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Dan Loney: Well, the topic of financial
literacy is one that continues to draw attention, but are we
seeing significant enough change
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in how we approach the topic, as
well as helping our younger generations be better prepared
for the time in their lives
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where they have to be fiscally
responsible? Pleasure to be joined by Olivia Mitchell, who's
Professor of Business Economics
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and Public Policy, as well as
Director of the Pension Research Council here at the Wharton
School. Olivia, great to talk to
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you again. How are you? Olivia Mitchell: Very well. Thanks.
Thanks for having me back.
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- Thank you. You and I have talked about this
topic a few times over the years, and I know how much you
have focused on it, and you know
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that I am a dad of three
teenagers, and it's very important to me as well. So
larger scale, where do you think
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we are on the topic of financial
literacy at the moment? - Well, there are few silver
linings out there. There's a
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rising chance of getting
financial education in high school these days. Twenty five states now
require a course in high school
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in financial education in order
to graduate. So that's the good news. But overall, the story is
still not a good one. The
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average financial literacy rate
of US adults is low. Only 48 percent can correctly answer all three
of our big three financial
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literacy questions, even though
their self-confidence is very high. And financial illiteracy is
actually rising over time. The
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percentage of US adults with
poor financial literacy rose from 20 percent in 2017 to 25 percent just a
year ago. So that gives me
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some concern. - What do you think still needs to
be done in order to continue to
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grow and build the options to
make those numbers better? - Well, there are several different
topics that people need to get
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better educated about. One is
they fail to budget. They don't track their finances. Also, they
pay too many overdraft fees for
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credit cards and credit card
interest, and they spend too much on luxuries, on top of
which there's increasing scams
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online and identity theft. So
all of these are things that I believe people could avoid and
protect against if they were
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more financially literate. - How much, and I know you and I
have talked about this as well,
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is I've been very focused as my
kids have grown up about trying to implement things that I know
I can help them with. And I
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think that's an important
component to discuss here, is just where parents may be able
to step in and help this process
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out.
- I think parents have a critical
role to play. For very young children, say ages three to
five, we have to explain what
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money is, why it's needed, show
them bills and coins, even though pennies are not going to
be around much longer. Show them
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how to make change. Then when
they're ages, say, six to nine, or maybe even younger, you can
introduce the concept of doing
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chores or tasks to earn extra
money. You can put in place a piggy bank or a savings jar to
separate how much you're going
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to spend and how much you're
going to save, and explain that time and money are finite
resources, so you have to make
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choices. When my kids were that
age, I set up the so called Bank of Mom, which was just a
spreadsheet with their allowance
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on one side and their spending
on the other. And if they wanted to spend more than they had,
they had to do some chores. Then
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moving on to ages, say, 10
through 13, you have to introduce the idea of saving to
hit targets for bigger
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purchases, maybe a bicycle, for
example. I believe it's useful to open a savings account and
explain what banks do. And then
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for your teenagers, 14 to 18,
it's very important to teach budgeting, tracking expenses,
discuss part time jobs, talk to
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them about paychecks, taxes, and
how to live within your means. Also we have to explain credit
and the risks of debt and why
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you want a good credit score. So
those are some of the things that I think we can do and
should be doing at various
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points along their growing up.
- And I know it's also an important
component for you as well, that
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doing this as kids are growing
up can be important for their lives in terms of having this
understanding and getting on a
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good savings path, so that they
are prepared for when they reach retirement down the road. - Well,
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it's important for retirement,
but it's also important much earlier than that. Almost 20 percent of
American 15 year olds don't know
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how to comparison shop, budget, or
track their expenses. So if they can't even do that, it's going
to be very hard for them to save
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later for those bigger targets. - Then there is that -- I guess
there is that impact of not
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having that understanding and
what it means for retirement savings down the road.
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- Low financial literacy costs a
lot of money. It's been estimated that low financial
literacy costs Americans around
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390 billion per year. So it
wastes money. It also wastes time. People who are not
financially literate are seven
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times more likely to spend over
20 hours a week dealing with personal financial and finance
related issues. Moreover, if you
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don't save when you're young,
you forgo all the beauty of interest compounding that will
make you a happier retiree. So
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yeah, it has a huge impact. - And I guess there's also the
important component of allowing
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kids and teaching them, but also
allowing to make these decisions in terms of the critical
thinking that they will need in
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a variety of different
situations as they go through their lives. - I think that's true. Obviously,
the parents need to lead by
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example. You can talk with your
kids, depending on their ages, about household decisions, like,
where are you going to go
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shopping? How are
you trying to save? How can you reduce your debt? You can
involve children in shopping
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trips, and if you have discount
coupons, use those. I played Monopoly with my children, cards.
My husband taught my girls
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poker. But financial concepts and
how to manage risk. Then a little bit later on, we encouraged them
to sell Girl Scout cookies and
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set up a lemonade stand and do a
car wash. Each of those things contributes to understanding
what's at stake, the money that
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you get from this activity, and
what to do about it. And then, obviously, for teenagers, you
have to talk about college and
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career costs, which is one of
the big ticket items they all face. - Any other advice that maybe we
didn't touch on that you think
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is very important in this
process? - Well, I've always tried myself,
and to talk to my children, about
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living within their means. That
is, don't spend it all. Try to spend less than you can. In
fact, my first house that I
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bought was the grand total of
$45,000. And of course, it was a while ago, but it was a way to
try to make sure that the
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mortgage didn't eat up the
entire paycheck. It's also important to teach them the
value of time. And like I said,
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time is a scarce resource, and
if you waste it, then that's going to have negative effects
on not only your spending, but
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what you're able to do later. I
think a third thing I would say is teach them the difference
between needs and wants, because
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a need is something, you know, food, a roof
over your head, make sure you're
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safe. A want might be a luxury
item, which today is trending, but you don't really, really
need it. And then, of course, to
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reiterate, we need to teach them
the habit of saving. And it's not that all debt is wrong or
evil, but debt needs to be taken
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on with understanding and
strategically. For example, if you take out a college loan so
that you will be able to get a
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higher paying career, that could
well be sensible. - Olivia, great insight. Thanks
very much for your time. - My
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pleasure. Thank you. - You got it.
Olivia Mitchell, Professor of Business Economics and Public
Policy here at the Wharton
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School, and also Director of the
Pension Research Council.