Financial literacy in school: Skills for the 21st century

Annamaria Lusardi (00:00):

Financial literacy is an essential skill to thrive in the 21st century.

Denise Pope (00:10):

Welcome to School's In, your go-to podcast for cutting-edge insights in learning. From early education to lifelong development, we dive into trends, innovations and challenges facing learners of all ages. I'm Denise Pope, senior lecturer at Stanford's Graduate School of [00:00:30] Education and co-founder of Challenge Success.

Dan Schwartz (00:33):

And I'm Dan Schwartz. I'm the Dean of the Graduate School of Education and the Faculty Director of the Stanford Accelerator for Learning.

Denise Pope (00:43):

Together we bring you expert perspectives and conversations to help you stay curious, inspired, and informed.

(00:52):

Hi Dan.

Dan Schwartz (00:53):

Hi Denise.

Denise Pope (00:54):

Dan, today we are talking about something I think really important like a life skill, [00:01:00] financial literacy, and specifically financial literacy for high school students.

Dan Schwartz (01:06):

Right. So it turns out that a lot of people never learned about credit card debt accumulation or how to figure out are the terms of this loan good or even what's inflation due to the amount of money you have. So did you learn these things? Do you know about these things?

Denise Pope (01:24):

My god, I don't even know what I don't know. Right? I did not take financial literacy in high school or college. [00:01:30] I'm sort of embarrassed. I didn't even take econ in college. Did you?

Dan Schwartz (01:34):

No. My goal in life was to get enough money that I could hire someone to do my finances for me.

Denise Pope (01:41):

That's good.

Dan Schwartz (01:41):

Thank you.

Denise Pope (01:42):

That seems very financial literate.

Dan Schwartz (01:44):

I'm still waiting. But yes, that is a sort of type of literacy. So today we are very fortunate to have Professor Annamaria Lusardi who's speaking with us today. She's a professor of finance at the Stanford Graduate School of Business and she's one of the world's most cited [00:02:00] authors on financial literacy and she's advised the Office of Financial Education at US Treasury. So she's here to help us understand a new bill that's been signed in California that requires high school students to complete a course on financial literacy before they graduate.

(02:16):

So welcome Annamaria.

Annamaria Lusardi (02:20):

Very happy to be here today.

Dan Schwartz (02:22):

Good. So here's the first question. What counts as financial literacy and how did you decide that's [00:02:30] a thing?

(02:30):

Well, that's what people need to learn, I know income and expenses, am I done?

Annamaria Lusardi (02:37):

Well, you are not done yet. Financial literacy includes a few more topics, and this is what we hope also this new law will establish what we need to have in the schools are a set of knowledge and skills that we think define financial literacy. And we know those because for [00:03:00] example, already in 2012, the Program for International Student Assessment already had added financial literacy into the list of topics, at 15 years old need to know in order to participate to society. So it is a long and important list and it includes the many skills that young people need to have today.

Denise Pope (03:26):

I can only imagine because other countries always [00:03:30] outscore us on the PISA in so many other ways that we were probably really outscored on this in terms of the US. Is this, are we way down there? Is this part of the problem?

Annamaria Lusardi (03:41):

We are not down there in a sense that we are at the OECD average and we have been mostly at the OECD average. But this is not a good score.

Denise Pope (03:51):

Being average is not good, right? Being average is not okay.

Annamaria Lusardi (03:54):

Being average is not good. The US is the country with the most advanced financial [00:04:00] markets. And so we need to do and we need to do better. But also what the result shows is that it's not because you are born in a country with well-developed financial markets that you acquire financial literacy by yourself. That's a language you need to learn and you need to speak because nobody is going to explain it to you. And so if you are going to make financial decisions, that's the language or that's the term you are going to face.

Dan Schwartz (04:27):

What are some of the other terms? Stock, a mutual [00:04:30] fund, compounding interest would be ...

Annamaria Lusardi (04:32):

Absolutely. Inflation is another word we have used. And of course, for example, insurances, managing risk. So making a budget, managing expenses, planning for the future, these are some of the words we have used.

Dan Schwartz (04:49):

So this financial literacy course could be very intense mathematically. So risk diversification is an evaluation of probabilities, right?

