Here are a few questions for the women out there: When was the last time you had a frank discussion about money with your friends? How aggressively did you negotiate your salary last time you got a new job or had a good review? Have you ever met with a financial planner to figure out what your savings goals should be?
If your answers are never, not very, and no, you're not alone. Research has shown that women, even professional women with good jobs and successful careers, tend to be less financially savvy than men. And women seem to be hesitant to talk about financial matters with their friends and peers, which means they may be less aware of whether their salaries measure up, and more likely to avoid thinking about the consequences of everyday spending habits-which can have a big impact down the road.
And these days, you probably find yourself making some pretty big financial decisions. Unlike previous generations, who largely depended on pensions to pay for retirement, the trend now is towards defined contribution plans, in which you pay a certain amount of each paycheck into a retirement account and are responsible for choosing how to invest that money. That requires much more financial knowledge-an understanding of investment strategy and markets, as well as calculation of your future income needs and how you can save enough to achieve your goals.
The National Financial Capability Survey released last December in the U.S. documents that women are lagging behind men in terms of financial knowledge. Across the board, women are found to be less financially knowledgeable than men. Yet, women increasingly have to rely on both their earning capacity and their ability to competently manage resources to take care of themselves and others.
Despite grim statistics about financial literacy among women, the news isn't all bad. The academic research also shows that women who hold stocks trade them less frequently than men, paying fewer fees and transaction costs and ending up with more wealth. Women tend to hold more conservative portfolios, and in the current environment this has worked out well. Women are also less likely to be victims of scams that seem to be disproportionately perpetrated against white men. A recent study using data from Vanguard showed the same results-during the recent financial crisis, men were much more likely to sell at the wrong moment, locking in losses. Women tended to hold steady and recover more during the market rally.
One reason that women might be better financial decision makers, despite a lack of financial literacy, is that women know what they do not know and aren't afraid to ask for help. In several surveys I have done, I have asked participants to rate their level of financial knowledge before answering a set of problems that measure their actual level of financial literacy. Women's self-evaluations tended to be pretty well in line with their performance on the literacy problems (men, on the other hand, had a tendency to assume they knew more than they actually did). This lack of overconfidence could help prevent costly mistakes. Plus, knowing that there is a gap in their knowledge could help motivate women to learn more; as several studies about financial education show, seminars and education programs are disproportionately attended by female participants. And it is primarily women who report being affected by those programs.
A project I did here at Dartmouth College drove home these points. The women I interviewed consistently spoke of finance with humility and considered themselves unsophisticated investors. Yet I was struck by how articulate women were in describing their financial needs, how much they had thought about financial matters, how much they cared about the financial security of their loved ones and the provisions they made to provide for them.
Given the importance of financial knowledge, I am continuously recommending women to be pro-active: seek out programs-through the workplace or the community-that offer some basic financial education. Learn a little bit about the stock market, and take the time to work out how much you need to save in order to live comfortably in retirement. It doesn't take much time to set yourself on the path towards financial security.
About the Author:
Annamaria Lusardi (Professor of Economics, Dartmouth College and Director of the Financial Literacy Center)