Financial Well-Being: How Does Australia Measure Up?

A Fulbright scholar compares the well-being of the financially vulnerable in some of the world’s most developed countries.

As part of a Fulbright Australia scholarship, I have the privilege of making my way across Canada and the US, connecting with those working to improve the financial lives of vulnerable groups within their communities.

People aspire to well-being, and the financial aspect of achieving this, referred to as financial health (having day-to-day financial systems that build long-term resilience and opportunity), financial wellness (achieving financial stability and address the financial issues that cause them stress) or financial well-being (the ability to meet current financial needs, feel secure about their future, and are free to make choices to enjoy life) in different parts of the world, is a growing area of interest for researchers, policymakers and practitioners.

This article, the first in a series exploring how my learning journey can strengthen the well-being of low income Australians, focuses on financial well-being in Australia and four comparable countries. It’s based on research led primarily by Professor Elaine Kempson at the Personal Finance Research Center.

This article focuses on financial well-being in Australia and four comparable countries.

Her work links cross-country surveys conducted in Norway, Ireland, Canada and Australia and New Zealand on financial well-being, which she defines as ‘being able to meet all one’s current commitments and needs comfortably, and having the financial resilience to maintain this in the future’. The selected countries are high-income, developed economies with virtually universal access to formal financial services except for Ireland, where 5 percent of the population doesn’t have an account. Generally, gender isn’t a barrier to access yet income is, as the poorest 20 percent of people are the most likely to be excluded, particularly those who are unemployed. Given similar levels of inclusion, this paper explores how these countries compare on financial well-being. What insights can be gleaned on what’s working globally, what’s not, and areas where Australia should prioritize the limited resources at hand?

Exploring Financial Well-being in Developed Economies

Kempson frames the research findings around three distinct components of financial well-being: meeting current commitments, being financially comfortable now, and having the financial resilience to maintain this in the future. At the national level, a country with high financial well-being is one where the population has the freedom and ability to fully participate in society and the economy. Despite similar levels of financial inclusion, Table 1 reveals a considerable variance in overall financial well-being across these countries. (All tables in this post are from this report from the Financial Consumer Agency of Canada).

Norway scores the highest on each component of financial well-being, while the lowest scores, almost 20 index points lower on all measures, are found in Australia and New Zealand. The research also segments the national population into four segments based on levels of financial well-being (see Table 2 below [data for Canada was not available at the time of publication]). Australia and New Zealand have the largest numbers of people who are struggling financially; in Norway, more than twice the proportion of the population are financially secure.

The results for Australia are a cause for concern, not just for the researchers but also for local stakeholders including myself, as financial inclusion, resilience and well-being have been an area of cross-sector national debate and action for many decades.

Kempson asserts that individual financial well-being is determined by the money people have and the way they use it. On average, people in higher-income countries are likely to have access to more money than those in lower-income countries. Yet we know that the way in which they use money, irrespective of income, is heavily influenced by individual factors such as personality, knowledge and experience. Any cross-country comparison of financial well-being must therefore explore both macro-level factors such as national income measures, and micro-level factors such as individual personality, financial knowledge and experience with money. Table 3 below compares the per capita Gross National Income (GNI), average household net disposable income, and Gini Coefficient (measure of income inequality) in each country studied.


Norway, Canada Lead the Pack

Norway, with the highest per capita GNI, net disposable income and the lowest income inequality, has the highest overall financial well-being. Ireland, with a high GNI and low-income inequality, scores just below Canada on overall well-being despite having the second-lowest disposable income. Australia has a high GNI, net disposable income and Gini Coefficient, yet shares the lowest overall score with New Zealand.

Based on these findings, the researchers infer that at the national level, the financial well-being of a country’s population is linked with the level of income inequality (Gini coefficient) and not the average income. Global studies have outlined the social, political and economic consequences of growing income inequality such as slowing GDP growth, lower well-being and income volatility, previously experienced primarily in low-income, developing contexts. The link between income inequality and overall financial well-being highlighted by this research, could explain why Australia, despite having the second-highest disposable income and universal access to finance, finishes last in class. Prioritizing policy and action to address income inequality may therefore be an important enabler of increasing overall financial well-being in Australia.

At the micro-level, research shows that individual socio-economic factors (e.g. household income, coping with a drop in income, whether parents discussed money) and financial behaviors directly influence financial well-being. Behaviors are driven by financial knowledge and experience; confidence and attitudes; and personality traits, with the latter often overriding knowledge in the financial decision-making process. Three behaviors — spending restraint, active saving, and not borrowing for daily expenses — one’s financial locus of control — the degree to which people believe that they have control over the outcome of events in their lives — and confidence exert the strongest influence on individual financial well-being, with “active saving” and “not borrowing for daily expenses” emerging as the best predictors of financial well-being.

Individual socio-economic factors and financial behaviors directly influence financial well-being.

The data shows that Norway scores the highest on all financial behaviors (except spending restraint) as does Canada, sharing the joint highest score for financial confidence. Irish participants have the lowest spending restraint, and also have the lowest levels of financial confidence. Respondents from Australia and New Zealand have the lowest financial locus of control – they are also the least likely to be active savers, and the most likely to borrow to meet daily expenses.

Kimpson’s research highlights that income remaining constant, policymakers aiming to influence how people use money must tackle their attitudes and personality not their knowledge, via a wide range of financial capability-building interventions. The results for Australia (based on a sample of 3,578 adults) show that the priority should be to improve the two lowest-scoring behaviors which are also the biggest predictors of financial well-being, i.e. “active saving” and “not borrowing for daily expenses.”

What Does this Mean for Australia?

So what does this mean for those working to improve financial inclusion, resilience and well-being on the ground in Australia? The finding that higher income inequality is driving lower overall financial well-being resonates with local challenges which have dominated Australia’s economic outlook – high growth which has not been equally distributed; rising cost of living and stagnant wages eating into disposable incomes; under-employment and casualization — interlinked factors which can explain why financial exclusion and low financial resilience  have persisted, despite considerable efforts to address them.

The recommendation to prioritize “active saving” and “not borrowing for daily expenses” in order to improve overall financial well-being mirror local calls for action, as rising household debt coupled with low savings have long been identified by regulators and consumer advocates alike, as key levers for policy and decision-makers to influence. Targeting the poorest 20 percent of Australians, the ‘working poor’ as well as those who are out of work also makes sense, as research on those on low incomes has found that pathways to employment are the key to improving financial resilience.

Australia needs a comprehensive strategy to address macro-level challenges including high income and wealth inequality, rising cost of living and pathways to education and employment, while simultaneously fostering grassroots-level change focused on enabling individuals, families and communities to move away from financial hardship and crisis towards stability and income generation. Catalyzing such “system-wide” social change will require all sectors in Australia to work together over the longer-term, in collaboration with global partners with a common mission to improve financial lives for all.

This is where cross-sector collaborations such as the Financial Inclusion Action Plan program, led by Good Shepherd, which aims to promote inclusive growth and reduce inequality by enabling organizations to take practical action to increase financial well-being within their own sphere of influence, and the Thriving Communities Partnership, which aims to enable fair access to the modern essential services people need to thrive, can lead the way to longer-term change in Australia.

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