Everyone in a modern society needs to know how to read, so America spends an awful lot of time, treasure and talent developing literacy curricula for kids.
We take a similar attitude when it comes basic math and science — but when it comes to financial literacy, only 21 states require financial education, Dr. Annamaria Lusardi recently told Karen Webster.
Instead, many kids get what financial literacy education they get at all at home from their parents while sitting around the kitchen table, Lusardi said. Unfortunately, that only works if the parents have good financial literacy themselves, which the expert said research shows is rarely the case.
“What we found is that among the adults, financial literacy is not very high,” she said. “Not [a] lot of adults are actually financially literate, and this is not surprising because a lot of people didn’t get it in the school. And the world has changed so fast around us. I mean, this is why, in a sense, we are ignorant — because the world has gone so fast and we didn’t catch up.”
Lusardi should know. She’s the George Washington School of Business’ endowed chair of economics and accountancy academic director and head of the Global Financial Literacy Excellence Center (GFLEC).
Lusardi said the problem is especially acute here in America. Studies have found that people from Finland, Luxembourg, Estonia and Australia all vastly outscore Americans when it comes to general financial literacy.
That’s mostly because, she said, those countries treat the issue for what it is — a complicated, technical academic subject that students must study early and often because the concepts are vital to making their way in a modern society. These aren’t things that people just pick up without formal education.
“No one understands the way interest-compounding works, or what inflation is or how to map out risk diversification just by looking at the world around them,” Lusardi said. “Some of these concepts are actually not even intuitive.”
And given that 18-year-olds can get six-figure college loans that could shape the rest of their lives (and impact society given that $1.3 trillion of student loans are outstanding), Lusardi said she believes America must make financial literacy a top priority.
Clearing The Hurdles
But she said getting financial education into schools isn’t easy, even though many school districts express interest in adding it.
Unfortunately, there is no shortage of logistical hurdles in the way. That’s why GFLEC has created “Fast Lane,” a one-stop digital hub that gives schools methods and mechanisms to quickly roll out financial education to their students.
For example, if schools say they can’t develop a whole new financial education course, GLFEC offers strategies for building financial education into existing math or civics classes. Money is also typically an issue.
“Often we hear: ‘We don’t have the money to buy the textbooks,’” Lusardi said. “That’s when we say they could try to ask their local business community. Often, these are not huge costs. It is about picking up $1,000 to buy textbooks for the students, [and] a local business is happy” to help.
But the biggest challenge GFLEC faces is the idea that financial literacy is somehow different from reading, writing or arithmetic — not absolutely necessary to teach. Or people push back ideologically, believing that financial education is a political position meant to indoctrinate capitalism into the young.
And sometimes the group faces opposition from those who feel teaching financial literacy will somehow put financial professionals out of business because people will manage their own money. But Lusardi said that’s ridiculous. Teaching someone to read isn’t the same thing as expecting them to write a novel, nor is showing someone the basics of compound interest going to turn the person into a financial wizard.
FinTech Is A Tool, Not A Replacement For Knowledge
It’s also true that the rise of FinTech has changed financial literary some, as various companies aim to help consumers automate their way to financial savvy. But Lusardi said technology is an excellent supplemental tool to layer over financial education — not a replacement for it. In fact, things actually turn out badly when people are technologically sophisticated but not financially literate.
“Unfortunately, what we have found is that the people who are using technology [without financial knowledge] are doing worse with their financial behavior,” Lusardi said.
The tools that FinTechs put in people’s hands can only help strengthen someone’s financial position if the person knows how to use them. Without that baseline knowledge, people are unlikely to optimize such tools’ settings, the expert said.
The good news is that so far, no one is pushing back on financial literacy as a concept in the pandemic’s wake, Lusardi said. That wasn’t true last year, when countless think pieces pushed back against the idea.
But with 2020’s economic instability in full swing, no one is arguing against helping Americans run their financial lives better. Lusardi said the challenge now will be keeping the commitment going — and making financial education as much a part of everyone’s schooling as learning to read is.
“I really hope that we take [financial literacy] up because we need help here,” she said. “It’s not happening if we don’t push [financial education] into the important role it needs to play.”
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