How Lessons in Personal Finance Can Help Teach Economics

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Annamaria Lusardi: I think students who are exposed to personal finance will start to see what economics is about and also how useful it is.

Scott Wolla: Hi. I’m Scott Wolla. Welcome to Teach Economics. This show is all about the power of bringing economics into the classroom. And it’s never too early to introduce economics to students. And some say the best way to do this is with lessons on personal finance.

Lusardi: You know, when the tooth fairy comes is the time to talk about money. Give a piggy bank to a child and you will transform it instantly into a clever banker.

Wolla: That’s Stanford University Economics Professor Annamaria Lusardi, a leading researcher in financial literacy and a pioneer of personal finance education.

Lusardi:I see personal finance as a new field within economics. So while economics is broader and encompassing, personal finance focuses on the financial decision making of individuals and households.

Wolla: Lusardi is one of the most cited researchers in financial literacy with close to 100 published articles and books, including top journals such as the American Economic Review and the Journal of Political Economy. She holds a PhD in economics from Princeton, and has taught at George Washington University, Dartmouth College, and more.

Lusardi: So I went to Bocconi University, the undergraduate university in Milan, to study business. And at the very first economics course I took, I fell in love with economics, I shifted into economics my first year.

Wolla: On this episode, Annamaria Lusardi talks about her career journey.

Lusardi: From economics to financial decision making and to personal finance.

Wolla: She also talks about designing her own personal finance course, and her passion for teaching it.

Lusardi: It’s changing student lives. And I have to say, I have myself benefited from the knowledge I continue to learn by teaching this course.

Wolla: From the Federal Reserve Bank of St. Louis, this is Teach Economics.

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Andrea Caseras-Santamaria: Hi, I’m Andrea Caceras-Santamaria, an economic education specialist at the St. Louis Fed. If you’re an educator, we know finding creative ways to engage your students can be a challenge. That’s why we created Page One Economics®. Each issue provides a short overview of a timely topic that offers students an opportunity to learn economics while using close reading strategies. You can find Page One Economics at stlouisfed.org under Resources for Teachers and Students. And while you’re there, be sure to subscribe to our newsletter. Okay, let’s get back to the show.

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Wolla: Annamaria Lusardi has achieved some great things. She is Senior Fellow at the Stanford Institute of Economic Policy Research, and Director of the Initiative for Financial Decision-Making at Stanford University. She’s also the founder and academic director of the Global Financial Literacy Excellence Center, and her research is regularly featured in national media.

I was curious about her path, from being trained as an economist to becoming one of the leading researchers in financial literacy.

Lusardi: My research at the beginning of my career was focused on saving decisions and in particular saving for retirement. So, it was about financial decision making and one of the most important decisions that people make, you know, how much to save for retirement and how to plan for retirement. That led me to financial literacy. So, assessing how much people know about the basics, the basic concepts that are the basis of financial decision making, such as retirement saving and personal finance. And, you know, which is now, a new and growing field. And I’m very happy to be a contributor. So, you know, from economics to financial decision making and into personal finance.

Wolla: So, in your recent paper in the Journal of Economic Perspectives, you define financial literacy as people’s knowledge of an ability to use fundamental financial concepts in their economic decision making. I really like the emphasis on economic decision making, by the way.

So, how do you describe the, the relationship or the differences between economics and personal finance?

Lusardi: I see personal finance as a field, as a new field within economics. So, while economics is broader and encompassing, personal finance focuses on the financial decision making of individuals and households. And in the same way, we have specialized fields in economics, labor, industrial organization, international trade. We now also have personal finance.

At Stanford we teach Economics 43. It’s a personal finance course, and its exact title is Introduction to Financial Decision Making. It’s offered within the economics department. And so, you know, again we have a field that we can offer within economics. And when I design the task for financial literacy, yet again I was referring to the most fundamental concepts that people need to know to make decisions. So, knowledge of interest rate and inflation being one of the two prominent ones. So again, there is a very strong connection, of course, with economics. To say that within economics, we have these fields now, which are important field for research, for study and for teaching.

Wolla: That’s great. In a high school setting, economics and personal finance are often two distinct courses. And because there are only so many hours in a school day and only so much room in the curriculum, they sometimes find themselves in competition with each other for space in the curriculum.

