Economists Annamarie Lusardi, and Olivia Mitchell recently conducted a three question survey where they asked Americans the following basic financial literacy questions:
- Suppose you had $100 in a savings account and the interest rate was 2 per- cent per year. After 5 years, how much do you think you would have in the account if you left the money to grow: [more than $102; exactly $102; less than $102; do not know; refuse to answer.]
- Imagine that the interest rate on your savings account was 1 percent per year and in ation was 2 percent per year. After 1 year, would you be able to buy: [more than, exactly the same as, or less than today with the money in this account; do not know; refuse to answer.]
- Do you think that the following state- ment is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” [true; false; do not know; refuse to answer.]
70% of U.S. respondents failed to answer all of the questions correctly. There is a lot of variability in the survey related to demographics, age, education etc. So, I think we can discount the results to some degree for people reading a blog focused on personal finances. However, it has been my experience that very few people have a deep understanding of important financial concepts. This is a major issue when working with people on their financial goals.
Included under the “financial Literacy” category on the righthand toolbar I’m going to address some basic financial concepts, covering topics ranging from consumer debt, how interest works, investment fees, taxes etc. If this is a category that interests you please check back for updates in this category, or subscribe to my blog.