Why young people are financially illiterate - and how to change this

When did you discover that finance and investing  can be exciting?

Professor Annamaria Lusardi: My parents always involved my two sisters and me in their financial decisions. Discussions about money were part of our everyday lives, they were normal. So we learned from a young age that money can translate into opportunities. When my parents wanted to buy a new house, I was ten years old and I offered them my savings as a loan. They took it and told me that could pay for part of the garden. The house still belongs to my family, and I always look after the garden when I'm in Italy in the summertime.

According to one of your studies, only seven per cent of 18 to 25-year-olds  are sufficiently financially literate. Why is that?

There are many reasons. Personal finance is not usually covered at school or university. So many young people never come into contact with it. Also, young people usually haven't yet made many far-reaching financial decisions - which means they have little experience with finance

Are there any indications that young people's financial literacy is improving?

We are not seeing much progress on that front. In July 2023, the Journal of Financial Literacy and Wellbeing, which I started and which is published by Cambridge University Press, published several studies that make it possible to compare financial literacy at an international level. In many countries with well-developed financial markets, young people's financial literacy is quite low, and much lower than that of the adults in those countries. In developing countries, young people are often more financially literate than the older generations. But their level of knowledge is still low - and it is lower than the financial literacy of young people in industrialised countries. We need to improve young people's financial literacy everywhere!

How do young people in countries with important financial centres perform in terms of financial literacy?

Often better than average. But there is still a lot of room for improvement. Our global financial literacy figures show that in Germany, 72 per cent of people aged between 15 and 34 are  financially literate. The United Kingdom (67 per cent) and Singapore (66 per cent) also performed well. And in the US (57 per cent), Austria and Switzerland (56 per cent), just over half of young people are financially literate. By way of comparison: in India, which is a major economic power, only 27 per cent of young people are financially literate. 

Where do you see the biggest gaps in young people's knowledge when it comes to investing? 

Risik management is an area where there is a major knowledge gap. It is a difficult concept to understand. We have noticed that it isn't just young people who struggle with it, everyone does.

What role do parents play in ensuring their children are financially literate?

A very important one. They should talk to their children about money and awaken their curiosity. People often think that money is a complex matter and that talking about it is taboo. We need to make it a natural, normal topic of conversation. Many people who are very successful financially have spoken to me about how it was their parents or relatives who introduced them to finances. 

Do we need to change our education system?

Yes, we need to have financial education at schools – from elementary school through to university and beyond. I always say: "Being financially literate is just as important as knowing how to read and write." It's an important skill if you want to participate in society.

How can parents help their children understand the importance of investing?

All parents should make sure their kids know how to manage and grow their wealth. Especially in an environment with high inflation and an ageing population. Unfortunately, our data indicates that many parents are not financially literate either. That is why I think it's so important for schools to teach basic financial literacy.

What are the biggest mistakes parents can make when it comes to their children's financial literacy?

The biggest mistake they can make is to not give their children a financial education, or to stand in the way of them getting access to such an education. And I am not just talking about investing here. In life, we face a range of financial decisions, whether it be in the context of paying for an education, buying a house, taking out insurance or planning for the future. Being financially literate helps us realise our dreams - it plays an important role in our happiness.

Some influencers on social media give financial advice. How do you feel about that?

I think that caution is advised. When it comes to important topics like this one, we should rely on trustworthy sources of information and people who have our best interests at heart.

Are some young people simply lacking the financial gene?

I am not sure to what extent people are born with a predisposition for finances. But I have noticed that many young people do not take an interest in finances without the help of another person. At that age, there are a lot of other important topics to deal with. Not everyone is a born financial expert. But we all have to handle our personal finances. And even if we hire an adviser, we still have to make sure they represent our interests.

What is your advice to parents?

The best way to ensure that your children will be able to stand on their own two feet at an early age is to educate them about personal finance.

About Annamaria Lusardi

Italian-born Annamaria Lusardi has been researching financial literacy around the world for many years - and her findings are striking. Lusardi is a Senior Fellow at the Stanford Institute for Economic Policy Research (SIEPR) and the Director of the Initiative for Financial Decision-Making, a collaboration between SIEPR, the Graduate School of Business (GSB) and the Economics Department at Stanford University. Her new personal finance book, "Il sapere che conta", was published by Mondadori in Italy on in May 2024.