Annamaria Lusardi (04:59):

So [00:05:00] when I teach personal finance at Stanford, we have a course here, we use a bit of math and I think students appreciate it because we also have a lot of students from the sciences and from computer science.

(05:13):

But I have to say you can teach personal finance with very little math. And how can you explain risk diversification? You use this example, don't put all of your eggs in one basket. You try to explain how growth can really be very fast, can be nonlinear. [00:05:30] But I've done the course in very simple ways and with very little math. I also teach one unit course during the summer. So you can do it with as little math as possible because we know that math can be an obstacle for many students to take this course.

(05:47):

And also I want to repeat, many people think while we teach math and therefore it is like teaching personal finance, but personal finance is its own topics. For example, you need to know the rule and regulation. [00:06:00] You need to know where it is useful to get information and so on.

Denise Pope (06:05):

I feel like I should hire Anna right now to teach me these things without math. Like compound interest, when you say compound interest, literally my heart starts going ... I mean I know to pay off my credit card every month because there is this thing that if I don't pay, it's actually way more money and it gets more. But again, I don't know the math. So what do you think about that?

Annamaria Lusardi (06:28):

I think I'm going to have you in my classes [00:06:30] as well because you have already explained in simple way many of the things we tell to the students. We try to explain what the concept is. We can explain it in simple ways.

(06:41):

One of the things I tell my students in the first class is you are going to learn the language of finance, but we start with plain English and we build that knowledge up so people learn little by little. And then we explain this concept in pure English. Sometimes we put [00:07:00] some of the formula on the whiteboard or the blackboard or on the slides, but we also explain it in very simple way. We explain the intuition behind it, things like the interest rate, which is how much your wealth can grow.

(07:13):

And so given that the interest rate is so high and it compounds, it builds over the interest, then it's really important, as you've said, to pay off your credit card quickly, or it is very useful to start saving as soon as possible. [00:07:30] So you can explain these things in simple ways.

Dan Schwartz (07:33):

I agree. I think it is important for people to learn these things.

(07:37):

So the military has very sophisticated equipment, and the first move was to train people to handle the sophisticated equipment. And that turns out to be very consuming. So what they did is they just made it easier to use the equipment. So here's an Obama-era law on credit card statements that they include [00:08:00] sort of the cost that you would pay, but if you paid the minimum amount, they show you how much it would cost you over like 15, 30 years. So why can't we just do that for everything? Just make it simpler for people?

Annamaria Lusardi (08:12):

Yeah. We can and we should, but it's not enough. It's not enough. We need also now for example, to make decisions about our pension, our responsibility to save and to invest our pension has been shifting upon us. And these are not simple [00:08:30] decisions. Also, decisions are interrelated. I have to decide not just how much to save for my pension, but also whether I want to buy a house and the down payment whether to pay off my credit card. And so if you simplify one decision, I still have to make decisions across different options.

(08:51):

The financial market, the world has become much more complex than in the past. So I cannot I think stop [00:09:00] that complexity. And I think this is what happened also for education. We need to increase and have a higher level of education because of the changes that we see around us. And this is precisely why we need to add this additional topic. The world around us are required to have that knowledge. We are not able to operate under just simplifying some of those decisions.

Denise Pope (09:29):

That is a great answer. [00:09:30] Really appreciate that.

Dan Schwartz (09:38):

So Denise, I don't know how you learned financial literacy 'cause you never took the econ course, but maybe it's there. So my question is what have you done to help your kids become financially literate?

Denise Pope (09:49):

Oh, that's a very good question. We have talked as a family about savings. And I know this sounds crazy, but early [00:10:00] on, so I was always told, don't pay your kids for chores. Okay? Stick with me on this. Don't pay your kids for chores because they should be doing them out of the kindness of their heart, out of being part of a family. This is what we do to help others. But I was told you should give your kids an allowance because giving them an allowance not tied to anything in particular, but giving them an allowance helps them learn financial literacy.

(10:28):

And so one of the things that we were told [00:10:30] is to have something where you give them an allowance that they get to spend a little bit, but they also get to save a little bit. And then also think about when we give to charity like helping others. So we get together right around Thanksgiving, we figure out where we want to put some charitable funds and we would always include the kids in that and they would put, when they were little, it was like I can give 25 cents, but you make a big deal out of it. So that's what we did in my family.

Dan Schwartz (10:58):

Wow.

