As our country grapples with the threat of the coronavirus, businesses, schools, and other public venues have closed, leaving many people out of a job. How do we teach financial literacy in these uncertain times?
I talked with Annamaria Lusardi, economics professor at George Washington University and founder of the Global Financial Literacy Excellence Center. There’s no easy answer here. Lusardi says that when it comes to personal finance during a crisis like this one, the best we can do is teach the basics of saving and budgeting. She reminds us of what history teaches us: our country has seen hard economic times and we’ve always prevailed.
The lesson of prevention may seem like cold comfort now. But Lusardi insists it can help students of all ages and economic levels prepare for future success. And it will be key to helping them cope with future economic setbacks.
Brenda Iasevoli: Given the overriding concern about our health, why should kids be thinking about financial literacy right now?
Annamaria Lusardi: Financial literacy is a lot like health; in fact, sometimes we call it “financial health.” And just as with health, prevention is better than the cure. Now is a great time to talk about the fact that shocks happen, putting us in a difficult situation we could have never predicted. Illness happens. Job losses happen. It’s important that we practice prevention—saving and budgeting—so that we are better able to deal with crises like this one.
BI: What should we be teaching kids about preparing for the future?
AL: One thing that personal finance tells us is we have to have a buffer stock of savings. We always need to have something in our piggy bank. Kids should know the ant and the grasshopper tale. When it’s summer and everyone is happy and having fun, the ants were putting food aside. When winter came, the ants were able to deal with it. Like the ants, we need to plan for the future and put money in our piggy bank in case of a sudden need or an emergency. Too many Americans rely on the flexibility of the labor market. When you ask them how they are going to deal with shocks, they say, “I’ll take a second job.” Unfortunately, many don’t have this option. You cannot go to a restaurant now and say, “Hey, I can work more hours.”
People are also borrowing, which provides liquidity but with no insurance. When you use borrowing in an emergency, say, when you max out your credit card, you get liquidity, but at a higher cost. You don’t want to pay a higher cost when you most need it. The best way is to always have money put aside. We should have three to six months of savings liquid—not in a retirement account—because that’s the most secure way to access our money. How does this translate into a lesson for kids? Put money in that piggy bank, because we might have a wish for the future to fulfill or an emergency to address.
BI: How can we teach these lessons to kids?
AL: The little ones should learn what money is. If you think kids aren’t interested in money, give them a piggy bank and you will instantly transform that kid into a banker. They should learn this simple concept: money buys things. You put money away to save up for the things you want to buy. In high school, teach about interest compounding in a savings account. The sooner kids learn these concepts, the better.
We should also teach the simple concept of having a budget. We are all constrained by a budget. It’s not about our wishes. If you ask me, I would like to have the biggest house and garden possible. But the reality is, what I can buy depends on my resources. That’s a very important lesson for the kids: Your choices are constrained by your resources.