Given the rise in personal finance education in high schools that we’ve seen in recent years, do you think economic educators should be worried about losing a spot in the curriculum?

Lusardi: First of all they shouldn’t, and I actually think we need both. As I mentioned before, economics is the foundational knowledge and personal finance is more specialized knowledge within the field of economics. So, they complement each other. But at the same time, I’m also glad there are now school mandates for personal finance. Because, you know, just learning economics alone is not enough, right?

So people think, well, you know, we have economics, so you know about personal finance. And that’s not true. Right? In the same way we teach economics. But, you know, you probably don’t know enough in your industrial organization or labor economics. So we need that specialized knowledge now more than ever, so you know, we need both courses.

And, you know, to your point, can personal finance be a gateway into economics? Perhaps if you are exposed to personal finance first, I very much think so. I think students who are exposed to personal finance will start to see what economics is about and also how useful it is. And I’ve seen this at Stanford because our personal finance course, econ 43, is open to all students, not just econ students, and there are no prerequisites.

So, for example, many freshmen take that course. In the summer I even add the non-Standford student. I even have some high schoolers, and I have to say, you know, they told me how much they became interested in economics, as well. So I really do think that, because it is, you know, that specialized course within economics, it can be a great gateway into economics with the advantage potentially even beyond econ one, that students really see the value. And really see the application of that knowledge to their financial decisions and to their lives.

Wolla: So in your paper, I refer back to that Journal of Economic Perspectives paper kind of frequently in this interview, it’s a great paper. You mentioned, not surprisingly, financial education is most effective when there is a rigorous curriculum, a specific course devoted to personal finance, rather than embedding those concepts in other classes and trained teachers.

So, I see those three components, those three parts as really important. And so, I’d like to take each of those three parts separately and ask you about them. So that your first point, is there a regular a rigorous curriculum. So what are your recommendations for creating a rigorous financial literacy curriculum?

Lusardi: We need to follow the lead of research like we do in other fields. So we should teach what we learn from research. And research should be the north star when it comes to a rigorous curriculum and always teach, also, you know what we have learned, you know, throughout the research, as well. And we should also teach what is relevant in this particular field.

This is financial decision making. So, personal finance is about the decisions that people make to manage their finances. So, the course cannot be just about investing. You know a lot of people associate personal finance with an investing course. No, it’s all the decisions, and it should encompass the decisions that people make related to managing their personal finances, from budgeting to saving to managing debt to investing and planning for the future and to insuring and so on. So, it should be that encompassing and very much led by research and data.

Wolla: That’s fantastic. Your second point, there is a standalone course. So, what makes a standalone course better than embedding the standards across the curriculum?

Lusardi: Because of the topics that we should cover, I think it’s very hard to cover this topic, like, you know in other fields, or in, you know, embedded in the curriculum, is too difficult to cover all these financial decisions in that way. It would take so much coordination, you know, I think it’s very difficult to be covering it consistently across topics.

I think it takes its own course. And, you know, there are so many topics also to cover that it would not get enough time if embedded across the curriculum. And I think it’s true for all the other courses as well, right? We don’t learn about macro by embedding them throughout the curriculum. You know it’s long enough, it’s specific enough, that to be learned properly it needs a standalone course.

Wolla: Okay. That’s good, that’s good, I like that. How about the last point, trained teachers. This is one I’ve been thinking about a lot. For example, if you’re a math teacher, you’ve gone to college and majored in math education. And in the process you’ve had considerable training in mathematics as a discipline and specialized courses in how to teach math. In economics, high school teachers are often trained as social studies teachers and have only one or two courses in economics, which, you know, can be potentially a problem because there’s not real deep expertise there, in many cases. Unless people seek additional professional development. And personal finance, the problem is sometimes even worse with teachers having had sometimes no formal training on personal finance, and states in school districts often have no requirements aside from, you know, that person being a licensed teacher.

So, I guess, all that leads to… does the lack of formal training worry you as a specialist?

