Thursday, June 29, 2017

Three Cheers For Financial Literacy

This blog post was also posted on Forbes and can be found here.

Since 2000, the Programme for International Student Assessment (PISA) coordinated by the Organization for Economic Cooperation and Development (OEDC) has assessed the reading, math, and science knowledge of 15-year-olds around the world every three years. More recently, since 2012, the program has also measured teen’s financial literacy. The latest findings just released by the OECDs provided small - but consequential - reasons for celebration.

The full report on the latest PISA financial literacy assessment is extensive, showing a disappointingly high proportion of teenagers who struggle to understand money matters, indicating where various countries rank on the list, and highlighting financial literacy disparities both across and within countries.

Yet it is also crucial to acknowledge that headway is being made, despite those continuing concerns.

First, important issues need champions, and the financial literacy campaign has picked up its share of celebrities! For instance, Her Majesty Queen Máxima of the Netherlands spoke at the May 24 PISA launch. The Queen has been and continues to be an impressive ambassador for financial knowledge. She was introduced by the OECD Secretary General, Angel Gurría, who also spoke eloquently about the importance of financial literacy for the young. France’s Central Bank Governor, François Villeroy de Galhau, discussed activities to boost financial literacy in his country, including plans for a new museum to teach about money, personal finance, and economics. These high-profile advocates contributed to a Paris gathering that was, quite simply, spectacular.

A second high point was that Germany’s G20 presidency has brought financial literacy into the global agenda. The Vice President of the Bundesbank, Claudia Buch, offered an illuminating explanation as to why financial literacy is important for individuals, society, and central banks. A major takeaway from her presentation is that financial education matters, and public policy can improve financial decision-making. Moreover, the effects of higher financial literacy can be particularly beneficial for the young.

PISA is a visionary project that recognizes financial literacy as an essential skill for navigating today’s society, not just in advanced economies, but globally. Countries participating in the assessment allow us to measure and compare financial literacy. This leads me to another piece of good news: new countries participated in the 2015 assessment and we can assess financial literacy in a sizeable group of economies.

Portugal’s Minister of Education, Tiago Brandão Rodrigues, stole the spotlight in Paris, not just for the enthusiasm and charisma he showed during his presentation, but also for his Ministry’s ambitious work to advance financial literacy. He formally announced that Portugal will join the PISA assessment in 2018.

Using the new data, we have been able to assess the state of financial knowledge among the young on five continents. For countries which participated in both the 2012 and 2015 rounds, we can also measure changes over time; this too has produced some positive news. For instance, we have learned that it is possible to improve financial literacy, even in as short a time span as three years. Two countries have done this: Italy and the Russian Federation. I am eager to study these results in greater depth, particularly since Italy is my native country.

Another hopeful sign came from the developing world, especially the BRICS (Brazil, Russia, India, China, and South Africa). The Securities and Exchange Commission of Brazil (CVM)’s chairman, Leonardo P. Gomes Pereira, gave a truly impressive talk. Brazil may be last in PISA’s 15-country ranking, but it is pushing toward the forefront when it comes to the pro-financial literacy work it is implementing and planning.

It was my privilege to participate in the design of the PISA’s financial literacy assessment, and collaborate with the OECD to host the Global Policy Research Symposium to Advance Financial Literacy following the PISA data release. As one whose academic life has been dedicated to economics and financial literacy, I am encouraged by the bright moments at the OECD gathering and the focused efforts underway in many countries.

In Paris, we toasted to financial literacy, and we also raised our glasses to Brazil. Progress can be achieved; it is within reach! Rankings are useful because they can change, and changes should be anticipated when we meet again in three years. Most importantly, we toasted to the young: we must never forget that they are our future.

Friday, May 12, 2017

How Much Financial Knowledge Do People Acquire as They Age? Not Much.

This blog post was also posted on The Wall Street Journal and can be found here.

People often argue that financial knowledge can be acquired with experience. But if the evidence from a new survey index is any indication, that way of learning may, in fact, be very slow or not work well at all.

The TIAA Institute-GFLEC Personal Finance Index, or P-Fin Index for short, provides a snapshot of Americans’ understanding of basic financial concepts. And the results don’t look too promising.

U.S. adults surveyed only answered about half the questions in the index correctly. Just 16% demonstrated a relatively high level of personal-finance understanding; they answered more than three-quarters of the questions correctly. But what was surprising is that Americans’ knowledge of personal finance is low even among people who have already made many important and fundamental financial decisions. This includes older Americans who own investment assets.

Specifically, by age 45 only 10% of respondents could answer more than three quarters of the survey questions correctly.

