When Annamaria Lusardi talks about the importance of teaching personal finance know-how, people sometimes imagine she’s carrying a torch for obsolete life skills, like balancing a checkbook. She is decidedly not. “That belongs to the history course,” she says. Rather, Lusardi, a senior fellow at the Stanford Institute for Economic Policy Research, wants to ensure that people have the knowledge and ability to use basic principles of economics and finance in their everyday decision-making—to get the most bang for their literal buck. It’s a skill she calls financial literacy. It’s so important, she says, that she advises parents to start talking with kids about financial ABCs around the time the tooth fairy arrives. And yet, as nobody knows better than Lusardi, few people get such an education—then or ever.
For the past two decades, she has plumbed our collective financial ignorance, most famously with a set of questions that expose just how financially naive most people are. The questions go back to 2004, when Lusardi, then an associate professor of economics at Dartmouth, and her longtime collaborator, Olivia Mitchell, an economist at the University of Pennsylvania, were concerned as to why so many Americans were struggling financially as they headed into retirement, including many who looked on paper—in salary, education, and marital status—similar to others who were prospering. To what extent, they wondered, was financial knowledge a factor? At the time, there was no national data that might shed light on those kinds of discrepancies. But the researchers were given the chance to add questions to the U.S. Health and Retirement Study, an established survey of Americans over 50.
Lusardi (Photo: Nancy Rothstein)
Specifically, they could ask three questions. So Lusardi and Mitchell focused on a trio of financial ideas at the core of most economic decisions: compound interest, inflation, and risk diversification. Put more simply, elemental ways that wealth can grow, shrink, and be protected. The three questions they settled on required no real math, only a basic conceptual understanding of each area. (Try your hand below.) Some colleagues advised them not to ask anything so obvious. But only a third of respondents answered all three questions correctly. “We were very surprised,” Mitchell says. “Perhaps stunned would be a better word.”
The results were no fluke. With their mix of brevity and incision, Lusardi and Mitchell’s “Big Three” questions have become a common metric of personal financial literacy, yielding reliably dismal results for all ages. In the 2021 National Financial Capability Study, a tri-ennial national survey, less than 30 percent of Americans answered all three questions correctly. The worst performers by age were adults under 35: Just 14 percent of them aced the Big Three. Additionally, nearly a fifth of all respondents got all three questions wrong. Results from Lusardi’s more in-depth surveys of financial savvy have reinforced the theme: As a whole, we just don’t grasp money basics. “We are as financially illiterate as we were illiterate in the past, and ignorance is not bliss when it comes to personal finance,” Lusardi says.
If there’s cold comfort to Lusardi’s work, it’s that the United States is by no means unique. Variations on the three questions have earned similar or worse scores around the world; Lusardi says her native Italy is notably bad. But the risks of ignorance are particularly high in a country that puts so much responsibility on the individual to create their own safety net, Lusardi says, from paying for college to saving for retirement to shelling out for medical expenses. Poor decisions can haunt us for decades. According to her and Mitchell’s research, people with low financial literacy are less likely to reap the benefits of investment, such as through mutual funds; to manage their debt well, like refinancing a home when conditions are ripe or shopping for a better loan; and to take advantage of tax benefits, like those provided by 401(k) and individual retirement accounts. Lusardi’s research finds that an estimated 30 to 40 percent of wealth inequality near retirement age can be attributed to financial literacy.
Not knowing how money works isn’t just a problem for individuals, although it cost Americans an estimated $243 billion in 2024, according to the National Financial Educators Council. Lusardi says it’s a bigger drag on the macroeconomy than experts have traditionally thought. When people make poor financial decisions, it doesn’t just deprive them of the likely returns of sound investments, saddle them with extra debt, or expose them to hidden fees. It deprives the economy of capital—that is, additional money that could be invested. But more consequently, if enough people make such decisions—like biting on offers of adjustable mortgages with dramatically increasing payments—the results can destabilize the entire economy, helping precipitate disaster, as in the 2008 global financial crisis. Financial literacy is more than a personal skill, Lusardi says. It shapes society in powerful and uneven ways.