Lusardi: It worries me, but it’s not mission impossible. You know, of course we have to train teachers. It is a new field and a new topic of that. They don’t have exposure or ex-ante. But once we have a curriculum backed by research, and material for teaching, we can organize courses for teachers for personal finance, and we can train the teacher.  There are already textbooks in personal finance and I’m sure more will be written. I am, contributing to that. I’m actually writing a textbook myself. And, you know, and we also have to indeed fill the gap and make sure that in the future, you know, students and future teachers can take these courses, you know, in college or in their preparation. It’s a new field, so we have to prepare for it. We have to fill the gaps. But I think it’s possible to do so. And you know, at Stanford, we are also working, to try to fill that gap, as well.

Wolla: So your Journal of Economics Perspectives paper mentioned that you’ve designed your own personal finance course. Can you tell me a little bit about the course that you’ve designed?

Lusardi: The course is very research and data based. For example, since 2017, we have been collecting data each year on personal finance knowledge and develop what is called an index based on 28 questions. And it’s called the Personal Finance Index. Where we assess knowledge across the eight areas which we think are at the basis of the, kind of, personal finance decision, the most important area.

And we use that data, collected, by the way, each year, both to design the course and also to provide that information to the students. You know, sometimes, you know, I in fact, actually I start almost all of my class with statistics, or data, or I use that information to teach.

So just to give you two example, one, one strong result from the Personal Finance Index, is that the topic that students know the least. And in general, the population know the least is risk and or risk management. So I have designed my course to start from more basic topics and move up to more complex topics.

So I try to shift risk and risk management, including investing and insurance, toward the second part of the course rather than the first part of the course. In other things that the data has shown very strongly is this gender difference in financial literacy. Which, by the way, is there at every age group, from the young to the old, from the educated, to across racial groups and so on.

And so I’m now very sensitive about how to engage not only my male student[s], but also my female students. And so I really change the way I teach this course. Also, we do quite a bit of calculation. Many decisions require calculation. I actually think that often you cannot make a decision if you don’t do the calculation. If you don’t compare, if you don’t, you know, calculate what this decision would imply? What’s the cost of this mortgage? What’s the cost of buying this car? And so on. And so students learn to do this in the course and learn to be familiar with using a finance calculator. And, I also stress the importance of accounting for personal finance. You know, firms do a lot of accounting in order to understand how they are doing and their situation. And I think the same is true for the household finances.

You know, we need to measure so we know if we are doing well and, if our books are in order, and how we can do better for our personal finances. And because I’m also a macro economist, I use a lot of micro data. I think the student learn a lot of economics in there from the importance of monetary policy for personal finance decisions to the effects of inflation, to importance of institutions like the FDIC, which are, you know, very important for, financial decisions.

So, you know, these are some of the characteristics that make potentially this course specific or maybe unique. But is very driven, let’s say, by data and research.

Wolla: And so, so your course is a university level course. Oftentimes people have a high school personal finance course but may not have ever taken a college level course. So, I’m, I’m curious, do you recommend that more colleges and universities have personal finance courses in their curriculum and really encourage their students to take them?

Lusardi: I believe every college and university should have a personal finance course now, it’s not only a new and important field, but it’s a win-win for everybody. First of all, students need this knowledge to do well. You know, and to start with, you know, by managing their student loan. And we see there is a big demand of this course, from the student. When personal finance started here at Stanford, 362 students signed up. And it has become and still is one of the most popular and largest course in economics.

College administrators and presidents, you know, need student and alum to be able to, for example, pay their student loan and also be financially secure and successful. So, it’s even in the interest of administrators.

And I think every econ department needs to update the curriculum with new or relevant topics. I remember when we added game theory, or health economics, right. So personal finance is a new course and I’m sure it will be very much in demand. And I think that’s a new course that should be added, as well, to every econ department. And by the way, alumni are also very willing to support this initiative. One of the things we have learned over and over and over from our alumni is that they wish there was such course when they were the university, when they were undergraduate here at Stanford. And interestingly, they have been very willing even to support this initiative. And, you know, we have gotten, gifts from alum here just precisely for the personal finance course. And I also think it’s a win-win for parents. So, they get their kids out of their basements.

Wolla: So very true.

Wolla: We’re going to take a quick break and when we come back, Professor Lusardi will talk about her love of teaching and how she empowers students to navigate the world around them.