More unsurprisingly, younger adults fared the worst. Just 30% of people aged 18 to 30 were able to correctly answer only a quarter—or fewer—of the questions in the P-Fin Index.

This is worrisome as young people today have to deal with important and consequential decisions, from whether to invest in education and how to finance that education, to saving and investing in retirement accounts that are much more dependent today than in the past on an individual’s savvy. It is also worrisome because, if we can infer how learning progresses with age by looking at the experience of  the older survey cohorts, we see from the index that learning, overall, is slow.

We can get further insights on that learning from the concepts the index covers. While previous surveys gauged financial knowledge by using only a handful of questions, the P-Fin Index encompasses 28 questions covering eight functional areas: earning, consuming, saving, investing, borrowing, insuring, risk and reliable sources of information and advice.

For most topics, American adults can barely answer half of the questions correctly, even when the topics affect decisions that are made regularly. Take risk and risk management. It is a feature of most, if not all, financial decisions since financial decisions relate to the future, which is by definition uncertain. On average, U.S. adults answered only 39% of the risk-related questions correctly. Risk is a very complex concept, and perhaps this is what limits learning by experience.

One example of a question measuring risk:

There’s a 50/50 chance that Malik’s car will need engine repairs within the next six months which would cost $1,000. At the same time, there is a 10% chance that he will need to replace the air conditioning unit in his house, which would cost $4,000. Which poses the greater financial risk for Malik?

-  The car repair (correct answer; chosen by 41% of respondents)
- The air-conditioning replacement (chosen by 19% of respondents)
- There is no way to tell in advance (chosen by 19% of respondents)
- Don’t know (chosen by 20% of respondents)

Interestingly, most U.S. adults understand borrowing. But knowledge about debt seems the exception rather than the rule. On average, 61% of the questions about borrowing were answered correctly. Debt is now a standard component of American life, and it may be that knowledge and understanding is generated from confronting accumulated debt, often while young.

Many of the index’s findings, while troubling, point to avenues for putting consumers on a safer financial track, which was one of the objectives of collecting these new data. We know people are making financial decisions that are important to their future and to society, yet their choices rely on a base of very limited personal-finance knowledge. We also know from P-Fin Index data that only 40% of U.S. adults have been exposed to financial-education programs. Clearly, access to financial education should be embraced and expanded.

School is one logical place to start. As I have written previously, a mandatory personal-finance course in college would provide a powerful boost. But we could—and should—start even earlier. Financial literacy in primary and high schools would prepare the young, including informing the decision to go to college.

Financial education in the workplace is another important avenue, particularly now that individuals carry greater responsibility for managing their pensions and health coverage. Workplace education also may be a way to reach older individuals.

Young people do not have the financial understanding they need to make informed decisions about their future. And now we see that U.S. adults, even late in life, have still not acquired that knowledge. Just relying on experience for enlightenment may offer too little and deliver it too late.

Thursday, May 11, 2017

Access to Financial Services But Without the Skills to Use Them: The Importance of Financial Literacy

This article was originally posted on the "Think20" blog, published by the German Development Institute and the Kiel Institute for World Economy. You can view the original post by clicking here.

Only half of the adults in major advanced economies who use a credit card or borrow from a financial institution are financially literate. In emerging economies, financial literacy levels are even lower. And around the world, population subgroups—women, the poor, people with low formal education—trail in their financial knowledge, regardless of the strength of their countries’ economies.

According to the new Standard & Poor’s Global Financial Literacy survey—the world’s largest and most comprehensive study of financial knowledge—we have reached a crisis stage. Financial literacy is not only very low in emerging countries, such as the BRICS, but it is also shockingly low in countries with well-developed financial markets and countries with high per-capita income. That includes the major advanced economies—among them the G7—where the use of financial products is widespread.

In order to make sound financial decisions, people must understand at least basic financial concepts. Yet the data shows that too much of the world’s population lacks the ability to make informed financial choices when it comes to saving, investing, borrowing, and more.

Financial knowledge is especially important during times when increasingly complex financial products are easily available to a wide range of the population. We are living in those times. As governments in many countries push to boost access to financial services, the number of people with bank accounts and credit products is rising rapidly. Changes in the pension landscape are transferring decision-making responsibility to workers who previously relied on their employers or governments to ensure their financial security after retirement. In the United States, where lawmakers are promising to revise an already complicated health insurance system, most Americans do not understand the precepts of insurance. In China, where credit card ownership has doubled since 2011, only half of credit card owners can perform simple calculations related to interest.