Making Change
For Lusardi, education is the remedy. She joined Stanford in 2023 to lead its Initiative for Financial Decision-Making, a collaboration between the Graduate School of Business, the department of economics, and the Stanford Institute for Economic Policy Research. Its goal is to democratize access to financial education for millions through research, technology, and policy work. Her efforts have ranged from launching an academic journal to teaching undergrads the basics of money to hosting an annual Teaching Personal Finance Conference on campus. People are the chief financial officers of their own lives, Lusardi says. They need training no less than their corporate kin. “We want to change the conversation about money,” she says. “We want to put personal finance in the classroom—in college but also in high school, and, in fact, in every place where people learn.”
Feel like a Million Bucks |
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1. 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? A) More than $102 2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? A) More than today 3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” A) True *Answers below |
Financial literacy is not distributed evenly across society. Those who score lower on surveys include Black and Latino Americans, the young, the old, those who are less educated, and women. Lusardi says seeing data that financial literacy was weakest among already vulnerable groups is what shifted her from studying the problem to trying to fix it. “The people who pay the cost at the end are the vulnerable groups,” she says. “It’s important to level the playing field.” She has worked for both the American and Italian governments on financial education, testified before the U.S. Senate, and presented to the World Bank. She may be the most recognized academic name in personal financial literacy, one whose data has been key to the fact that 27 American states now require high school students to pass a personal finance class in order to graduate. “She has done more to promote financial literacy in high schools and in colleges than anybody I can think of,” says Ed deHaan, a professor at the GSB. Nan Morrison, former president and CEO of the Council for Economic Education, praises the rigor Lusardi has brought to the cause. “The research before her was weak.”
Financial education has been growing at Stanford too. In March 2020, professor of economics Michael Boskin started a course he had long thought students needed. Econ 43: Introduction to Financial Decision-Making aimed to give students a framework for thinking about topics from insurance to interest rates to inflation. They weren’t the sexiest-sounding subjects, but the course—initially taught online because of the pandemic—debuted to 360 students and 80 auditors, including seven professors and a dean. Its popularity has never waned. This spring, Econ 43 maxed out at 306, with 40 students on the waitlist. “It’s been by far the largest new class ever taught in economics [at Stanford],” Boskin says. “We didn’t think it would be anywhere near that.” The popularity of the course inspired Stanford’s Initiative for Financial Decision-Making and is now part of it.
When Lusardi teaches the course, she opens by asking students what they think the class will be about. Investing is a common answer, which is partially right—they get there eventually, after covering more elemental topics, like the five components of your credit score—“your financial GPA”— and how to maximize them. Lusardi believes in first getting your financial house in order. Similar to how many people don’t grasp how interest grows on interest to expand wealth, they also don’t appreciate how quickly it explodes debt. “Before you invest, pay off your credit card,” she says. “You will increase your credit score, and I don’t know of any stocks that pay 25 percent interest risk-free.” The course is not an investing workshop, she tells the students. It is a happiness project—one that will help give them the skills to move toward their life goals and away from monetary stresses and anxieties. Her goal is not to create little Warren Buffetts trading derivatives, just as an English teacher’s goal isn’t to teach someone to write the next War and Peace. The point is to impart necessities to navigate the world. “We cannot have zero knowledge.”
Lusardi doesn’t ask new students her three questions, but she is confident many would not do well on them, regardless of their academic credentials. “Financial literacy is not about intelligence,” she says. If a Stanford student’s family didn’t discuss finances at the dinner table, they might be as unaware of financial matters as anyone else. This is especially likely in first-generation college families, she says. Since adults with lower educational achievement tend to score worse on financial literacy, they might be less equipped to impart better financial skills to their kids.
