Financial Literacy: Does It Work?
You can’t expect much if you take only one class in high school.
Annamaria Lusardi is the Denit Trust Distinguished Scholar and Professor of Economics and Accountancy at the George Washington School of Business. She also heads the Global Center for Financial Literacy.
Some people say that teaching kids financial literacy won’t help them read a complicated, 50-page contract when they buy their first house. So why bother? That shows a major misunderstanding. Financial literacy is a basic tool that helps people cope with day-to-day financial management. We are living in a world with increased individual responsibility, and we’re asking people to make more decisions about how to invest and borrow. We don’t teach students literature so that they can write War and Peace. We teach literature so that they can appreciate a good book. Teaching financial literacy makes them able to frame everyday financial decisions in a more informed way.
What about studies that show students aren’t learning money skills? I’d be cautious about studies that measure financial knowledge. You need to measure other things also, such as the curriculum. Financial literacy is often an elective course taught at the end of high school. Almost no one learns math or science like that.
How can we improve financial education? We find a way to make it more effective. We look at the curriculum or change how it’s taught so that it becomes relevant. With financial literacy, having uniform standards would help. I’m working on standards with the Council for Economic Education that would include a number of concepts -- for example, gross versus net wages, compound interest, inflation, opportunity cost, and risk diversification.
You prefer the phrase "financial literacy" to "financial capability." Why? Capability refers to changing behavior, and we have to be humble about that. We can’t characterize what’s the best behavior for everyone. Financial literacy, on the other hand, empowers you to make choices.
Can you give an example? Even something like automatic enrollment in a retirement plan might not be right for everyone. For instance, if you have to pay down debt, you should take care of that first. We have to get away from one-size-fits-all, which fits no one.