Annamaria Lusardi, professor of economics and accountancy at the George Washington University School of Business, has spotted an unusual pattern when she looks at the results of multiple financial literacy surveys.
“Women disproportionately say, ‘I do not know,’” Lusardi says, reflecting on this month’s survey results examining financial literacy.
“The reason we know it’s gender is it happens in all of the countries,” including the U.S., Italy, Switzerland, Australia and Brazil. In addition, the frequency of “I don’t know” responses increases with more heavily jargon-laden questions, she says.
Rather than worry overly about the persistent gaps in financial literacy gaps between men and women financial literacy and fluency, Lusardi is focused on fixes for closing the divide.
“Their knowledge is lower — but they are also more aware of their lack of knowledge potentially than men,” she says. “When I see this evidence, I see not just the negative but also lots of possibility.”
The best place to start, if Wall Street wanted to help people really understand what was going on — not just women, but all non-professional investors and especially younger, more novice investors — would be reducing jargon as a barrier to understanding financial topics, she says.
“Start with plain English,” she says. “We should stop pretending that people know this language of finance …that’s not the language we speak. We cannot pretend people understand the language of professionals.”
The Two Things To Master First
That seems unlikely, though. Luckily, you don’t need to get your MBA to get a lot better at personal finance quickly, nor do you need to be intimidated, she says.
Lusardi advises that you start by mastering two concepts: Risk and compound interest. Of all financial topics she has focused on, these are the two areas Lusardi finds are most crucial.
They form the underpinnings for most major financial decisions from choosing investments, to comparing those risks and returns to developing a long-term plan.
The takeaway about risk she encourages everyone to grasp is that “every financial decision is about the future which is uncertain — we have to understand we are always dealing with a situation not in certainty,” she says.
As for compound interest, it’s critical because developing an inherent sense of interest rates, the long-term effect of how fast savings can double may be more motivating toward saving for a future goal that otherwise can seem impossible.
Yet based on her experience, the best way to understand it quickly is to look at its inverse: Debt. Debt, she says, resonates most deeply when illustrating the power of compound interest.
As an example, she likes to illustrate the true cost of buying a computer with a credit card. Imagine purchasing one for $1,000. If your card levied an 18% interest rate and paid only the minimum payment, you would effectively pay almost double.
Appreciating the value of compound interest is at the heart of avoiding and managing debt — but also building wealth.
The so-called rule of 72 similarly can be a simple and effective tool to assess how quickly debt — or wealth — can accumulate.
“It’s really important to start to save early — that time works in our favor,” she says.
“Young people have an incredible asset which is time — what I tell my students is ‘when they sleep, interest compounding is working for them.’”
Auto Pilot?
What about just turning over your investments to professionals—or, increasingly, to decision-making algorithms and systems of behavioral nudges that do everything from automatically enroll you in a 401(k) to balancing and increasing your savings?
That may be tempting, but it’s still no substitute for understanding what’s actually going on with your money, Lusardi says.
She urges people — especially women and young savers — to dig into learning the fundamentals.
“The best thing for people is to understand,” she says, pointing to how many more complex decisions most of us face from choosing a mortgage to selecting a credit card.
“Even a basic understanding of finance and being able to make savvy financial decisions has become a lot more important today.”
