By Brittney Dunkins
As 2014 begins, many Americans are preparing to make major financial decisions, from a down payment on a new home to a career change.
But varied predictions for U.S. job and industry growth and a slowly recovering economy make it difficult to gain a full picture of financial health, especially if you lack a basic level of financial literacy.
According to findings from a national study conducted by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation, many people find themselves in this position. The study indicates more than half of those surveyed have an inadequate understanding of how to manage their finances and assess economic trends.
George Washington Today spoke with the School of Business Denit Trust Distinguished Scholar in Economics and Accountancy Annamaria Lusardi about the importance of financial literacy and tips for managing personal finances.
Q: What is financial literacy? What is the best way to gauge if one is financially literate?
A: One informal definition is the knowledge of concepts that are the basis for financial decision-making, in other words, knowledge of the ABCs of finance. There is a simple test to judge your financial literacy and even see how you compare with the national average and the average in your home state. This test is part of the work that the GW Global Financial Literacy Excellence Center is doing in collaboration with FINRA Investor Education Foundation.
Q: Why is it important for people to have sound financial literacy in today’s economy?
A: Today, we make many more financial decisions than in the past. For example, we have to decide on retirement savings and how to invest those savings. We make those decisions using far more complex financial instruments than in the past. The opportunities to borrow have also increased. Young people have to make critically important financial decisions, such as how much to invest in education and how to finance that education. Poor financial decisions carry far-reaching consequences, from financial insecurity, to declaring bankruptcy, to facing a lifetime of low and stagnating wages.
Q: What are some key tactics to attain financial literacy?
A: My top recommendation is to take a course on personal finance. We offer such a course at the university, “Financial Decision-Making: Implications for the Consumer and the Professional,” and it starts this week! If you are not a student or cannot take a course, look at resources offered by your employer, often human resources offices offer seminars on specific financial topics, such as growing your savings, investing in retirement and planning for large purchases. Institutions like FINRA Investor Education, the Securities and Exchange Commission and the National Endowment for Financial Education have web sites devoted to financial education. And there are financial literacy games, such as those by Doorways to Dreams Fund.
Q: When do you recommend that people begin learning about finance and economics?
A: As early as possible. Financial literacy belongs in school, and it should start during kindergarten. Learning should come as soon as children start receiving money, for example, from the Tooth Fairy.
Q: As a professor, what trends have you noticed in the level of financial literacy among university students?
A: The level of financial literacy among university students has not improved over time, but this is not surprising. Without financial literacy in school, we cannot expect people, especially the young, to learn on their own. Given the low levels of financial literacy among the general population that have been documented in many studies, we cannot expect young people to learn from mimicking those around them.
Q: Given that we are at the beginning of 2014, do you have recommendations for financial resolutions in the New Year?
A: The most important resolution is to pay closer attention to your finances, or start paying attention if you do not already. Like a health check-up, it pays to catch problems early. Do you know how quickly debt doubles if one borrows at a 25 percent interest rate? Or how slowly you can grow savings by leaving them in a checking account? The financial decisions we make have important short-term and long-term consequences. Now, about that money from the Tooth Fairy…