Denise Pope (10:59):

What? How about- What?

Dan Schwartz (11:00):

[00:11:00] Nothing. I didn't give an allowance. He would have to ask for money. But then in college his roommate was the world's best online poker player.

Denise Pope (11:11):

Oh, well that helps.

Dan Schwartz (11:12):

And that's where he learned it all, right, from this guy who really understood sort of taking bets and risk and where do you invest, so.

Denise Pope (11:24):

Well, we need him to teach the financial literacy classes.

Dan Schwartz (11:28):

If I can just point out, [00:11:30] even though I did nothing, he's now a certified public accountant. So I don't know where it happened. It wasn't me. I didn't give him a credit card or something like that and say, "You have to pay off your debt, kid." I don't know where he got it.

Denise Pope (11:43):

Although that is interesting because that's the other thing that we were told, is have them have a credit card early on that you're a cosigner on 'cause they don't have enough to get their own, but they will learn. And then that's how you teach them about always pay off your credit card in full.

(11:59):

My [00:12:00] dad taught me that. My dad taught me how to balance. I used to have to balance my checkbook to the penny because that's what my dad taught me. I mean literally to the point I would just go through. Remember in the old days you'd have your checks and you'd go through and you'd check them off and see. Yeah, that's what I was taught.

Dan Schwartz (12:17):

I've never done any of that. I just look at my bank account and I say, "I'm not broke. It's okay."

Denise Pope (12:23):

It's okay.

Dan Schwartz (12:25):

That's about as far as I get, but ...

Denise Pope (12:27):

I will say this though, we do have students [00:12:30] who will think like, "Oh, I still have checks in my checkbook." I'm dating myself. "I must have money in my account." Right?

Dan Schwartz (12:38):

Ooh, I like that mis- I like that one.

Denise Pope (12:40):

There's problems. There's problems. It sounds like we do really need to invest in financial literacy, and the more, the better at this point.

(12:52):

Okay, so you have me convinced, Annamaria. We need this. Talk to me a little bit more about the bill itself [00:13:00] and what it's requiring and why high school and what this all means.

Annamaria Lusardi (13:04):

Yeah. So the new bill requires a semester-long personal finance education course to graduate. So the schools have to offer the course by the 2027 and '28 school year and make it a graduation requirement by 2030 and '31. So it has to be a standalone personal finance [00:13:30] course. And that's I think what makes it unique, and California will become the 26th state to require this standalone personal finance course to graduate.

Dan Schwartz (13:44):

So Denise, do you think students are going to love it? I mean it's so practical and relevant.

Denise Pope (13:49):

I mean, I think it's to be determined, right? How is it taught? Is it taught in the way that Anna just did with me? Yes. Can we clone Anna and send her out to every high school in [00:14:00] the California? That would certainly help. I worry, and I can just tell you from my own experience, sometimes these classes get the reputation of the dumb math class. So you're not taking algebra one. You're not taking algebra two. You're in the dumb math class.

(14:16):

What I love about requiring everyone to take it is I think that that stigma is going to go away. And personal finance is not going to be considered sort of math for dummies, for lack of a better word, but it's going to be like, "Oh wait, this is really [00:14:30] important. This is how I buy a car. This really affects my future."

(14:34):

And I will say this, the fact that it became a full semester is really incredible because I've seen other things passed – there has to be some mental health education – that are short, maybe unit-long type things or you kind of cover it in, it's a checklist and you can check it off. But to make this a full semester long class shows you just how important the government thinks it [00:15:00] is for us to learn this. So well done, well done, Anna.

Annamaria Lusardi (15:05):

Well, I think the same. And I want to say judging from the students here at Stanford, I know these are not high school students, but when the course was first offered here, 362 students signed up.

Denise Pope (15:19):

Wow.

Annamaria Lusardi (15:20):

It became the most popular course within economics. And even now that we are teaching it, I'm teaching it also in the summer. We have had more than 400 students during [00:15:30] the spring and the summer term and we had to raise the cap four times. It's very, very popular among the students. So hopefully it doesn't have that stigma.

(15:40):

I actually want to mention something that people don't mention enough, which is the importance of making this course mandatory is because we made it accessible to every student. So when you look at the proportion of people, young people who are financially literate, and I've studied [00:16:00] for example, younger people but older than the high schooler, we see that it's disproportionately the white male college-educated young people who are financially literate. And so by making this course mandatory and accessible to everybody, we can give this access to those students who otherwise would not have it.

