Improving Our Financial IQs- Why Managing Money Should Be a Lifetime Skill

Fantastic and highly recommended for everyone……

Introduction (via Wharton)

It’s no secret that many Americans are financially illiterate — unable to understand basic principles of money management, including how to save, invest and manage their money. To address this situation, Wharton, Dartmouth and the Rand Corporation have established the new Financial Literacy Center, which will develop “educational materials and programs that help foster saving and retirement strategies over the life cycle.” Annamaria Lusardi, an economics professor at Dartmouth, will lead the new Center with Olivia S. Mitchell, professor of insurance and risk management at Wharton. They will be assisted by researchers from a variety of organizations. Lusardi — along with Michelle Greene, deputy assistant secretary for financial education and financial access at the U.S. Treasury Department — spoke with Knowledge@Wharton about the need for financial literacy training and tools, the reasons why Americans tend to be ignorant when it comes to money matters, and why it’s especially important to teach smart spending and savings habits at a young age.

Important Excerpts (via Wharton)

Knowledge@Wharton: Annamaria Lusardi and Michelle Greene, thanks for joining us. Annamaria, let me start with you. What specifically are Americans most ignorant about when it comes to managing their money? And just how bad is the situation?

Annamaria Lusardi: According to a new financial capability survey, we found that financial illiteracy is widespread — meaning that a lot of Americans don’t know the basic concepts of economics and finance. But it goes beyond financial knowledge. What we also found is that people are not particularly good even in their everyday management. For example, a [certain number] of people overdraw their checking accounts, are late in credit card payments and pay a lot of credit card fees. [Especially] alarming is that many people don’t hold a buffer stock of savings, meaning they are vulnerable to the many shocks that can happen to them.

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Greene: I would say that you have to start younger than high school. Some of the very basic concepts [are] about needs versus wants — about deferred gratification, about [learning] that saving for later can help you get something more later. I think you really need to start building on those concepts much earlier than high school. High school is a time when you can start getting into some of the topics that you mentioned, which people will need as they enter their own adult lives and start taking responsibility for their own finances. The teacher issue is a huge one, and I think teacher training has to be a part of the solution. Ideally, in the long term, it would be terrific if we could get more of this training into teachers colleges so that teachers feel more comfortable [with the subject] and can [teach it to their students].


Knowledge@Wharton: What do you think is the biggest impediment to Americans learning about money management? It seems to me it might be lack of time. It might be a feeling that they really don’t have that much control over their money or certainly not over the economy. Maybe it is just fatigue from looking at all the options out there — including all the new financial terms they feel they need to know in order to make wise decisions

Lusardi: All of the things you have mentioned are important. I think that financial decisions per se are complicated, and are made more complex by the complexity of the financial markets. We have to take that into account because we need to find ways, first of all, to simplify information. And we need to find a way for people to be able to [access] good sources of information. Time is definitely important. That is why we need to find a way to provide information when it is needed. We need to use the times when people are making decisions, for example, as teachable moments to simplify those decisions and provide information.

An example is when people are filing taxes or when people are first hired [at new jobs]. We have shifted onto the individual the responsibility to make financial decisions. But it is very important to understand that these are difficult decisions and to find ways to provide helping tools. One tool is financial literacy…. We need to make improvements and equip people with the tools that are necessary for making good financial decisions.

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