The course will not turn anyone into a stock picker either. In fact, research indicates that it’s very hard to do better than a low-cost, diversified mutual fund, Lusardi tells her students. The lessons make vivid how other decisions ripple through time, from the high cost of poor credit to the enriching consequences of early enrollment in retirement programs like 401(k)s, as well as the benefits of delaying taking Social Security if you’re healthy and financially able. “We can all, if we use this knowledge, arrive at financial decisions that will make us financially resilient,” Lusardi says. “Resilience in engineering means you bend, but you don’t break, when facing a shock.”
Easy Money
Gavin McDonell, ’24, a math major and co-term in materials science and engineering, is a long way from Social Security, but he took Econ 43 his sophomore year and found it so engaging that he decided to try other courses in the department. There’s a good argument, he says, that a course in which pragmatic advice ties to macro- and microeconomic factors such as interest rates is the perfect introduction to economics. He now wants to enter a doctoral program in the field. “This class was not only something I took to gain some skills and learn something that I could apply to my life, but it was also a bridge into the subject of economics,” he says. “It can hook people.”
Economics major Isamar Marte Núñez, ’26, took Econ 43 after meeting Lusardi at a student-run finance workshop. An international student from the Dominican Republic, Marte Núñez arrived at Stanford knowing little about credit cards and felt overwhelmed by the process of applying for one. The course put her on firmer footing on a range of topics. “I think students who come from first-generation, low-income backgrounds, when they are exposed to this, they can make better decisions,” she says. That, she says, has a radiating influence into social and family circles. “It starts a conversation,” she says. “You get to reflect on these topics on both a personal and academic level that just makes it transcend the classroom. And then you begin talking to your friends about it.” Marte Núñez says she has already used her financial literacy knowledge to mentor students through a summer program she runs for low-income students at home.
For both Marte Núñez and McDonell, the course has left lasting conceptual impressions—like the importance of compounding interest and the time value of money—and brought about at least one concrete investment. They both opened Roth IRAs, individual retirement accounts built on after-tax contributions. Those deposits grow tax-free and, unlike traditional IRAs, aren’t taxed when they are tapped later in life. Generally, only people earning below a certain income qualify for one. In other words, they’re perfect for many college students who are not yet receiving a full-time salary and who have decades to let compound interest work its magic. And yet, students are also the group least likely to be thinking about tax-free earnings on retirement funds.
Marte Núñez recalls telling her friends they should open a Roth IRA too. They were all 20 years old, and none had thought about such tax benefits. “I think that’s why this class holds a great value,” she says. “We were not introduced in the past to this idea, and now we can have that information and we make our decision based on that information.” McDonell says his girlfriend opened one on his recommendation. “It’s a no-brainer,” he says, “but not a lot of people do it.”
Show Me the Money
Who gets all three questions right?
High school grad: 13%
Some college: 27.2%
College grad: 44.8%
Post grad: 50.7%
Source: 2021 National Financial Capability Study
The growing emphasis on financial literacy is not without its critics, who think it implicitly blames people for their own financial burdens while giving a pass to an unfair or even predatorial system. Financial savvy wouldn’t matter so much if, say, the government had outlawed the subprime loans at the heart of the 2008 financial crisis. There are also those who doubt whether a single high school or college course can do enough to change behaviors over a lifetime.
For Lusardi, teaching financial literacy is not an exoneration of policy choices or an excuse not to reform systems. It’s a recognition that without individual knowledge, outcomes only get worse. It’s like highway safety, she says. Authorities have a responsibility to build and maintain safe roads and provide traffic rules and enforcement. But we still need knowledgeable drivers. “At the end, you are in the driver’s seat,” she says. “If we put you there without any license, without checking whether you can drive, there are going to be a lot more problems.”
Sam Scott is a senior writer at Stanford. Email him at sscott3@stanford.edu.
* Answers: 1. A; 2. C; 3. B
