Fellow GradSWE Members, are you ready to test financial literacy? See if you can answer these questions!
How does compounding interest work? What is an index fund? Can you have an individual retirement account (IRA) even if your employer doesn’t sponsor one? Should you close an old credit card account that you never use?
If you struggled to answer any of these questions, you are not alone. According to a recent study conducted at the George Washington University School of Business, when tested with four financial literacy questions, 30% of women spanning various countries were able to obtain a passing score, while 35% of men passed. These questions focused on four important terms in financial literacy: interest, compound interest, inflation, and risk diversification. Narrowing the results to countries with advanced economies, these passing rates rose to 51% for women and 59% men. Additionally, a survey conducted by the American College of Financial Services found that only 18% of women aged 60-75 were able to pass a retirement income financial literacy quiz, compared to 35% of men that passed.
These results indicate a gender gap that seems to exist regarding financial knowledge between men and women at various stages of life. Interestingly enough, while women seem to lag behind men when it comes to financial literacy, it is actually more imperative for women to have a sound financial plan—challenges uniquely facing women detailed in the GW study included 1) longer life expectancies than men, 2) lower lifetime earnings than men, and 3) interruptions to career from childbearing.
As a woman, I’d love to see more women have a strong background when it comes to financial literacy. Think you need a financial advisor? As graduate students, we may feel like we cannot afford to pay for advice from a financial expert. However, results from the retirement income survey showed that people, both men and women, who were self-taught in financial literacy were more financially savvy compared to people who had a financial advisor.
Below are some visual curves that show potential investment earnings you could incur if you were to invest at age 25 in an interest-bearing account (not any specific one):
Scenario 1: A principal investment of $2,000 in an account that provides a 7% annual return.
Scenario 2: No principal investment but a yearly investment of $1,000 with the same interest rate.
Scenario 3: A principal investment of $2,000 and yearly investment of $1,000 with the same interest rate.
As shown in the figure, even investing a mere $2,000 in this scenario and letting it grow would provide you almost $30,000 at age 65! Investing a lump sum of $1,000 per year (an average of $83/month) would grow to approximately $120,000 after 40 years. If you provide a principal investment and invest $1,000 a year, your account would almost reach $150k!
So, if you’d like to improve your financial literacy, there are copious resources you can use! Try picking some great reads on finances (Investopedia has fantastic picks and tips!), seeking resources from government agencies such as the Consumer Financial Protection Bureau, and looking into initiatives supporting women and financial literacy (check out the LiSA Initiative). I encourage you all to become knowledgeable in finances, as it can help you plan your future and achieve your financial goals. Let’s begin closing this gap!
Comment below if you’d like to challenge GradSWE members with financial literacy questions, or if you’d like answers to the ones above!