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Mike Kaiman: Hi. I’m Mike Kaiman, an economic education specialist here at the St. Louis Fed. I wanted to briefly cut in and give a quick shout out to all of our teacher friends who are listening out there. If you’re anything like me, this conversation has you feeling pretty excited about the idea of bringing more econ into your classroom. But it’s not like you don’t have a bunch of other stuff going on. Trust me, we get it. That’s why we created Page One Economics®. Each issues covers a current economic topic, explaining key concepts without the jargon. Your students will see the economics behind the headlines without feeling like they need to be economist to understand it. Each issue is aligned with national standards and includes an assessment that’s easy to use. You can find Page One Economics at Stlouisfed.org under Resources for Teachers and Students. And while you’re at it, subscribe to our newsletter. We’ll keep you up to date on new resources and events. Thanks for all that you do to enrich the lives of your students. Alright, let’s get back to this awesome conversation.

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Wolla: Welcome back to Teach Economics and my conversation with Professor Annamaria Lusardi.

Professor Lusardi has taught economics for years, but she says her personal finance often have an especially deep meaning for her students.

Lusardi: So I have to tell you I’ve been teaching a lot of econ courses, from money and banking, to macro to econ one, to advance macro. But it’s only when I started teaching personal finance that I have started to receive these thank you notes from the students. And this is not just after the course. And so when the course ends, I get these, you know, long list of email when people are really thinking about the course or what they have learned.

But in fact, years later, students write back. And I say so because one letter that I receive from a student, and this was actually a master’s student I was teaching at the graduate level George Washington University where I started with this new course in personal finance. And she wrote to me four years later, and she said, you know, I wanted to tell you that because of your course I have paid off my student loan and faster than I expected. And it’s because of what I’ve learned in your course and in particularly because I was able to do this calculation. And those calculation were just so important for my financial decisions. And the letter was very long and very heartwarming, I have to say. And it sort of ended with this line with which said that, you know, that course will change your life. And I was so touched by that, that I also sent it to my dean, just to show that, you know, there is evidence that the course is important for students, you know, as the student become future alum. But it also makes a difference in their, their lives.

And so we invited the student back on campus, and we had an event with her and, and she has become kind of our ambassador for financial literacy for other students because, you know, one of the one of the concerns or regrets I have is that I often don’t have in the classroom the students that need this topic the most. So I have, for example, a student from the sciences, I have students from econ and the social sciences. I very rarely have students from the humanities or from other topics. And I think everybody needs this knowledge. And it is only perhaps when you take the course that you realize just how helpful, just how useful it is for you. But how do we tell the students that it is that helpful and useful? And so, you know, I’ve used student ambassadors for doing that. So, you know, it’s great to see this in their own words. And this is why I’m also so passionate about teaching this course. I am truly convinced it is changing people’s lives. This is changing students’ lives. And I have to say, I have myself benefited from the knowledge I continue to learn by teaching this course.

Wolla: You also say beyond, just like the personal change in behavior and making people better off financially. You also say that financial literacy has larger macroeconomic implications. In the paper you say the fact that so many people’s lack of financial knowledge not only limits their ability to utilize their resources to the fullest, but also contributes to macroeconomic problems. Would you say that improvements of financial literacy would decrease the risk of financial crisis or economic downturn if broadly distributed?

Lusardi: Yes. If a large group of people, for example, do not have precautionary savings. And according to our research, about one third of Americans could not come up with $2,000 in a month’s time. If people don’t plan for retirement and as a result they end up with savings that are not adequate to their needs. If people take up debt they cannot afford, not just individual, but also the economy as a whole can suffer.

And even without going to crisis, if people don’t participate in financial markets, they don’t invest in financial market. They don’t share in the prosperity of the grow of the economy. If they don’t refinance when the interest rate goes down, they don’t take advantage of the opportunity offered by the financial markets. If they don’t take up the full match by the employer, they don’t take advantage of the benefit offered by the firm to grow their wealth. So, you know, I always say financial literacy is like water in an ecosystem. It is needed to grow and flourish.

Wolla: That’s actually really inspiring. You mentioned before some of the gender gap, and some of the racial ethnic gaps that exist. What do you recommend for helping to close some of those gaps?

