What it is and why it’s so important to include it as a fundamental part of our education. And a test you can take
Literacy is the ability to read and write; financial literacy is having the knowledge and skills to make sensible financial decisions, such as budgeting and spending, and saving and investing, and borrowing. Both forms of literacy require education. Literacy skills are automatically included in the school curriculum; financial literacy skills are not.
The result is that, though rates vary across the world, overall 84% of the world’s adults can read, but only 33% are financially literate. Most adults lack an understanding of basic financial concepts.
It’s tough to imagine a world without education. We accept that education is a direct cause of improved health, improved productivity, higher income, greater self-confidence, etc etc etc. Education used to be a blessing. Now it’s a necessity. So it’s distressing that practical aspects that contribute to financial literacy aren’t automatically included.
What does education do for us? Two kinds of things.
First, and very directly, it helps us understand things around us – people, the way the world works, a framework for thinking about things. That’s a wonderful preparation for life.
Second, and indirectly, it teaches us to think. We get learning techniques. So when we encounter new situations and new problems, we’re not totally lost. That framework helps us cope.
If only we could all cope with basic, everyday financial problems!
In June I had the pleasure of interviewing one of the world’s foremost financial literacy experts, Dr Annamaria Lusardi. (To me, she is the foremost expert! She is one of my heroes.) Among her distinctions is that she is the University Professor of Economics and Accountancy at The George Washington University, a very eminent position, as well as the Academic Director of the Global Financial Literacy Excellence Center. Her doctorate is from Princeton, and (in a long list of similar activities) she chaired the financial literacy experts PISA committee, PISA being the global test of the ability of 15-year-olds. Not only is she frequently quoted by newspapers and on TV, she has also written books and papers that have been cited literally thousands of times. Personally I think of Anna as a charming and friendly human being, and it was such a pleasure to chat with her again.
I conducted the interview for the Pensions & Investments (P&I) World Pension Summit, of which I have been an Advisory Board member for many years.
Here’s a link to our 26-minute discussion: https://www.pionline.com/video/board-talk-full-don-ezra-annamaria-lusardi-gflec-wps2021.
In it I asked her:
- What would be different if the world were more financially literate? In other words, what are the benefits? – to individuals, to their employers, to the world.
- Our audience is in the business of pensions, in different roles. They may be parents, or even grandparents. How can they help the young ones in their families become more financially literate? And if the kids reach work without an adequate background in financial literacy, what can their employers do, to help?
Those were fundamental questions. In addition, I asked some questions relating to the current scene. I asked for her comments on:
- how late-in-life debt is remaking retirement, and what can be done about it;
- what’s ahead for investor education and investor protection, as we move out of the pandemic;
- the stock market participation of women (and until Anna explained it, I hadn’t realized what caused such a large gender gap between men in women in this regard).
Was there anything she wanted to talk about that I hadn’t brought up? Yes there was: inequality, and how democratizing financial literacy can help protect people against financial shocks.
I took notes all the way through, because I learned so much.
We concluded by asking each other what is the best piece of advice we’ve been given. That’s the (by now) standard ending to the series of Board Talks that the Advisory Board members are making. Anna’s advice is a rule we should all live by, but I won’t tell you what it is – listen to the interview.
To my surprise, it turned out that my response has been well received too. In fact I actually had no idea how to respond! But since I knew I would be asked the question, I asked my wife Susan in advance to help me answer it, as she knows me much better than I know myself. And she came through! After our discussion formally ended, Anna and I talked about it a lot.
Here again is the link to our discussion: https://www.pionline.com/video/board-talk-full-don-ezra-annamaria-lusardi-gflec-wps2021. I have no doubt that you’ll thoroughly enjoy it!
And it’s a huge pleasure to acknowledge how much Mirjam Guldemond, of the P&I World Pension Summit, helped to make it happen and assembled the final version. Mirjam, you know how much I admire you and how grateful I am, not only for this but for all your help at the Summits over the years.
While on the subject of financial literacy, via LinkedIn earlier this year I heard from Mark Coan, founder of Moneysherpa, an Irish firm that, as he puts it, helps people to make better money choices through financial education.
I very much like his thoughts on financial literacy, especially in the context of all that I learned from Anna. Here’s a link to a specific piece I like: https://moneysherpa.ie/financial-literacy-survey-data/. I particularly like the quick financial literacy test in it, one that has five questions that are not country-specific but have the same answers anywhere in the world. When you answer them online and get your results, you get feedback from which you learn from any that you may have answered incorrectly. Mark says that to pass the test you only need to get 3 of the 5 correct, yet only 33% of 150,000 people globally were able to do that.
I also like his 6 steps to “money zen” which, while it has an Irish context, also contains global truths: https://moneysherpa.ie/the-6-steps-irish-money-guide/#step-1 .
So I thought this would be a nice added resource for you, my readers. Hope you like it!
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.