Financial ignorance carries a hefty price tag. Consumers who do not understand interest compounding, for example, spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less.

The potential benefits of financial literacy, meanwhile, are manifold. People with strong financial skills do a better job planning and saving for retirement. Financially savvy investors are more likely to diversify risk by spreading funds across several ventures. They also earn more on their investments.

Until recently, a comparison of financial literacy across many countries was not possible. The Standard & Poor’s Ratings Services Global Financial Literacy Survey has opened the way to a comparable measure of financial literacy in more than 140 countries. The S&P Global FinLit Survey, for short, also links financial literacy to measures of financial inclusion provided by the Global Findex Database. These new data make it possible to examine financial knowledge worldwide and to assess the potential impact of what consumers do—or do not—know.

Financial literacy is measured through questions that assess basic knowledge of four fundamental concepts in financial decision-making: interest rates, interest compounding, inflation, and risk diversification. The S&P Global FinLit Survey findings are sobering. Worldwide, only 1-in-3 adults are financially literate. Or put in another way, some 3.5 billion adults globally fail to understand basic financial concepts.

Worldwide, there are striking similarities among the groups that are less likely to be financially literate. Irrespective of the level of income or the sophistication of the financial markets, women’s financial literacy levels are low—and that is true in almost all countries. This finding is important since roughly half the people on the planet are female. Worldwide, 30 percent of women are financially literate. That compares with 35 percent of men.

Income is another indicator. The rich have better financial skills than the poor. Some 31 percent of adults in the richest 60 percent of households in the major emerging economies are financially literate. In the poorest 40 percent of households, 23 percent of adults are financially literate. The size of the income gap is similar in the major advanced economies, although some suffer from even deeper inequality.

Access to Financial Services Carries Benefits; Poor Financial Literacy Dilutes Them

Financial literacy skills are important for people who use payment, savings, credit, and risk-management products. For many, opening an account at a bank or other financial institution—or using a mobile money-service provider—is an important first step to participation in the financial system. When people have financial accounts and use digital payments, they are better able to provide for their families, save money for the future, and survive economic shocks. According to the S&P Global FinLit Survey, financial account holders tend to be more financially savvy (although plenty of them still lack financial skills). Globally, 38 percent of account-owning adults are financially literate, as are 57 percent of account owners in major advanced economies and 30 percent in major emerging economies.

But there is a drawback. Account owners without financial knowledge may not fully benefit from what their accounts have to offer. Even more, this access to financial products can propel them into financial disaster, such as high debt or bankruptcy.

Take savings as an example. Globally, 57 percent of adults save money, but just 27 percent use a formal financial institution, such as a bank, to do so. Others rely on more precarious and less lucrative alternatives, such as informal savings groups or stuffing cash under a mattress. Only 42 percent of account owners worldwide use their accounts to save, and 45 percent of these adult savers are financially literate. Given the benefits derived from using financial services, it is important to ensure that people are capable of managing those services to their advantage.

Financial literacy challenges are universal, confronting developing economies and advanced economies alike. Policymakers should build strong consumer protection regimes to safeguard citizens from financial abuse and provide a smooth market environment. They should also take steps to ensure access to financial education.

School seems a great place to start, both for its capacity to reach large segments of the population (including women) and because individuals lacking financial knowledge are less likely to learn it from families or peers. Low-income groups can be targeted by embedding financial education programs in some of the programs already offered to them.

The message of the G20 Summit is “shaping an interconnected world.” As these influential leaders convene to empower people around the globe, addressing the challenges of financial literacy promises a high-impact multiplier effect.

Map 1: Global Variations in Financial Skills

Friday, May 5, 2017

New insight into Americans' financial capability

This blog was originally published in the May 15, 2017 print issue of Pensions & Investments. The online version can be found here.

When the National Financial Capability Study launched in 2009, it promised valuable new information about the financial situations of U.S. households following the Great Recession. The ongoing national surveys — every three years — have lived up to that expectation, revealing not only how people manage their finances but also whether they are capable of handling those responsibilities.

But the FINRA Investor Education Foundation sought an even deeper dive into what we know about consumer finances. In 2012, it provided funding to add the NFCS' questions to a representative sample of 2,000 individuals selected from the RAND American Life Panel, which includes more in-depth information about Americans' finances. That new data is examined in “Financial Capability of the American Adults: Insights from the American Life Panel,” a report I wrote in collaboration with Marco Angrisani and Arie Kapteyn from the Center for Economic and Social Research at the University of Southern California. It includes a number of findings of interest for the pension and financial industry.