(16:24):

Our study finds something really interesting, which is that if you look at these young people that [00:16:30] have studied 23 to 27 years old, we can link that financial literacy to the wealth of the parents when they were growing up, when these people were 12 to 17, and in particular, if the family had retirement savings and stocks. In other words, young people today learn these topics at the dinner table, but only if they come from families which are well-off and which are college-educated.

(16:58):

We see this in the PISA data [00:17:00] as well. One of the most important determinant of financial literacy is unfortunately socioeconomic status. We need to have it in the school to provide access to everybody.

Denise Pope (17:14):

So important, so important.

Dan Schwartz (17:16):

I think that finding is not surprising, but it's incredibly important.

Denise Pope (17:20):

Yeah.

Dan Schwartz (17:20):

If you don't have money in your household, you don't spend a lot of time talking about your mutual funds.

Annamaria Lusardi (17:25):

Right. And also money becomes a source of anxiety, of worries. [00:17:30] We see this in the adult population as well. And also money is taboo. And so we don't discuss this easily and this is why eventually people will never learn about it. But it's better to have this knowledge before you make financial decisions than after and learning in school rather than learning by mistakes.

Denise Pope (17:55):

Totally. And that actually makes me think of this whole concept of money as taboo as a whole, [00:18:00] right? No one talks about how much they make. You're not supposed to say these things in public and at dinner parties or whatnot. It's just mystifying to me because another thing that I read that you said is it's not necessarily wealth that is connected to happiness, it's actually financial literacy connected to happiness.

(18:18):

Can you say a little bit more about that? I think it plays into what we're talking about right now.

Annamaria Lusardi (18:22):

Yes. What we say and the reason why we make the statement is that we have seen that financial literacy [00:18:30] is linked to a variety of behavior that is bringing that happiness. I would say that financial well-being, that financial security. We don't at the end save just to save. We want to save to achieve an objective, to, for example, send kids to college, to be able to have a secure retirement, to be able to do the things we would like to do, maybe take a trip, maybe help others. And so is that, I think knowledge that [00:19:00] today is so fundamental. Every decision we have to make is relatively complex. So it’s that knowledge that allows us to navigate better the financial system and therefore be able to be savvy in making the financial decisions.

(19:18):

I always ask my students in the first class what the course is about, what they think the course is about. And most of the students, I have to say – similar to I think what the [00:19:30] average person thinks – they think the course is about investing because of personal finance, you feel like, well, it has to be about investing. And I always say, no, this course is a happiness project. It teaches you the things that are important so you can make the decision that allows you to achieve some of the objectives that you have.

Denise Pope (19:54):

Well, there's your hook for high schoolers right there, especially given the mental health issues of kids right now [00:20:00] and the state of economy and the real wealth gap that we're seeing, right?

Annamaria Lusardi (20:05):

Yeah. Think how daunting it can be for a high school student today to think about a decision to go to college and how to finance that education. So that in itself is a complex decision. So right there, young people have to make important and consequential decisions very early on.

Dan Schwartz (20:26):

So I want to get back to one of the findings that [00:20:30] I saw, which I found kind of stunning. And so the claim is that 30 to 40% of differences in net worth are due to financial literacy. So that's pretty stunning. And I'm sort of thinking maybe the causal direction's the other way, that if you have a lot of money, you become more financially literate. So tell me, because 30 to 40% based on financial literacy is huge.

Annamaria Lusardi (20:56):

Yeah. This is actually part of a study that we did, but like [00:21:00] you were suggesting, we actually argue that financial literacy can also be an investment and that people who have a lot to gain from financial literacy will potentially invest more in financial literacy. And this is actually what we see as well in the data, that there is a little bit that endogeneity as well, as you have correctly indicated.

(21:25):

But our result at the end is indeed stunning and I think [00:21:30] is very much in line with, I think even a simple example. Suppose as we do, we both have a PhD, but I invest in the stock at age 30 and you don't invest in the stock market. 30, 40 years later, we are going to look very different just because of that decision. And that decision is often very much led by financial literacy. So financial literacy can really influence our wealth [00:22:00] much more than it influences our income.

