Wednesday, May 13, 2015

The cost of sofas and mutual funds

This is the original and longer version of the blog I wrote for the Wall Street Journal. You can see the posted blog at:

Starting out as an assistant professor more than 20 years ago was truly exciting, even though the move was full of problems and it took months to settle into a new place. The day I showed up in the Human Resources office to enroll in health and pension plans, I was handed a bunch of brochures and asked to fill out a stack of forms. I spent most of the time focused on the health plans and their varied coverage.
When I turned to the pension plans, I had to choose among three providers and a long list of investment funds, from money markets to stock funds. I am not exaggerating when I say I took less time to choose where to put my retirement savings than I did to buy a sofa that morning. As an economist, I thought I should know about investment. I selected a global stock fund, looking at nothing else but where it was invested.
Months later, my colleagues in the economics department told me about the Supplementary Retirement Account (SRA) that the college offered. That’s where I could put money, tax-free, for retirement. Signing up for it was extraordinarily cumbersome. I needed my employee ID (a number I still cannot remember, let alone find easily) and was rushed to fill out all of the information in 20 minutes before the online system closed for security reasons. It took me several attempts to sign up and, again, little attention was devoted to where the money was invested.
I blame the harsh life of an assistant professor that I paid so little attention to my retirement savings and investment decisions. It was not until I received tenure and started my research work on financial decisions that I revisited what I had done with my personal finances. Changes were much needed. I began contributing the maximum amount to the SRA, I opened a Roth IRA and I moved all of my savings from high-fee international funds to index funds and built a more diversified portfolio.
Smart choices matter in finance. Small investment mistakes we make early in life, such as ignoring fees or failing to take advantage of tax-favored investments, compound over time and become large. I tell my investment-choice story to students in the personal finance course I teach to show them that finance truly is personal—and we must make time for it. I still have that sofa I bought in my first year as an assistant professor. If I had taken time to compare mutual funds in the same way I compared the cost of sofas, I would have the money today to refurnish my entire house.

Sunday, April 19, 2015

Financial Savvy Key to a Secure Retirement

I have started to write a blog for Forbes, and I hope you will follow my blogs there. I provide the link below. However, I will keep posting the blogs here as well as I sometimes write a longer text than what is published online.

Over the last 40 years, we as individuals have been given increasing responsibility for ensuring our own financial well-being in retirement. But it’s gotten quite complex, with an alphabet soup of retirement saving vehicles – from 401(k) to 403(b) plans to IRA and Roth IRAs – and our responsibilities loom large. Not only must we figure out how much to save and how to invest our retirement assets, but we also must take advantage of a variety of tax-favored assets, employer matches, payout options, and much more.  

In my research, I investigate how well-equipped we are to make such complex financial decisions. For instance, how much do we know about the power of compound interest, so we can appreciate how critical it is to save early and grow our money tax free? Do we know how to diversify risk? Such knowledge provides a firm foundation for good financial decision-making over the entire lifetime.

To gain an understanding of the level of financial literacy in the population, Olivia S. Mitchell and I designed and fielded three key questions which have now been used in a large number of national and international surveys. We have also administered the survey to a variety of employees at large companies, to see exactly what they know – and don’t know.  

Try the quiz yourself (right answers are in bold)

1. The Interest Rate question (Numeracy)
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?
More than $102
Exactly $102
Less than $102
Do not know
Refuse to answer

2. The Inflation question
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?
More than today
Exactly the same
Less than today
Do not know
Refuse to answer

3. The Risk Diversification question
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.”
Do not know
Refuse to answer

Our findings in the US and around the world proved to be shocking! Only one-third of Americans can answer all three questions correctly. And while one might expect that the more experienced would be substantially more financial literate, this is not the case. In fact, older adults are not much savvier than the young, despite their having had to make many financial decisions including about retirement savings. We also find that financial illiteracy is particularly severe among certain demographic groups, such as the low paid, women, and young adults. Moreover, when we take our financial literacy survey abroad, the results are not much better! Respondents in Australia and Germany do perform better, while thus far we see respondents in Eastern Europe and Russia are the least financially savvy. But all of us have a long way to go.