Out-of-pocket medical expenses are a significant source of financial strain.

The likelihood of incurring large out-of-pocket expenses — for preventive care or treatment after a medical crisis — is, perhaps not surprisingly, linked to how healthy an individual is and whether they have insurance. But the weight of those factors is impressive when looking at short-term shocks and their affect on families' security. At the same time, since low education and low income often go hand-in-hand with poor health and lack of insurance, households with low socioeconomic status are both more likely to face economic shocks and less prepared to deal with them.

Using respondents' self-assessment, our study divides individuals into those with good health and those with poor health. As expected, we find the risk of health shocks to be high for individuals who smoke, have a body mass index greater than 30 or have been diagnosed with high blood pressure. We also break respondents into groups depending on whether they have health insurance. Respondents with poor health, a higher risk of health shocks and no health insurance — those who are most likely to face a health shock — are 15 to 30 percentage points less likely to have money to cover an emergency than respondents on the opposite end of the scale.

When it comes to planning for the long term, most Americans fall short.

An important aspect of planning is to set medium- and long-term financial goals, taking into consideration future events such as retirement. But the NFCS-ALP reveals a widespread lack of planning. Only 40% of respondents have ever thought about their retirement savings. Looking more closely, only 47% of workers aged 40 to 59 have planned at all. Among younger (workers aged 18 to 39) the figure is much lower: it is only 31%.

People nearing retirement age are not thinking ahead.

Even when it comes to individuals aged 60 and older, less than 50% have thought about planning for their post-work years. To look at this unsettling finding in more detail, we take working individuals in the NFCS-ALP who are at least 60 years old and separate them into two groups, according to whether their expected likelihood of working past age 65 is below or above 50%. We would assume that workers more likely to leave the labor force by 65 will have put more thought into their retirement savings. Indeed, 66% of them have (as have 56% of those more likely to work past 65). Still, it is striking that more than half of older workers on the verge of retirement have not done any retirement planning.

Financial planning is critical for economic well-being, but a large proportion of Americans live from paycheck to paycheck.

The NFCS-ALP questionnaire asks respondents whether they have set aside a “rainy day” fund to cover expenses for three months in the event of sickness, job loss or other adverse circumstances. Only 41% of respondents answer affirmatively. As further evidence of the financial fragility of American families, only 44% are certain they could come up with $2,000 if an unexpected need arose within the next month.

Planning for retirement pays off in powerful ways.

There are striking differences between non-planners and planners when it comes to the wealth they have available beyond employer-sponsored pension plans. Among workers over the age of 60, the median financial wealth is only $1,500 for those who have not planned. At $160,000, it is many times that amount for planners. Viewed another way, the mean financial wealth for non-planners is $65,000 while that of those who plan is $310,000 — still a dramatic difference.

Financial literacy levels are an obstacle.

Research has found that higher financial literacy correlates strongly with whether individuals plan for retirement and have rainy day funds. The NFCS measures financial literacy through questions addressing key concepts of economics and finance, notably compounding interest, inflation and risk diversification. Two additional questions test individuals' understanding of the effect of the length of a mortgage and the relationship between interest rates and bond prices. These questions have been asked in the broader ALP panel as well. Only 18% of the respondents in the NFCS-ALP sample answer all five questions correctly. Less than a third — 31% — answer four questions correctly. Consistent with previous research, data from the NFCS-ALP show those who are more financially literate are more likely to plan for retirement and more likely to hold precautionary savings.

What do all these findings mean? By exposing the behaviors and barriers that contribute to financial vulnerability, the new data open a pathway for exploring policies and programs that will make American families more secure. It will be important to fortify financial health not only in the long term but also in the short term. And it will be critical to ensure Americans have the basic knowledge needed for sound financial decisions, including to plan for retirement and to save for unexpected shocks.

Thursday, April 20, 2017

Imparare a valutare il rischio

This blog, written in Italian, was originally published in the April-May 2017 edition of Focus Risparmio, which can be found by clicking here.

