Sunday, April 25, 2010

Fixes for the Financial System

Today's New York Times described the proposal of six academics for changing the financial system. Mine is one of them.

Compound Interest 101

A person borrows $100 at an annual interest rate of 20 percent. How long does it take that debt to double? About four years. What share of American adults can figure that out? About one in three, says Annamaria Lusardi, an economist at Dartmouth College.

Ms. Lusardi wants to add financial literacy to high school curriculums. A crisis sparked in part by the decisions of millions of Americans to take mortgage loans they could not afford has underscored her conviction that “lack of financial knowledge is alarmingly widespread.”

Only three states — Missouri, Tennessee and Utah — now require a course devoted to personal finance, according to the JumpStart Coalition for Personal Financial Literacy, a nonprofit group. Another 18 states incorporate some lessons into other courses.

“Financial literacy is an essential piece of knowledge that every student should have,” Ms. Lusardi wrote recently on her blog. “Just as reading and writing became skills that enabled people to succeed in modern economies, today it is impossible to succeed without being able to ‘read and write’ financially.”

Let's hope that in this time of reforms some attention will be given to consumers and to financial literacy.

Friday, April 23, 2010

April showers bring future flowers

I like very much the fact that April has been declared Financial Literacy Month. As a result there has been a flurry of events and activities devoted to discussing, promoting, and improving financial literacy. I cannot stress enough how important it is to have financial literacy at the center of attention, including the extensive coverage it’s been receiving in the media.

It is also at this time that one realizes the need for information. How many institutions are doing financial education programs and how do they do them? I do not know the answer to this question nor would I know where to find this information. I also fear that anybody who is entering this field could end up reinventing the wheel: devising yet another set of curricula, materials, and programs rather than making use of what already exists or backing their program with proven best practices.

Via the creation of the Financial Literacy and Education Commission (FLEC) under the coordination of the Office of Financial Education at the U.S. Treasury, the federal government had admirably coordinated the efforts of its agencies and bureaus that are doing financial education programs. But what about the not-for-profits and other organizations that have become engaged in financial literacy?

In my view, there are many advantages to sharing information and in some degree of coordination among agencies, organizations, and businesses. First, it is very important to know what others are doing so as to minimize wasteful overlap. These days everybody seems eager to set up yet another Web page adding to the ten-thousand existing Web pages! While I appreciate the differences that may distinguish these offerings, I am afraid that their proliferation may simply add to the search costs of individuals who have to navigate an ocean of information on the Web. For those developing financial literacy programs, coordination with others who are doing the same thing can save valuable time and resources. For multiple organizations to spend weeks and months in designing programs that others have already thought about and perhaps even implemented and tested is certainly a waste of time and brain power.

Understanding what is effective in improving and promoting financial literacy is another critical piece of information. It would be very valuable to have this information reported somewhere. We need to devote resources to that which is effective and which has an impact. Funders should be able to determine which programs are effective and worthy of support and institutions interested in promoting financial literacy should be able to look for success cases and use them as models for their own programs.

Because I direct a center that is devoted to promoting financial literacy, I have to subject myself and the center’s research teams to these criteria: evaluate what we do, share information, coordinate activities, and not waste a cent of our valuable resources.

Thursday, April 15, 2010

Tax day

Today is April 15: the deadline for filing income taxes. Money is on everyone’s minds these days. Even before the recession, Americans were confronted with an increasingly complex financial landscape that requires difficult financial decisions. Yet, studies show that most are not well-prepared to handle their personal finances. I discussed this topic on Vermont Public Radio last Tuesday, and how we can improve our financial literacy. If you would like to listen to the interview, the link is below:

Thursday, April 1, 2010

April 2010: Financial Literacy Month!

April is Financial Literacy Month. You know financial literacy is in troubles when they dedicate a month to it! Because today is April 1, I thought we could start off with a list of the reasons to be financially literate, following the example of other famous top ten lists.

Top ten reasons to be financially literate:

1. Because being financially literate is smart and sexy!
2. Because it is useful to know that ARM has to do with mortgages and is not a rock band;
3. Because 401(k) is the worse name that could be given to pensions and you still cannot figure out how anyone came up with it;
4. Because you are tired of having to get endless stock market tips from your brother-in-law;
5. Because you would love to criticize banks but do not know what to say;
6. Because you need topics to share with your barber/hair-dresser, taxi drivers, and bar tenders that make you look rich and cool;
7. Because everybody talks about the financial crisis and you have no clues what is going on and whom to blame other than banks;
8. Because you have time to spare now that unemployment is really high and nobody seems to be able to find a job;
9. Because you want to protect granny from scams;
10. Because you want to mathematically prove that the Lexus your neighbor drives with such pride was a bad financial decision.