(Hint: If you can’t, you’re in good company, but you’ll need to take a few extra steps to stay on track financially).
I’m always interested in new research on women and financial literacy from Annamaria Lusardi, chair of economics and accountancy at the George Washington University School of Business, where I completed my MBA. Dr. Lusardi is one of the foremost experts on the subject of financial literacy in the world and heads up GWU’s Global Financial Literacy Excellence Center.
Why should we care about financial literacy?
First of all, let Dr. Lusardi explain why financial literacy is important. “Financial ignorance can be expensive or even ruinous,” she writes. In today’s world, ordinary people are required to make important financial choices, like how much to save, what kind of mortgage to apply for, or how to invest their workplace retirement funds. If they don’t understand how to make good choices, the results can be disastrous.
Financial literacy is especially important for women, because they live longer on average and need their money to last longer. Most women – whether widowed, divorced, married or single – will handle their own finances at some time during their lives. If women, on average, have lower levels of financial literacy and do not obtain high-quality financial advice, Lusardi says they may be at risk of failing to plan for retirement and making other financial mistakes.
The sad facts: men and women consumers – especially those under age 35 – don’t understand basic financial concepts
Lusardi’s recent survey showed low levels of financial literacy in the U.S. and other developed countries. Both men and women scored badly, although women did worse on average than men. Respondents were asked three questions. Only 38% of men, and 22% of women got all three right. Here’s one of the questions (you can read all three at the bottom of this page):
Question: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a). Less than $102
b). Exactly $102
c). More than $102
Lusardi says that the knowledge gap between men and women does not appear to be narrowing over time, despite more women entering the work force and handling family financial responsibilities (surprising when you consider that a full 40% of women are now the primary breadwinners in their families).
Alarmingly, financial literacy is worse still in the under-35 age group, where only 26% of men and 12% of women got all three financial literacy questions right.
Writes Lusardi: “This is worrisome because young people have to make many important financial decisions—from whether and how much to invest in education to dealing with credit cards and other debt to contributing to retirement accounts— and women seem less equipped than men to effectively do so.”
So if financial literacy is not your strong suit, here’s a few steps you need to take
We’re all not going to run a marathon, cure cancer, or become financial geniuses. But if finance is really a foreign language to you, you’ll need to take some extra steps to protect yourself and keep your finances on track.
Learn: You can start by making a commitment to learn more about your money. The more you read about personal finance – and there are plenty of free resources online – the more you’ll understand and be prepared to make informed decisions. Try ConsumerReports.org, Kiplinger.com, or SmartAboutMoney.org.
Share: Reach out to other women – your mother, your daughters, your friends – to encourage more conversations around the dinner table, in the break room, or in the wine bar about saving, investing, budgeting and setting goals. The first step toward understanding and mastering money is to talk about it.
Practice: Nothing beats hands-on practice. Think money is boring? It’s much less boring when it’s your hard-earned dollars and cents. Open a Roth IRA. Review your own 401(k). Comparison shop for better car insurance. Look for a more rewarding credit card.
Delegate: If personal finance is really not your cup of tea, that’s OK. Consider hiring a professional adviser. (Believe it or not, the people who scored highest on the financial literacy survey were those who are working with professional advisers. Advisers don’t just help you make money. They also help educate you). Good advisors can help you avoid expensive mistakes, demystify financial decisions, and direct your financial resources toward giving you and your family the best life possible.
Global Financial Literacy Survey Questions:
These three questions test your knowledge of simple interest rate calculations, inflation and risk diversification.
1). Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
Possible answers: More than $102; Exactly $102; Less than $102
Correct answer: More than $102. The future value of your savings account would be $110.41.
2). Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
Possible answers: More than today; Exactly the same; Less than today
Correct answer: Less than today. Your investment of $100 would be worth $101 after 1 year, but inflation would reduce the purchasing power to $99.02.
3). Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
Possible answers: True; False
Correct answer: False. Diversifying your stock portfolio reduces risk by protecting you in the event one stock’s value plummets. Holding one or even just a few stocks subjects you to greater risk.