In un arco temporale di più di dieci anni, assieme a un team di ricerca, siamo riusciti a misurare la financial literacy in molti Paesi, aggiungendo domande relative alla conoscenza finanziaria in indagini nazionali, fino a realizzare un paio di anni fa un’indagine globale della financial literacy in più di 140 Paesi, in collaborazione con Gallup e la Banca Mondiale. Ma ciò che mi ha sempre interessato in modo particolare è la risk literacy, ovvero la conoscenza finanziaria relativa al rischio. Poiché molte delle decisioni finanziarie si riferiscono al futuro, che è per definizione incerto, capire il rischio e i concetti a esso legati, per esempio la relazione tra rendimento e rischio, è fondamentale nella gestione della finanza personale. Un argomento su cui avevamo dibattuto già qualche anno fa, ma i dati si basavano su pochissime domande (spesso solo una) relative alla conoscenza di concetti quali la diversificazione del rischio. È per questo che siamo stati felici di collaborare con Allianz in un’indagine non solo sulla conoscenza finanziaria ma, in particolare, sulla risk literacy in ben 10 Paesi europei, inclusa l’Italia. Abbiamo utilizzato domande che si riferivano alla conoscenza finanziaria di base e alla risk literacy. I risultati di questo nuovissimo studio fatto lo scorso autunno sono stati resi pubblici a gennaio.

Tre gli elementi di particolare interesse. Primo: anche se esistono varie differenze tra i dieci Paesi europei, un aspetto comune è la bassa risk literacy. In generale, in tutti i Paesi, meno del 50% della popolazione sa rispondere correttamente a domande relative al rischio. Contrariamente alle domande relative alla financial literacy, quelle sulla risk literacy hanno un’alta percentuale di “non lo so”. In sostanza, i dati rilevano una ignoranza diffusa su uno dei concetti fondamentali per le decisioni di risparmio e di investimento.

Secondo: la conoscenza conta! Oltre alle domande relative alla conoscenza finanziaria, il questionario ha incluso tre scenari che consistevano nella scelta del migliore prodotto finanziario in situazioni di rischio. In particolare, viene valutata la capacità di assicurarsi contro il rischio di non avere risorse finanziarie in età avanzata, la capacità di gestire la liquidità in un orizzonte temporale di breve periodo, e la capacità di diversificare il rischio in scelte di portafoglio di lungo periodo. Chi ha una conoscenza finanziaria di base e ha una conoscenza del rischio è in grado di scegliere prodotti finanziari adeguati alle esigenze descritte nei tre scenari. Terzo: nel confronto con gli altri dieci Paesi, l’Italia ha la più bassa financial e risk literacy.

Non tutti questi risultati sono nuovi. Al contrario, molti tendon a confermare i risultati di altri studi fatti nell’arco di più di dieci anni. È forse questa la novità. Senza interventi mirati a migliorare la conoscenza finanziaria è difficile aspettarsi che le persone la acquisiscano da soli. E la bassissima conoscenza tra i Millennials è una indicazione che i giovani sono fortemente impreparati a scelte finanziarie e assicurative. Il messaggio di questi dati è semplice: “Abbiamo un grande bisogno di cambiamento, in particolare in Italia”.

Wednesday, March 22, 2017

Should College Students Be Required to Take a Course in Personal Finance? YES: Ignorance Carries a High Price

This is an extract of an article which first appeared on the front page of the Personal Finance section of The Wall Street Journal on March 19, 2017. Read the full online version by clicking here

Think about driving. To ensure orderly traffic, we create speed limits and roadway rules. We erect signs to warn where turns are difficult or roads are treacherous. And before we allow someone behind the wheel, we make sure they understand the basics. That’s where a driver’s license comes in. We take those precautions to protect the drivers and to protect others.

It is time to extend that type of thinking to financial knowledge by making personal finance a required course at U.S. colleges and universities. For people—especially young people—to survive and thrive in today’s financial environment, knowledge of personal finance is a necessity.

We’re already seeing what happens when young adults juggle high-impact financial decisions without the benefit of financial knowledge. Take the well-known burden of student-loan debt. Student loans are the second-largest part of the consumer credit market, after mortgages. The lion’s share of that debt sits in the hands of millennials—and our research shows they worry about their ability to pay off those loans. As well they should. The default rate on student loans is sobering.

Multiple studies confirm that students have little understanding of how student loans work. Our analysis of the latest National Financial Capability Study, or NFCS, finds that more than half of millennials take on student loans without even attempting to calculate what their payments will be. Given that student loans are pursued to acquire an education, it seems only prudent to have that education include the knowledge needed to manage that debt.

But student debt is just one of the challenges. These young people will have to support long retirements on savings and investments managed throughout their careers. To accomplish that feat, they will depend on interest compounding—a basic concept that they don’t fully understand. They also struggle with two other critical concepts: risk diversification and inflation.

These are the ABCs of personal finance, the benchmarks by which we measure financial literacy. By age 40, when a majority of Americans have already made most of their important financial decisions, only 1 in 3 has mastered these concepts, according to the NFCS. Unless something changes, millennials will become part of that disturbing statistic.