I worry a great deal about such low levels of financial literacy, because retirement planning requires a modicum of financial sophistication -- and planning is a strong predictor of retirement wealth. According to our research, those who plan accumulate up to three times the amount of wealth of non-planners. The data shows the link to financial literacy is very strong; it is those who are financially literate that plan for retirement. And without basic financial skills, people get into trouble young, taking out payday loans and overdrawing their credit cards, and they stay in trouble later, by failing to pay down their mortgages and borrowing against their retirement accounts.

Granted, raising our nation’s financial savvy will require costs and effort. Nevertheless, there are costs of ignorance, including not saving, not being able to retire, and being poor during one’s later years.

Saturday, April 18, 2015

Three Key Concepts Every Personal-Finance Class Should Teach

I have started to write a blog for the Wall Street Journal, and I hope you will follow my blogs there. I provide the link below. However, I will keep posting the blogs here as well as I write a longer text than it is published because there is a hard word limit at the WSJ.

More than ever before, we must make financial decisions that are important and consequential. How much should we contribute to retirement accounts and how should we invest our retirement savings? Should we enroll in a health insurance plan with a low or high deductible? What do we need for our children’s education? Household finances have become sufficiently complex that simple intuition or the advice of family and friends is not enough to guarantee good choices.
There are courses in corporate finance and specialized curricula for managing firms’ finances, but what is available when we serve as our own Chief Financial Officer (CFO)? Fortunately, personal finance is a subject making its way into schools, from high schools to colleges to graduate programs. Online courses are also springing up, and some employers have started to offer financial education programs to their employees.
What should the content of such courses be? As member of the Board of Directors of the Council for Economic Education, I served as an adviser on the National Standards for Financial Literacy. From these standards, we can identify some of the crucial concepts that everybody needs to make informed financial decisions. I am going to focus on just three, the Big Three as I tell my students.

One fundamental principle of personal finance is the power of interest compounding. This knowledge is key for saving, borrowing, and investing decisions. It enables us to understand, for example, why it is important to start to save early. And we need to do calculations to see results. If I borrow at 20 percent on my credit card, how long does it takes before my initial debt doubles? If expenses and fees reduce my rate of return by one percentage point, how is my wealth affected over a 30-year horizon?
Because financial decisions are inherently about the future, we must consider how money’s purchasing power changes over time. We must also acknowledge that the future is uncertain. That brings into play two more building blocks: knowledge of inflation and risk. Distinguishing between real and nominal values is essential to keeping a stable standard of living over a lifetime. Indeed, personal finance is where we can fully appreciate the critical role the Fed and its monetary policy play, especially when it comes to low and stable inflation and its implications for financial planning.

Knowledge of risk and risk diversification is at the basis of portfolio choice. We can formally prove that the old adage “do not put all of your eggs in one basket” is, indeed, good advice. Even more, we can learn how to implement it well. Moreover, we can protect ourselves and our wealth from the many sources of risks: interest rate risk, health risk, and the risk of living too long!
The Big Three are the stanchions of a personal finance course we launched three years ago at the George Washington University School of Business. While I cannot say whether this course will lead to smarter financial decisions, students’ eagerness to enroll, performance on the tests, and comments when they complete it give me much hope.

Saturday, January 10, 2015

Highlights from 2014: Notes from my travels

As in my previous post, I would like to continue to reflect on highlights from last year. One of the advantages of founding and directing a global center is that I get to travel a lot. In the Fall 2014, I travelled to seven countries on two continents. I cannot tell you how much I have enjoyed it, even though I had little time to do anything else, including write my blog.

