Everyday Decisions Affect Your Wealth

Everyday Decisions Affect Your Wealth

In an interview with Barron’s, economics and accounting professor at George Washington University Annamaria Lusardi discusses her drive to improve financial literacy and the three questions she utilizes to measure it. Most people are unable to answer all three questions correctly, and unless Americans can improve decision-making about their finances, she believes, societal inequity will increase.

Lusardi defines financial literacy as knowing three main components: “interest compounding, inflation, and risk diversification.” Living in a world of 401(k)s, individuals have to take care of their own retirement savings, and that’s really only available for a small segment of the population that has good jobs with good benefits. Those without those opportunities have to make different financial decisions.

The other issue with Americans, Lusardi tells Barron’s, is that the world is rapidly changing and “we are not catching up [and] we aren’t teaching young people this topic.” It can start as early as age 15, when a teenager has to decide whether to invest in a college education, and how to finance it. That education should continue throughout high school, college, and into the workplace.

Countries where there’s more interest in financial literacy, such as the Nordic countries, Canada, Australia and New Zealand, do better at it. And Lusardi’s data shows that women are worse at financial literacy than men, because they’re not investing in retirement as much, and not entrusted with decisions such as buying a house or a car. By including women in more important financial decisions from the get-go, they will be better equipped later in life after the death of a spouse or a divorce.

Lusardi also believes that the government should play a stronger role in educating people about financial literacy, not only protecting them but also empowering them to make good financial decisions. Increased financial literacy, Lusardi concludes in the interview, has the ability to decrease wealth inequality.