrifice my super from the age of 20! I learnt growing up the importance of your super balance. We need to educate the up and coming generation to pay more attention to their super especially our future female leaders.

Prue
July 01, 2020

Great article Erica. I think one of the benefits of this quieter time is that people may get to 're-set' some of those slightly more frivolous expenditures. If we can combine this with greater awareness and tools, just perhaps we have a chance to make those changes.

Erica Hall
July 02, 2020

Thanks Prue, I agree impacts of COVID-19 has created a circuit breaker. Whilst there is so much that is out of our control one thing we certainly can control our discretionary spending. Small changes can make a world of difference or to quote Lao Tzu, "The journey of a thousand miles start with a single step".

Mart
July 01, 2020

Erica - great article, even more relevant given the stats point to women typically being better with finances / investing than men. Bravo to those promoting education aimed at women in this area!

Erica Hall
July 01, 2020

Thanks Mart really appreciate your comment. As a female and mother of 2 daughters it’s an issue very close to my heart. Would love to see women’s’ financial literacy drastically improve. Poor financial literacy has punitive flow on effects as the less financially literate you are the greater your likelihood of experiencing poverty. The research suggest twice as much. We need to do better.

 

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