There are many things that surprise me as I attend conferences, meet people, and make my way through various cities. First, it is surprising how many similarities I’ve found across countries that we usually consider to be very different. I was at a restaurant in an unnamed city that was so special it could have been a very popular dining destination in New York, London, Rome, or Hong Kong, but it was in none of those cities.  And while the food has been good, the traffic has been bad and seems to be getting worse in every city around the world; this is not just a feature of Rome or Washington, DC.
And there are differences that also work in surprising ways. We refer to countries as “developed” versus “developing” or “emerging,” of course with the assumption that the developing countries have a host of problems to solve. One of the things I have started to notice in the supposedly “developing” countries is that women are often in positions of command. I was invited to speak at a conference in an “emerging” country where the rector from one of the oldest and most prestigious universities is a woman and where women are at the top management levels of financial institutions. In another developing country where I attended a conference at the beginning of the Fall, the chair of my session was a very famous journalist and, again, a woman.  Developed countries have well-developed markets, well-developed institutions, and good education systems, yet women are paid less than men, and finding women in positions of power is often rare if not impossible.  So watch out young people (young women)!
Another thing I have observed in the “developing” countries is that young people get good jobs. It is not unusual to see directors and managers who are under 30 or 40 year old, and I did not get the impression that they were considered inexperienced or less competent because of their age. In many developed countries, the unemployment rate among the young is so high that I am not sure why we do not consider it a crisis. In my native Italy, if you leave your parents’ home before age 30 or 40, you are considered an adventurous person who does not understand what a jungle it is out there.
I think we may want to change our terminology: we may want to refer to market economies as either “mature” or “young” because the lines between developed and developing countries are starting to be very blurred and there is not always such strong evidence of progress—as the term “developed” seems to imply—on how women and young people are faring in some of these supposedly developed countries. 
These are some observations from my travel last year and I hope to keep writing while sitting on airplanes…

Thursday, January 1, 2015

Financial Literacy Highlights of 2014: The PISA data

I am starting the new year by looking back and thinking of the highlights of 2014. For me, one event stands out: the release of the Programme for International Student Assessment (PISA) data, which measures the financial literacy of 15-year-olds around the world. I am very proud that the Global Financial Literacy Excellence Center (GFLEC) hosted the U.S. release of the data and that we did it in collaboration with three of the most important institutions for financial literacy: the Department of Education, the Consumer Financial Protection Bureau, and the Department of the Treasury. While my team can tell you that the months before the event were really hectic, my preparation actually happened over several years.  It started when the financial literacy expert group that was asked to design the financial literacy assessment for PISA first met. It was in Cambridge, Massachusetts (MA), and we all felt we were starting to work on something very important. Since that meeting, I had been waiting for the day when the data would be made available. That day was July 9, 2014.

The data was accompanied by a report that was written over a period of time (hence the different timing than the data release for other PISA subjects) and that can be accessed on the OECD’s and GFLEC’s website (see  A lot has already been written about the PISA financial literacy data and rather than summarizing the many findings, I would like to highlight three main facts from these important data.

1)      There are large differences in financial literacy across the 18 countries that participated in the assessment. It is not the countries that have the most developed financial markets or the highest Gross Domestic Product (GDP) per capita that rank at the top of the financial literacy scale. On the one hand, this should be a worry for rich countries, as it shows that their youth is not well prepared to deal with the complexity of these economies. On the other hand, it shows that financial literacy is not acquired informally, simply by living in economies with sophisticated financial markets (financial literacy does not come in the milk bottle.).
2)      There are wide differences in financial literacy within the countries that participated in the assessment. One of the most interesting findings is the difference between male and female students. Many have noted that, on average, there are no gender differences in financial literacy. This requires some clarification. We have worked very hard at designing questions that are gender neutral, and the methodology itself (some questions have open-ended answers, so respondents can answer in their own words) can soften the differences we have observed in male and female responses to financial literacy questions among adults. But gender differences are still present at these early stages of the life cycle. In fact, looking deeper one finds that boys are more likely to locate at both the top and bottom levels of the financial literacy scale than girls.
3)      A sizeable amount of the variation in financial literacy is accounted for by socio-economic status; in other words, the income and education levels of parents matter for youth financial literacy. This is a finding that we have documented among other age groups, for example young adults (age 23 to 28). It shows that differences in financial literacy start to emerge early in life, and depend on the family students are from. This is a worrisome finding, and in my view, one of the main reasons why we need financial literacy in school—to try to create a level playing field. This is the topic we discussed at the conference GFLEC organized jointly with the OECD last November titled “Toward a more inclusive society.” These are also my wishes for 2015: Having financial literacy in school and a more inclusive society (the two topics are related, but, okay, I like to dream big!).

