Many Australians are ignorant of three crucial money concepts, leaving them “highly vulnerable”, a leading researcher has warned.

Fewer than half of Aussies can explain the meaning of interest rates, inflation and diversification of risk, said University of Sydney retirement expert Professor Susan Thorp.

Without knowledge of these, consumers and investors – especially retirees – are in danger of wasting their money.

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“If you are going to manage your credit card you need to understand interest rates or you need to understand how inflation might affect the spending power of your wages and you need to understand risk if you are going to manage your superannuation investments,” Professor Thorp said.

She based her claim on her own study published in 2013 in the journal Numeracy, and a 2011 survey by the ANZ bank, as well as other research.

“What we see is that people who have poor skills in this area are much less likely to have prepared for their retirement,” she said.

“They are likely to have found these decisions difficult and alienating and they don’t want to think about it.”

The warning came as no surprise to a spokeswoman for Finder.com.au, a website that seeks to help consumers compare financial products.

“Financial literacy in Australia and across the world is quite low,” Finder.com.au money expert Michelle Hutchison said.

“When there is ignorance or naivety on those topics, it becomes a real concern because it means people end up paying more interest and fees than they need to.”

What is interest?

Mastering the basics is the first step towards becoming a money-making superhero. Photo: Shutterstock

This is the fee charged by banks for such products as home loans and credit cards.

It is crucially important to check the interest rate of any financial product before signing up to it because of the magic of what is called ‘compound interest’, which is simply the interest charged on interest.

Compounding can either make or break your finances.

For example, if you invest $1,000 for five years in a savings account at a steady interest rate of five per cent per year, it could become $1,276.

“If the investment is set up to re-invest, then it requires no further action from the investor to grow their savings,” Melbourne-based financial planner Graham Chatterton previously told The New Daily.

But forget to pay off your credit card, and the penalty will also grow and grow.

You can use the credit card calculator on the ASIC MoneySmart website to work out how to repay your balance sooner by paying more than the minimum repayment.

What is diversification of risk?

‘Don’t put all your eggs in the same basket.’

That’s the very simple wisdom of risk diversification.

It is tempting to put all your money into a single investment that you think is a surefire winner.

But hundreds of years of investing history tells us that is a bad idea, for houses can plummet in price, companies can fold and the share market will inevitably crash.

So do yourself a favour and spread the risk.

For more info on choosing the right amount of risk for your super fund, follow this link to the ASIC MoneySmart website.

What is inflation?

Parents and grandparents love to bemoan how much cheaper everything was back in their day.

While it’s true some things have become more expensive, it’s also true that the Australian dollar buys less these days.

This is known as inflation, which is measured by the consumer price index (CPI).

It is the enemy that constantly eats away at the buying power of your wage and whatever money you have squirrelled away.

So unless your wage is keeping pace with CPI increase, you are getting ripped off.