Advice to freshmen

As I walk through college campuses this fall, I can easily spot the freshmen. They are identifiable not so much by age (although they look younger every year) but by the look on their faces: that unique mixture of surprise, excitement, and fear that accompanies the start of the first year of college. There is so much to do and to learn and there’s no shortage of advice being directed at college freshmen, but I am going to add my piece anyway, and it is not only a suggestion about what students should do but who most needs to do it.

My recommendation is simple: if your school offers a financial education course, take it. If it does not, take a basic economics course (Economics 101 or Principles of Economics). Financial knowledge has become an essential life skill; just as it is necessary to be able to read and write (and use Twitter and Facebook), it is essential to have basic financial knowledge. Financial decisions are made every day, from how much to borrow on a credit card to how to manage a checking account to whether to pay for dinner on a disappointing date. And the responsibility of making good decisions has been shifted onto individuals. Both government and employers are increasingly asking citizens and workers to take care of their own financial security. Like it or not, the benefits and risks associated with financial decisions are now yours. And you have just embarked on one of the biggest investments of your life: the investment in education (in case you are not aware of just how big an investment it is, ask your parents, but only after they recover from the shock of paying the first round of bills for tuition, room, and board). In my view, education is one of your best investments, with returns in higher lifetime wages and likely entry into more stable sectors of the job market. (There tends to be lower unemployment among jobs requiring a college education.) And there are many intangibles, too, that command a value, from gaining a network of smart and educated friends to having the opportunity to experiment and gain knowledge in many fields, under the guidance of experts.

In the same way that low educational attainment may mean a lifetime of low and erratic wages, so low financial knowledge has been found to be associated with poor financial decisions, from excessive borrowing to lack of participation in financial markets to inadequate wealth accumulation for retirement. The costs of poor decisions can be high, particularly when dealing with debt: choosing the wrong mortgage can push people into poverty or bankruptcy, and according to the research I did with Peter Tufano from Harvard Business School, those who display low levels of financial literacy are likely to pay 50% more in credit card interest and fees than those with higher levels of financial literacy.

While a course in financial literacy or in basic economics can benefit all students, based on my years of research, I recommend it most strongly to the following students:

Women: According to my research, women are much less financially literate than men. I do not know why this is the case, but one worrisome finding is that there is a gap in financial knowledge between women and men not only among young people but also later in life. This likely means that women face fewer opportunities to become financially knowledgeable than men do, for example by interacting with groups (perhaps other women) who are less likely to talk about finance. Enrolling in a college-level economics or financial literacy offers a chance to counteract that tendency.

African Americans and Hispanics: There is a wide gap in financial knowledge between whites and African-Americans and Hispanics, even after accounting for the many demographic differences in these groups, including income and wealth. Again, this may be the result of fewer learning opportunities over the lifetime. A college course in economics or finance can start to make up for this gap.

Students whose parents are not financially sophisticated: According to my research, as well as research from the Jump$tart Coalition for Personal Financial Literacy, the (small) percentage of students who are financially knowledgeable are disproportionately white males with college-educated parents (in particular, college educated mothers) who had stocks and retirement savings when their children were teenagers. This means that a lot of financial knowledge is learned at home. If you are among the first generation in your family to go to college and your parents have never invested in stocks, you start at a disadvantage in terms of financial knowledge with respect to your peers. Take the opportunity now to make up for that gap.

Students who hate economics and finance: If you think that the study of economics and finance is for uncreative people, and is evil and will only teach you to work on Wall Street and exploit poor people and poor countries, then you, too, should sign up for a basic economics or financial literacy course. In my experience, people who express disdain for economics tend to make poor and costly financial decisions. Take advantage of a chance to offset that tendency.

Let me finish by adding that there is a risk in taking a course on financial literacy and economics: You may actually find that you like it!