Such courses must be well designed to be effective. There is mounting evidence that personal-finance courses with a rigorous curriculum and trained teachers are influencing behaviors of young people in matters such as debt and defaulting on debt. Teaching personal finance is not about describing financial products, it is about teaching the principles of financial decision-making so that people understand how financial instruments work. When people are knowledgeable, they also are better able to benefit from the services of financial advisers.

Those opposed to requiring personal-finance courses say that the main thing students should learn is skepticism about the financial industry and its products. Some skepticism is always warranted, and I teach my students about the potential conflicts of interest that financial advisers may have. But the purpose of a personal-finance course goes beyond those topics.

Financial literacy is about prevention. Regulators simply cannot keep up; they tend to come in when a problem already exists. This is why regulation is not enough.

The lack of financial literacy—just like the lack of a driver’s license—is more than a personal problem. It is dangerous for our country’s economic health. The Great Recession was driven by mortgages and loan terms consumers didn’t understand. The entire nation went into an economic tailspin as a result of that lack of understanding.

Looking ahead, will young people saddled with student loans be less likely to buy cars and homes? Will their ability to engage in transactions that require not just liquidity but good credit ratings be hampered? Will they veer away from starting their own businesses or pursuing advanced degrees? If they are not saving enough for retirement, will they have to be rescued from poverty in old age—and at what price to the country?

One of the basic lessons in personal finance is that time is money. But time is starting to run out. Young people are already behind the steering wheel of their financial decision-making. It’s time we step in to make sure they know how to navigate the highway ahead.

Thursday, February 2, 2017

Educazione finanziaria, costa di più non farla

A shorter version of this blog was published in Il Sole 24 Ore and can be found here.

Ci sono alcune somiglianze tra l’inizio del 2017 ed il 2016. Un anno fa si parlava di bail-in, ma anche di educazione finanziaria per salvaguardare i risparmiatori. Un anno dopo si parla di nuovo di decreto legge “salva banche” e di educazione finanziaria. Questa volta però, le indiscrezioni sul Dl banche sembrano autorizzare la speranza che il più trascurato dei due temi riceverà qualche attenzione in più rispetto al passato.

Tutti i sondaggi parlano chiaro. Il livello della conoscenza finanziaria in Italia è molto basso e molto più basso della maggioranza degli altri Paesi europei. L’analisi dei nuovi dati su un campione di dieci Paesi europei pubblicati proprio lo scorso lunedì in un rapporto di Allianz fatto in collaborazione con il Global Financial Literacy Excellence Center vede l’Italia fanalino di coda. Rispetto a Paesi come l’Austria, il Belgio, la Francia, la Germania, l’Olanda, il Portogallo, il Regno Unito, la Spagna e la Svizzera, l’Italia si colloca ultima o penultima in quasi tutte le domande che misurano i concetti base della finanza, l’abc della conoscenza finanziaria. Più del 30% degli Italiani non sa calcolare il 2% su una somma di 100 euro. La conoscenza più bassa si riferisce al rischio e alla diversificazione del rischio, un fatto di cui avevamo preso amaramente nota lo scorso anno guardando agli investimenti dei risparmiatori di Banca Marche, Banca Etruria, CariFe e Carichieti.

Altre indagini confermano gli stessi risultati. Il S&P Global Financial Literacy Survey, il Programma per la valutazione internazionale dell’allievo (PISA) dell’OCSE, e i dati della Banca d’Italia sono tutti concordi nel descrivere un Paese con pochissime conoscenze dei principi alla base delle decisioni finanziarie. Se per importanza economica l’Italia si colloca tra i Paesi del G7, per conoscenza finanziaria assomiglia invece alle economie emergenti, dove anche il Sud-Africa fa un po’ meglio dell’Italia. Purtroppo questo è vero anche per i giovani: nella valutazione della conoscenza finanziaria dei quindicenni in PISA, gli studenti italiani sono arrivati penultimi; fanno meglio solo della Colombia. Non possiamo quindi aspettarci che le generazioni future facciano meglio delle generazione odierne; il ciclo della bassa conoscenza finanziaria sembra destinato a ripetersi.

