Carla Fried: Women Know More About Money Than They Realize

Carla Fried

WWR Article Summary (tl;dr) Researchers suggest that about one-third of the gender gap in financial literacy is attributable to a lack of confidence, not a lack of specific knowledge.

Being smart enough to know what you don’t know pays off when it compels you to learn more or seek out expert help. But when it comes to money, research is finding that women seem too quick to say, “I don’t know,” and this lack of confidence can hold them back financially.

The confidence game
A survey last year by researchers at George Washington University and the educational arm of FINRA (a self-regulatory agency) found nearly half of women investors chose the “I don’t know” option on at least one-third of questions testing their investment knowledge. About one in four men chose “I don’t know.”

No surprise then that among men who attended college, had at least $100,000 in investments and income of at least $75,000, 57% said they are confident making investment decisions vs. 45% of similarly situated women.

The financial literacy gender gap
Men, in fact, on average score higher on tests that explore core financial concepts such as how interest rates (compounding) work, the impact of inflation and the concept of risk diversification.

But new academic research suggests women know more than they realize. A study asked participants to answer three questions — about interest, inflation and risk — considered key to measuring financial literacy. It was multiple choice, including the option, “I don’t know.” Six weeks later the questions were asked again, but in this round, participants didn’t have the option of choosing “I don’t know.”

On all three topics, men scored better than women in both phases. But when women were forced to make a choice other than “I don’t know,” they tended to answer correctly, and the gender gap narrowed.

On the compound interest question, in the first phase, 92% of men answered correctly vs. 84% of women. Nearly 7% of women chose the “I don’t know” option, twice the percentage of men who punted.

In the second quiz, nearly 95% of men answered correctly compared to more than 91% of women. The gender gap narrowed on the two other literacy questions too.

The researchers estimate that about one-third of the gender gap in financial literacy is attributable to a lack of confidence, not a lack of specific knowledge.

How to boost your financial confidence
The research makes a case that women’s lack of confidence plays a role in holding them back from taking better control of their finances. No one simply flips a switch and becomes more confident. But there are ways to build money confidence.

—If you’re married, engage. A recent survey of married millennials found that more than half of wives let their spouses handle the money stuff. While delegation can be effective time management, it is simply too risky for women to be out of the loop financially.

Having to get up to speed in the midst of a separation or divorce is less than ideal, especially if that’s when you learn there were some suboptimal money decisions made while you weren’t paying attention.

And if you enjoy a long marriage, wives tend to outlive husbands. Having to get up to speed while grieving, let alone at a later age when assets may be highest and cognitive capacity is not, is not a recipe for peace of mind.

Having a solo conversation now with your financial planner, your husband absent, will make it impossible for you to delegate and also easier to ask questions.

—Get started with a TDF. Hung up on how to invest your retirement accounts?
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Look for a target date fund in your workplace retirement plan, or at the brokerage where you have an IRA or other investment account.

Target date funds handle all the allocation decisions based on your age. It’s a smart option to get started, and as you learn more you can decide if you want to invest differently.

—Learn. Many large companies now offer “financial wellness” as a benefit: free classes and material to help employees conquer facets of their personal finances (debt, credit, etc.) beyond the company 401(k). The big discount brokerages (Fidelity, Schwab, Vanguard) all offer up free content that covers more than Investing 101. If you want a formal class atmosphere, community colleges often offer personal finance classes. And the edX online learning site offers a personal finance course taught by Indiana University that is free to audit.

Distributed by Tribune Content Agency, LLC.

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