Lusardi: So first of all, I want to say this is such a striking result. Meaning we see a gender gap in most countries around the world. So when we did this global survey, this is the most consistent finding. And the countries that don’t have a gender difference are mostly those where the financial literacy is so low that it’s equally low between men and women. It’s not that women are doing that much better.

And so it’s a very, strong finding. And, you know, we have done a lot of research and it’s very hard to explain it all. So as a result, it’s also hard to address it. But I think one of the recommendations I would have to close the gender gap is to teach financial literacy in school, make it mandatory so that everybody is exposed to this and to start as early as possible.

You know, I think that, you know, women might not be exposed as much to that education, potentially at home, potentially by peers. And so, the school could become a level playing field in particular, and disproportionately so for women and girls.

You know, when the tooth fairy come is the time to talk about money. And you know, I think the socialization about money starts very early. And contrary to what people think, children are very interested about money. Give a piggy bank to a child and you will transform them instantly into a clever banker. So, you know, it’s important to have that socialization. And I think it’s particularly important for, you know, for girls, to be exposed to that, to think that, you know, this is, this is a topic that’s important and, you know, that they should talk about. And I think, you know, starting early and as early as possible, we create a good approach to money.

Money is a means to achieve an objective. I always say it’s a way to achieve dreams. You know, there are so many great things we have done because of money and in our life, as well. We can achieve important objective because we manage our money well. So the sooner we start, the better. I really do recommend that we have financial literacy in school starting in elementary school, because this is how we learn all of the other topics, you know, literature, history and so on.

So it has to have that gradual kind of level rather than all of a sudden talking about finance, you know, in your senior year. And yet again, in particular at time then women might have already been discouraged to, you know, maybe talk about this topic or, learn about this topic and, you know, in feeling that’s not for me. And, and nobody talks to me about this topic anyway.

Wolla: I think that’s a great strategy. In fact, we feel the same way. Here at the St. Louis Fed, we have a lot of materials both in economics and personal finance at the elementary level.

You mentioned earlier that you’ve been teaching for quite a while. And what do you enjoy most about teaching, if even after doing it for quite a while?

Lusardi: I enjoy empowering people with the knowledge and skills that are so important today. So given the complexity, for example, of financial markets and the complexity of financial products, you know, I think that knowledge is such a powerful tool and financial knowledge, so much so. So that’s what makes me teaching this topic, you know, very happy because I really do think I am empowering the student, to be able to, to navigate the world around them.

And I have to say, it has been very rewarding to teach first-generation students, to teach personal finance to first-generation students. For them, financial literacy is not only transformative, but they bring it back to their family, to their friends, to their community. There is a multiplier effect when you teach personal finance to these first generations and, you know, we love doing it. And, you know, we are trying to attract as many students as possible, you know, freshmen. non econ students. But in particularly first generation, because the impact for them is so palpable, and they are able to bring it to become the best ambassador for financial literacy for other students and for their community as well.

Wolla: This has been a super conversation. And I really appreciate you spending time with me today. A large group of our audience are economics and personal finance teachers. So I’m wondering, do you have any last words of advice or inspiration to share with educators?

Lusardi: One line I’ve been repeating since I’ve been working in this field is that financial literacy is essential, like reading and writing. It is an essential skill to thrive in the 21st century. And so I think as we speak or think of teachers in, you know, high school or elementary school or college, I think it is, very important that we embrace this new topic so that we are better able to prepare our students for the decisiona that they are expecting and that there are in front of them.

And if one hundred years ago it was essential to be able to read and write, today it is essential to have that basic financial literacy that allows you to better navigate the world around you and to be financially secure.

Wolla: Professor Lusardi, thank you for spending time with me today. And thank you for your contribution to economic education and financial literacy.

Lusardi: Thank you. Thank you, Scott.

Wolla: You’ve been listening to our conversation with economics professor Annamaria Lusardi from Stanford University.

If you like the show, tell all your friends and be sure to subscribe on your favorite podcast app.

I’m Scott Wolla, economic education officer at the St. Louis Fed. And from the St. Louis Fed, you’ve been listening to Teach Economics.

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