Denise Pope (22:03):

I mean, I do want to point out though, you have to have money to invest in the first place. So if you're constantly living paycheck to paycheck, that's not even a reality for you. Right?

Annamaria Lusardi (22:14):

Right. But in our story as well, financial literacy helps in smoothing some of those shocks. So financial literacy is not just to accumulate for retirement, it's also to accumulate to smooth some of those shocks that [00:22:30] you might have. And so that ability, for example, to have a buffer stock of savings, putting aside a little and particularly early on if you can, is going to bring a lot in the long term.

(22:45):

I myself have to say, have regrets of not having invested and invested earlier on, for example, in this type of tax favor asset like a Roth IRA that really allows people [00:23:00] to grow in their wealth very early on. So there is really a lot we can learn and we can benefit from the financial market, the opportunity offered by the government and the employer, but we have to be aware of it and take advantage of them. And this is what financial literacy does.

Dan Schwartz (23:18):

So here's a complicated financial literacy issue that I had. So I had a job before I went back to PhD and I liquidated all my retirement to pay for my doctoral studies. [00:23:30] And so now I'm sitting here thinking, "Should I have left it? Would I be happier if I had not liquidated my retirement, which was age 30, or was my investment in a college education, advanced college education better?" I decided to get the PhD.

Annamaria Lusardi (23:49):

It's another investment I think you have chosen, but again, I don't know to know what is best. And I think that's also what we normally say, right? It depends [00:24:00] on you, what your decision are and what your knowledge is. But this could have potentially been a better investment because you have invested in education that has brought, I'm sure a very satisfying career and the things you wanted to achieve. So that's what money is for. That's the main lesson of financial literacy, use money for what is best for you.

Dan Schwartz (24:26):

So Denise, I liquidated my retirement so I could reach the [00:24:30] culmination of doing School's In with you.

Denise Pope (24:31):

I was just going to say-

Dan Schwartz (24:33):

That's how it cashed out.

Denise Pope (24:33):

You wouldn't be there if you hadn't have done that. So of course it was the right decision. Right?

(24:38):

Okay, as we wrap up, Anna, what's sort of one takeaway that you want people to get out of the show today?

Annamaria Lusardi (24:44):

The takeaway is that financial literacy is an essential skill to thrive in the 21st century. I am quoting the title of the first report of the Program for International Student Assessment [00:25:00] by the Organization for Economic Cooperation and Development, or the OECD, who added financial literacy into PISA already in 2012. It recognized that that's a very important skill. And so my suggestion to young people is, while you are in school, take this course if it is offered. My suggestion to parents is talk about money to your children as soon as possible when the Tooth Fairy comes.

Denise Pope (25:30):

[00:25:30] Yes.

Annamaria Lusardi (25:31):

And my suggestion to an adult person is to try to acquire this knowledge because it's a good investment for the future.

Denise Pope (25:39):

I love that. Can I just say the Tooth Fairy, on that topic, talk about inflation. We gave our kids maybe a quarter. Maybe my third kid got up to a dollar a tooth. I hear it's like 20 bucks a tooth these days. Talk about ...

Annamaria Lusardi (25:54):

Inflation has gone up. We need to adjust that little money, right? In particular, remember inflation [00:26:00] was 8%, so please adjust the money accordingly.

Denise Pope (26:04):

I love it.

(26:04):

Dan, any last words?

Dan Schwartz (26:06):

Well, I think the answer is you need to explain to your children why they should put it in the piggy bank.

Denise Pope (26:11):

Instead of spending it on candy.

Dan Schwartz (26:13):

And you add 3% to the piggy bank every year.

Denise Pope (26:15):

Exactly. Nice.

Annamaria Lusardi (26:17):

So you can see and they can see how much it grows.

Dan Schwartz (26:17):

Yeah.

Denise Pope (26:20):

I love it. I love it.

(26:21):

Well, thank you so much Annamaria for being here. We learned so much. I personally learned a lot and I know our listeners did too. Thank all of you for joining [00:26:30] this episode of School's In. Be sure to subscribe to the show on Spotify, Apple Podcasts, or wherever you tune in. I'm Denise Pope.

Dan Schwartz (26:38):

I'm Dan Schwartz. I will go back and look at my investments this evening.