Let me return to July 9, 2014, the day of the PISA data release.  As I mentioned earlier, for the financial literacy expert group (and many were there on stage at the Washington, DC, event), it was a day we had been waiting for for many years, since that first meeting in Cambridge, MA.  And as the data was being illustrated on slides, discussions, testimonials, and reports, we felt we had laid the first brick of a financial and economic structure that includes financial literacy. For me, this was the best day of 2014.

There are a lot of advantages to organizing the release of important data. You get to invite and meet famous people. You get to bring together representatives of important institutions. You get to hear new ideas. You get to test the patience and ingenuity of your collaborators. Arne Duncan, the U.S.  Secretary of Education, came to speak at the event. He is a very charismatic leader and I got to interview him on stage. He sent me a handwritten thank you note afterward, and I have framed it!

Happy new year.

Saturday, July 19, 2014

Hosting the US release of the the Programme for International Student Assessment (PISA) financial literacy data

I have not written for a long time and the reason is because of new data (only economists say these things).  I am returning to write because the data is finally out and there is a lot to report about it. I will start with the opening remarks I gave at the U.S. release of the Programme for International Student Assessment (PISA) financial literacy data, but a lot more is coming. I am so happy (I hope there are other people in the world who are happy about data!).

I am Anna Lusardi the Academic Director of the Global Financial Literacy Excellence Center, or GFLEC. We are delighted to host the US release of the PISA financial literacy assessment in collaboration with three of the most important institutions for financial literacy in the US: The Department of Education, The Department of the Treasury, and the Consumer Financial Protection Bureau.
We’ll be talking a lot today about the importance of financial literacy for young people. I am happy that we have many members of President Obama’s Advisory Council on Financial Capability for Young Americans here today. They join us both as speakers—including the chair of the Council—and in the audience.

For the financial literacy expert group that designed the PISA assessment, this has been a long journey. We first met in 2010 in Cambridge, Massachusetts, where I was asked to chair the group. For the next 2.5 years, we met regularly – in five different countries — to work on the assessment. And now many members of the group have traveled yet again — some from as far as New Zealand — to be here. I want to thank that work team for an exceptional collaboration. For us, this is a day of celebration.

We are at the beginning of something momentous. The new PISA data will serve as an important tool in helping us assess how much the young know and to guide programs and policies that can improve financial literacy among young people.   

To help us understand the data and how it can be used, we have Andreas Schleicher from the OECD here. Andreas, who has been in charge of PISA, travels around the world advising countries on their educational policies.  We are so fortunate to have him here today. The OECD was visionary in unveiling the PISA initiative in the year 2000, and it showed leadership again when it added financial literacy to the assessment in 2012. At GFLEC, we are very proud of our collaboration with the OECD.

Also this morning we will hear from two speakers whose financial literacy work goes back many years. Secretary of Education Arne Duncan will discuss the PISA findings together with John Rogers, the chair of the President’s Council on Financial Capability for Young Americans.  And we will hear from Richard Cordray, the Director of the Consumer Financial Protection Bureau, and Mary John Miller, the Under Secretary for Domestic Finance at the US Department of the Treasury. The word passion has come up when they speak about financial literacy.

For most of us here today, it is hard not to be passionate about this topic. Financial literacy is critically important for young people. While still in high school, students face life-changing decisions – notably about whether to continue their education and how to pay for it if they do. Financial literacy is also important for job readiness. But financial literacy may remain elusive unless we identify how – and where – financial education can achieve effective results.