I costi dell’ignoranza finanziaria sono spaventosi. L’ignoranza è un po’ come quelle malattie silenziose che si annidano nel corpo senza particolari sintomi che siano visibili a occhio nudo, per poi esplodere al momento dei test, quando talvolta è troppo tardi per curarle. Il costo delle scelte sbagliate dei mutui negli Stati Uniti si è transformato in una enorme crisi finanziaria non solo per le famiglie ma per l’intera economia. Se ci riferiamo solo al comportamento relativo alle carte di credito, secondo le nostre stime, più di un terzo delle spese relative a interessi ed altri costi del credito—per intenderci più di 3.5 miliardi di dollari nel 2009—è dovuto alla mancanza di conoscenza finanziaria, ovvero a costi che potevano essere evitati. Sempre negli Stati Uniti, si è stimato che l’ammontare dei mancati rendimenti degli investimenti azionari dovuti a commissioni ed altre spese si aggira intorno ai 100 miliardi di dollari, e questi costi sono sostenuti soprattutto da chi ha bassi livelli di alfabetizzazione finanziaria.

I costi dell’ignoranza finanziaria sono alti anche nella semplice gestione del conto bancario, non di complessi portafogli. Secondo recenti stime, il mancato utilizzo di tecnologie come online banking, unito all’ignoranza finanziaria crea perdite di ricchezza anche nello strumento finanziario più semplice che tutti possediamo, ovvero il conto corrente.

In passato abbiamo creduto di poter risparmiare dei soldi rinunciando all’educazione finanziaria? Purtroppo anche l’ignoranza finanziaria costa. Non solo i costi ci sono, ma sono anche alti, e se non vengono pagati adesso, saranno pagati nel futuro. Se le risorse da investire nell’educazione dei cittadini non sono sufficienti dobbiamo intervenire anche noi. Ci sono varie organizzazioni in Italia che si stanno occupando di alfabetizzazione finanziaria, dalle organizzazioni dei consumatori, al Museo del Risparmio di Torino che è nato proprio per promuovere l’educazione finanziaria. Lavoriamo con loro. E possiamo fare molto nelle scuole e nelle università in modo che i nostri giovani siano meglio preparati a capire il nuovo mondo finanziario che si apre di fronte a loro, e per non creare nuove vittime e nuove povertà.

L’educazione finanziaria è un investimento per il futuro. In tutti i paesi i mercati finanziari sono diventati più complessi, i prodotti finanziari più numerosi e le scelte finanziarie, anche quando si riferiscono agli strumenti di base, sono più difficili rispetto al passato. Ogni cittadino si confronta con queste scelte. L’obiettivo dell’educazione finanziaria è quello di trasformare i risparmiatori non già in esperti ma solo in persone più consapevoli. Promuovere l’educazione finanziaria significa fare prevenzione invece di interventi drastici quando i problemi si sono protatti così a lungo che non sono nemmeno più curabili con semplici medicine. I costi allora sì che esplodono.

Il 2017 non deve diventare una triste continuazione del 2016. No grazie, non abbiamo tempo da perdere. Una cosa che ci insegna la finanza, è che il tempo è denaro. L’educazione finanziaria non può più aspettare.

Friday, January 20, 2017

Our hopes for the future

Many challenges await the new president, some of great urgency. In his inaugural address, he expressed a desire for action. There are many areas of action but one especially pernicious issue has several relatively simple solutions. That is the problem of financial illiteracy.

Our research shows that financially knowledgeable individuals make smarter financial decisions and achieve better outcomes; they are more likely to save, plan for the future, invest, and become contributing members of society; and less likely to take on expensive debt.

However, millions of Americans lack even a basic understanding of personal finance. In 2015, only 32 percent of Americans could answer correctly three basic questions on financial concepts like interest rate, inflation, and risk diversification. This “financial illiteracy” undermines their quest for a better future.

Consider debt. The number of student loan borrowers has nearly doubled in the past decade, and many borrowers do not understand the effects of that borrowing beforehand. According to our research, 54 percent of student loan holders did not try to calculate their monthly payments before borrowing, and 53 percent said that given the chance, they would do things differently. This debt causes financial stress: 37 percent of people with student loan payments due said they were late with a payment at least once in the last 12 months.
Debt is also a growing problem for older Americans, threatening their retirement security. And speaking of retirement, only 39 percent of Americans have even tried to determine how much money they will need in later life, a figure barely changed since 2009.
Financial fragility is another problem exacerbated by limited financial literacy. Some 34 percent of Americans said that they could not come up with $2000 if an unexpected need arose within the next month. We need to put in place policies that improve individuals’ financial security both in the long-term and the short term. We need to equip people with the knowledge to make quality financial decisions around debt, and we need ways to encourage American families to build “rainy day funds” for emergencies.
There is an urgent need for policy action to encourage the spread of financial education so that people in all walks of life can make savvy financial choices. Parents and teens would benefit from having a better grasp on how to pay for college. Millions of Americans would be more likely to build emergency savings if they realized their importance. People also would benefit from a better understanding of how to save for retirement. Our research shows that the mere act of planning for retirement is a strong predictor of retirement wealth.
Some schools already provide financial education for all students. Workplace financial education and financial wellness programs can also impart essential knowledge. Government incentives for both employers and schools to provide financial education could spur new solutions to the problem of low financial literacy.
If more schools and employers provided financial education, millions of American would have the tools to build better lives for themselves and for us all. This is a vision for the future we hope for.

