Financial Literacy

Yesterday I had some good news. Young people are starting to live without credit cards. Today there is some bad news to report. Americans are becoming less financially literate. Below is a basic 5 question financial literacy multiple choice test.

The results are totally depressing.

National Average:
2.88 Questions Answered Correctly
0.81 Questions Answered Incorrectly
1.26 Questions Answered Don’t Know

Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?

More than 102
Less than 102
Exactly 102
Don’t know

Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?

More
Same
Less
Don’t know

If interest rates rise, what will typically happen to bond prices?

Rise
Fall
Stay the same
No Relationship
Don’t know

True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.

True
False
Don’t know

True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.

True
False
Don’t know

According to the Wall Street Journal (Americans Short on Financial Know How) author unknown, the scores on this financial literacy test have dropped a little over the last three years. However, patterns of spending and savings haven’t changed.

41% of respondents still say they spend less than their income
19% spend more than it
36% spend roughly what they earn.

In spite of a frightening lack of financial acumen, Americans are confident they are well able to manage their financial affairs. Many of the people who gave themselves high marks use payday loans, borrow money from pawn shops, rent to own, or frequently overdraw their checking accounts.

Once again the studies find that the lack of an emergency fund is often a prelude to disaster. When participants in one study were asked if they could come up with $2,000 for an unexpected expense such as a car repair within one month:

49% of 18-34-year-old respondents said probably not.
42% of those between ages 35 and 54 said no
27% of respondents age 55 or older who said they couldn’t

Over all age groups surveyed only 40% had a three month emergency fund.

There is a failure of both our educational system and a lack of responsible parenting in the area of finance. I suspect in part because neither teachers nor parents are sufficiently knowledgeable in financial matters nor do they provide good role models in their own financial behavior. We live in a society that is becoming more complex and less trustworthy. Americans are being forced to make difficult long term financial decisions (such as investing in 401K accounts) that were not necessary even a generation ago. Student loans have turned into a national disgrace, as 18 year olds with no knowledge of compound interest are selling themselves into long term debt slavery for degrees that are often worthless. In 1970 credit cards were still something of a novelty. Now they are the norm.

I still have a great deal of work to do.