There’s no question that it “takes a village” to make progress on financial literacy. That’s why I’m so pleased to have representatives from the private sector, from universities, and from other institutions join our conversation today. I know some of them are working on innovative ideas. In particular, I’m grateful to PwC for its support of this event. We will hear more this afternoon about the impressive work they are doing on financial literacy in schools.

You’ll also hear from students as the day goes on, and at the end of the day, from a surprise guest – although it might be hard to hide her all day. Who better to motivate and inspire students than a star athlete? At the George Washington University School of Business, we have a customized executive MBA program – STAR EMBA. “STAR” stands for Special Talent, Access and Responsibilities. One of our STAR “students” will join us on stage at the end of the day.

The broad impact of the PISA assessment cannot be underestimated. It has already sparked others to collect more data. McGraw Hill Financial and Gallup, for example, have launched the Global Financial Literacy Research project, which is collecting financial literacy data among adults in 148 countries. This adds data from a different age group and a larger set of countries. I’ll be working on this project, too, and I am excited about how this will enrich our understanding of financial literacy. And I would like to thank McGraw Hill Financial too for their support.

Please take note of the title of PISA’s latest volume, “Students and Money: Financial Literacy Skills for the 21st century.” Just as it was not possible to live in an industrialized society without the ability to read and write, so it is not possible to thrive in today’s world without being financially literate. 

Tuesday, December 24, 2013

Financial literacy in school is common sense

On my plane to London and then Milan, Italy , a few days ago, I picked up the Financial Times, a newspaper I particularly like, but that I normally read online. The week-end edition had a FT Money section, which was reviewing the main events of 2013. As I was browsing through the articles, I noticed one that was titled: “Cheer up, 2013 wasn’t as bad as we thought” by Jonathan Eley. It was about the UK and the author listed five reasons why 2013 was actually much better than it looked. I reported below his number 4 reason in quotation marks:
“Children will be taught about money. What was the best thing the government did this year? For me, it wasn’t putting Aim shares into Isas; it was putting financial education into the national curriculum. This passed barely noticed, won’t come into effect until next year, and will take many years to bear fruit. But it’s vital. We cannot expect young people to take responsibility for their own financial future unless we give them the skills and knowledge to do so.” 

 I report the link to the article at the end of this post, if you want to read the other four reasons why 2013 was not as bad.

I was pleasantly surprised to read this article, but it also made me realize that adding financial literacy in school has become common sense. Anyone who understands the changes in the current financial environment can see that the new generations will need new skills and these skills are best acquired in school. It is a simple argument and I hope not just the UK but other countries as well will think of adding financial literacy in school in the new year.

As I landed in Milan, I was determined to do some qualitative testing on my favorite subject: my little niece Giorgia. So after the many hugs and kisses I get when I come back to Italy and while I was looking at the new drawings she did for me, I asked her whether she was interested in learning about money. I was not even done asking the question that she jumped from the chair and she went to get her piggy bank. I was amazed by how much money she had in there. It was obvious that we had to go beyond the lesson on money, we had to talk about investment. So I told her that she should not leave the money in a piggy bank, she had to put the money at work. And while I was thinking of creative ways of explain that to her, she told me the she and her schoolmate Michelle were thinking if Santa Klaus needed help with his toy factory, an idea suggested by one of the parents.

 The morale of this story can be summarized as follows:
1)      It is never too early to talk about money to children;
2)      It is best if money is learned at school, so we do not have to spend our time thinking of ways to teach money ourselves (I do it for living, but in my case as well I would prefer to play checkers with Giorgia);
3)      It Santa Klaus were to do an IPO, we will be ready to invest. For the moment, indexed funds will have to do;
4)      The new year will not be as bad if we have financial literacy in school. 

Here is the article. The online version was titled: Five reasons why 2013 was better than it seemed