Friday, January 13, 2017

Six Questions to Help Determine Your Financial Health

This blog post was also posted on the Wall Street Journal and can be found here

Many people, when thinking about their financial health, focus on a single indicator, such as whether they are saving enough for retirement or carrying too much student-loan debt. If personal finances were limited to--or fixed by--a single line item in the balance sheet, that approach would be fine.

But they aren’t.

During an annual physical exam, it is not possible to assess how well a patient is doing simply by checking the heart rate or blood pressure. Rather, a more comprehensive series of evaluations are needed. How well is the patient managing his or her health? Is the patient taking medicines as prescribed? Is the patient exercising and eating well?

The same is true of financial health.

Fortunately, there is a short financial checkup that effectively predicts what I think of as the key components of financial health--including short-term and long-term savings, management of financial products and financial literacy. The six-question test, which is based on a body of national and international research, evaluates four key areas: 1) ability to make ends meet, 2) advance planning, 3) management of financial products and 4) financial knowledge. (More in-depth questions from a national survey on financial capability, now in its third wave, are available online.)

Taken together, the questions below--and their answers--provide a starting point for people to better understand and improve their personal finances.

1. How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?
-  I am certain I could come up with the full $2,000.
-  I could probably come up with $2,000.
-  I could probably not come up with $2,000.
-  I am certain I could not come up with $2,000.

This first question of the test assesses financial fragility--or the ability to mobilize resources when facing a shock. It is a rich measure that goes well beyond availability of or access to liquid assets, taking into consideration that one could deal with a shock by borrowing, by relying on the help of family and friends, by selling possessions or through other strategies. Moreover, it is a summary measure of the balance-sheet situation (not just assets) even as it addresses how one manages resources. Research links the lack of resources or the inability to access them when facing a midsize shock (specifically, answering this question with either of the last two responses) with indicators of financial distress.

2. Have you ever tried to figure out how much you need to save for retirement?

This question measures advance planning by examining the longer-term horizon and whether one has made plans for the future. While simple and intuitive, the question looks yet again at the state of personal finances and, in particular, at the steps taken to accumulate retirement savings, which can take many forms, including keeping within a budget. Academic research shows that those who answer affirmatively to this question have up to three times the amount of wealth as they near retirement as those who have not made any plans.

3. On a scale from 1 to 7 (where 1 = strongly disagree and 7= strongly agree), how strongly do you agree or disagree with the following statement: I have too much debt right now.

The third question turns to the liability side of the balance sheet. There are many opportunities to borrow and a multitude of options for doing so. Many young employees today start their working life in debt. The answer to this question reveals both the extent of the respondent’s debt burden and his or her management of finances. Those who choose value above the median (value 4 ) are found to carry not only several forms of debt, both short term and long term, but also to use high-cost methods of borrowing, such as payday loans.

The next three questions measure understanding of the ABCs of personal finance. They apply to the many financial decisions people have to make and that, ultimately, shape their finances and ability to achieve financial security in the short and long term. The questions address fundamental concepts--interest compounding, inflation and risk diversification--that underlie financial decisions, from day-to-day money management, to saving and investing for retirement, to borrowing.

Those who correctly answer the three questions reported below (the correct answers are the end) are not only less likely to be financially fragile and over indebted, but they are also more likely to plan for the future and to engage in many other behaviors conducive to higher retirement savings.

4. Suppose you had $100 in a savings account and the interest rate was 2% per year.  After five 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
-  Don’t know

5. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, with the money in this account, would you be able to buy…
-  More than today
-  Exactly the same as today
-  Less than today
-  Don’t know

6. Do you think the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.
Rather than looking at a single behavior--an approach that usually is inadequate for evaluating how someone is doing financially--this test provides an encompassing measure of financial capability. It also identifies the areas where help may be needed.  Even more, it allows individuals to compare their results to those of the average American. The findings for each question are available here.

As employers and others look for ways to help employees become financially fit, this test may provide them with a tool to measure, assess, and reconsider what they are doing. Perhaps it is something to add to employee benefits in 2017.

(Answers: 4. More than $102;  5. Less than today; 6. False.)