Why Financial Literacy Starts at Home and School

A mother works with her young son on a laptop at a table outside.

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Annamaria Lusardi is senior fellow at the Stanford Institute for Economic Policy Research and coauthor, with Tim Kaiser, of the new study “Financial Literacy and Financial Education: An Overview.” I spoke with her about the results of her study.

How do you measure financial literacy?

“More than 20 years ago, we developed what we call the Big Three, a trio of multiple-choice questions to measure understanding of the ABCs of personal finance: compound interest, inflation and risk diversification. Since then, we have added these questions to almost every survey of consumer finances and other global surveys in countries around the world. The results in most countries are strikingly similar: very low levels of financial literacy that have not improved a lot over time.”

Does your research show a difference between men and women?

“We find a persistent and large gender gap in almost every country. Women answer fewer questions correctly, and they are more likely to choose the ‘I don’t know’ response. To test this, we have asked the questions again but without the ‘I don’t know’ option. When forced to answer the questions, women tend to be right, but they’re not confident of their answers.

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“We estimate that lack of confidence accounts for about one-third of the gender gap. This can make women too reluctant to take steps that can grow their wealth, especially in a high-inflation environment — for example, by investing in the stock market.”

Are there differences between age groups?

“Financial literacy is particularly low among the young. That makes sense because they don’t have experience in the real world and don’t generally learn about finance in school. Early studies showed that financial knowledge tended to increase with age up to a point and then turn down. But in more recent studies, we don’t see financial knowledge going down with age. One reason may be that one topic we measure is inflation, and older generations have had more experience with higher inflation.”

What do your results mean for financial well-being?

“Financial literacy is as important as reading and writing in our society, when you have to deal with making a budget, managing debt, planning for the future, saving for retirement. Building wealth doesn’t depend on income or luck alone. Financial literacy plays a role, too, and it’s not minor. For example, we estimate that 30% to 40% of the wealth gap at retirement could be closed if people had the knowledge and skills to invest in the stock market and earn higher returns.”

What’s the solution?

“Adding financial education in schools levels the playing field. Earlier studies didn’t find evidence that financial education works, which led to a lot of disappointment. But those studies were looking at very minor interventions — for example, giving people a brochure. When financial literacy is so low, you can’t address it by one brochure or one lecture. You need a full, robust course.

“More-recent mandates for financial education in high schools have improved financial literacy scores and behaviors. Instead of classroom settings, programs for adults work better when they are tailored to target groups, are relevant to life situations and use digital delivery.”

How early can you start?

“As soon as the tooth fairy comes. In every interview I do with adults who have been successful in personal finance, they tell me about experiences they had when they were young. Giving a child a piggy bank can be quite helpful.”

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.