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Improving your financial literacy skills

With even Harvard students lacking basic knowledge, the search is on for the best way to teach money skills

Thomas Murphy addressed Harvard students who attended a financial workshop hosted by the Harvard University Employees Credit Union over the winter break.PAT GREENHOUSE/GLOBE STAFF

CAMBRIDGE — On a blustery winter morning, about 50 Harvard University students gradually settled into their seats under the glow of fluorescent lights, setting up laptops, pulling out notebooks, and sipping coffee to rouse themselves waiting for the lecture to begin.

But the subject wasn’t philosophy, medieval history, or Russian literature. It was something less lofty: how to choose credit cards, budget money, and understand credit scores.

“I have very little background in personal finance,” admitted Anna Sato, 18, a freshman from Long Island, N.Y., before the class. “I have to learn the ­basics.”

That the brightest college students confess they know so little about money is just one sign of what many economists, government officials, and educators say is the country’s woeful lack of financial literacy. Some analysts have even suggested that lack of financial knowledge contributed to each of the last two recessions.


In the late 1990s, millions of Americans poured into the stock market, investing in dreamy dot-coms with fuzzy business plans. And a few years later, they took out mammoth mortgages they couldn’t afford or didn’t understand.

More than two-thirds of the Americans surveyed in 2010 by Milwaukee insurer Northwestern Mutual flunked a financial literacy quiz. A separate 2009 survey by the Financial Industry Regulatory Authority’s Investor Education Foundation, which supports financial education, found that fewer than half of Americans could answer two basic questions about interest rates and inflation.

“The lack of financial literacy is a major problem in the United States,” said Michael Goodman, an associate professor and chairman of the public policy department at University of Massachusetts Dartmouth. “It affects not just people who are poorly educated, but also people who received some of the finest educations in the world.”

The literacy gap is particularly wide for younger adults, who have less experience with money and can easily fall into debt through credit cards or student loans. A 2009 study by student loan giant Sallie Mae found only about 18 percent of college students with credit cards paid them off completely every month, while the rest likely racked up interest costs or fees by carrying a balance or paying their bills late.


A survey of Harvard students by the Harvard University Employees Credit Union found that only 10 percent had any formal financial education.

To bring students up to speed, the credit union and alumni helped design a three-day crash course on ­financial management, investments, credit scores, and taxes. As part of the workshop, students collaborated on real-world exercises, such as budgeting to make the rent, and developed personal financial plans. Some students said they were just hoping to find out how credit cards worked.

“College students as a whole just aren’t financially sophisticated,” said Shahar Ziv, a Harvard Business School graduate who helped organize the workshop. “Harvard students are no different than other students. Succeeding academically does not necessarily translate into being financially literate.”

Meanwhile, thousands of schools, nonprofits, financial institutions, and other corporations have sponsored events from children’s plays to adult education classes to help teach financial literacy. A Boston nonprofit, D2D Fund, even developed a half-dozen video games to teach players about money, including one featuring vampires called Bite Club designed to teach people the importance of saving for retirement.

Several states have also passed legislation to increase ­financial literacy. Massachusetts recently set up a nonprofit to promote financial literacy, the Financial Literacy Trust Fund; so far, the fund has received a $20,000 grant from the attorney general’s office to fund training for financial educators. Separately, the Legislature set aside $750,000 over three years to fund financial literacy programs in high schools in poor cities.


Many of the programs across the country focus on students, women, minorities, and lower income adults, who are believed to need the most help learning about finances. But the research is mixed on the impact of the programs. Some studies have concluded that financial education can help people save more money and build wealth, while others have found the lessons didn’t stick with participants over time.

A 2009 study, for instance, found that high school students who took a financial management course were no better about saving, paying credit card bills on time, or bouncing checks than students who didn’t take the classes.

“The jury is still out,” said Sol Carbonell, director of financial education at the Federal Reserve Bank of Boston. “There’s definitely no consensus yet about what works in ­financial education.”

Many researchers and industry groups are now trying to figure out which programs work best. The National Endowment for Financial Education suggests that students are most likely to retain information if it is covered comprehensively over time — not in one-time lessons. And adults are likely to learn more about ­finances in the workplace, working with advisers, or other alternatives to staid classroom lectures.


About 70 students attended at least part of the Harvard workshop, which was held during the school’s winter break. Many students told organizers they didn’t understand how interest rates, fees for credit cards, and credit scores worked.

“They are all raising the same concerns about stress and lack of financial knowledge,” said Thomas Murphy, director of student services for the Harvard University Employees Credit Union. “There is the perception they should already know this stuff, but they have never been taught.”

The seminars also went beyond explaining how credit cards and 401(k)s work. ­Brigitte C. Madrian, a Harvard professor who teaches behavioral economics, talked about the psychology that leads to poor financial decisions. For instance, she noted many people are tempted to sign up for a store credit card, in exchange for an instant discount at the register, even though many consumers will wind up adding to their debt, paying far more in interest and late fees than they save.

Or they’ll buy something to get a rebate — even though they’ll probably never go through the hoops needed to get the cash back.

“Marketers are very sophisticated,” Madrian noted, “and one of the things they study a lot is the psychology of decision making so they can convince you to buy products you may not want or need.”

The good news: The more you know about the traps, Madrian said, the less likely you are to fall for them.


Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.