As the term implies, financial literacy is the ability to read, write and, ideally, talk about money.
But many don’t know have a working knowledge of the language of finance, which is at the heart of increasing stress among Americans related to everything from paying bills to planning for retirement, said Annamaria Lusardi an economics and accountancy professor at George Washington University who kicked off the first Annual Financial Literacy Lecture Series at the University of Tennessee at Chattanooga last week.
“It’s not just the lack of knowledge but the consequences of that that are concerning,” Lusardi said during the Zoom lecture for UTC students, faculty and staff hosted by the department of finance and economics at the Gary W. Rollins College of Business. The event was co-sponsored by the Probasco Distinguished Chair of Free Enterprise for Financial Literacy Month.
“Sometimes, the language of finance and economics is intimidating,” said Bento Lobo, who organized the lecture and heads the finance and economics department at UTC.
“Our personal finance minor (introduced in 2018) focuses on helping students learn the language of finance and economics,” said Lobo, also a UC Foundation Professor and First Tennessee Bank Distinguished Professor of Finance.
A recent survey showed 52% of adults feel more financial stress now than they did a year ago, and 32% of parents reported “never” talking to their children about household finances–two statistics (among many widely reported in the media) that speak to Lobo’s and Lusardi’s point: Financial literacy is important but elusive to many.
“If we don’t make the access to financial education universal….people will have a lot of difficulties,” said Lusardi, the academic director and founder of the Global Financial Literacy Excellence Center who has served as a faculty advisor on financial education for the U.S. and Italian governments.
“To address the problem, you need to identify it and to measure it, and so we have spent a lot of time at GFLEC measuring financial literacy and measuring it in the most detailed way,” she said.
The center has been working with the TIAA Institute since late 2016 to develop the Personal Finance Index built on results from surveying adults in eight areas:
- Borrowing/Managing Debt
- Comprehending Risk
- Go-to information sources
Here’s a sample of the 28-question survey Lusardi discussed in the lecture:
“Anna saves $500 each year for 10 years and then stops saving additional money. At the same time, Charlie saves nothing for 10 years but then receives a $5,000 gift which he decides to save. If both Anna and Charlie earn a 5% return each year, who will have more money in savings after 20 years?”
(Hint: Try to answer without doing the math.)
The correct answer is Anna, but only 53% of respondents got it right.
The point of the question isn’t to gauge someone’s ability to calculate percentages but rather to determine if they know that investing earlier yields higher returns in the long run, Lusardi said.
That’s also the spirit of the entire survey, she said.
“We are trying to measure, do you have an understanding of how these things work?” she said.
The point of financial literacy campaigns doesn’t aim to make the average American as knowledgable as a professional financial advisor or stockbroker but instead to provide more of the general public with a general understanding of how money is made, spent and saved.
“Sometimes people think that if you have a good income, you know, then your personal finances will be will take care of themselves,” Lusardi said.
Some of the most vulnerable groups when it comes to a lack of financial understanding, she said, are women, Hispanic and Black people and people in lower-income communities.
One interesting finding when it came to women, Lusardi said, was that they were more likely to answer “I don’t know” on the survey than men.
So, she and her team “drilled down into the data” and tweaked the survey to remove that answer option. It revealed that part of the problem is “actually a lack of confidence, not a lack of knowledge,” she said.
Regardless of demographics, most people need money to meet their basic needs. When they comprehend and apply basic financial concepts like budgeting, saving for retirement and creating an emergency fund, they are less stressed about money and make better financial decisions.
The underlying point, said Lusardi, is that “you potentially live a better life.”
“You make an excellent point there,” he said to Lusardi. “One of the initiatives we are trying to drive here is that some kind of a personal finance course should be part of the general education of all college students and it’s broader than the discipline and it’s really about, as you point out, living a good life and financial wellness.”
To watch the entire lecture with Dr. Lobo and Dr. Lusardi please click here.