Posted on 08/30/2014 10:09:19 AM PDT by SeekAndFind
“The college educated are more likely to own stocks and less prone to use high-cost borrowing.” — Journal of Economic Literature
Financial literacy is important, but sadly, only a handful of states require students to take personal finance or an investment course. I earned a Ph. D. in economics and never took a class in accounting, business or personal finance!
How bad is financial education in this country?
In 2008, two economists came up with three simple questions to test the financial knowledge of citizens 55 years or older. See how well you do:
1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
A. More than $102.
B. Exactly $102.
C. Less than $102.
D. I do not know.
2. Imagine that the interest rate on your savings account was 1 percent per year and price inflation was 2 percent per year. After 1 year, would you be able to buy:
A. More than today with money in this account.
B. Exactly the same amount as with the money in this account.
C. Less than today with the money in this account.
D. I do not know.
3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
A. True.
B. False.
C. I do not know.
(Excerpt) Read more at finance.townhall.com ...
Many people don’t have a bit in savings. My wife and I could live on the interest from our savings. I just have a job for beer money and to go out to eat now and then. Our daughter and husband saved enough to pay cash for his new pickup a couple of months ago.
We transferred $25,000 to them - plus seven years interest - that she had as a damage settlement with the insurance company after her car was totaled by hail back in 2007 as part of the payment.
True.
E.g., on question 3, you could reasonably choose C. An investment in a single stock is both more likely to grow ten-fold and more likely to be lost entirely than the same investment in a portfolio of stocks, especially if the portfolio is spread across industry sectors and global regions.
Those three questions are the ones that Lusardi, along with Olivia Mitchell of Penn, have been inserting in a variety of major U.S. surveys. In a new working paper titled “Financial Literacy: An Essential Tool for Informed Consumer Choice?” (abstract here, download here), Lusardi writes that among respondents age 50 and older, only half of them got the first two answers right and only one-third of them got all three answers right.
Because Lusardi, Mitchell, and many other economists focus on retirement behavior, it is pretty horrible news to learn that so many older people are ill-equipped in the basics of saving and investing. With most U.S. companies doing away with big employee pensions (see Roger Lowenstein‘s new book While America Aged), more and more people have to plan their own retirements.
Q: Who puts money in a savings account that pays 2%?
Point taken but the conclusions are meaningless.
Most Americans are not 55 and higher. 34% is not Most of anything.
Everyone who has a bank savings account if their lucky. Most savings accounts pay less than 2 %.
This is the result of the government artificially controlling interest rates. The Feds are riding a tiger with no notion of how to get off without being devoured.
The only reason I have a savings account is I put money it it to pay fees and subscriptions - I calculate the monthly amount I should put in it and pay fees out of that. Keeps things separate. I don’t use it to earn money - I use mutual funds for that.
“”Democrat voters are either (1) financially illiterate, so they do not understand liberalism, or (2) corrupt, so they expect to profit from liberalism. There are no honest, intelligent votes for democrats. We knew the ill-informed were a majority when Obama won the first time, and we knew the ill-informed were slow learners in 2012.”””
You forgot one category: The hordes that depend on government for their livelihood.
So what’s new. I felt at the time King Obama was elected that 2/3 of Americans are idiots. Still feel that at least half have not woke up yet!
You can't really tell, given the author couldn't even be bothered to name the two economists, much less provide a link to the original publication.
A little googling indicates a possible source as this 2009 paper, by Annamaria Lusardi and Olivia S. Mitchell.
The Health and Retirement Study (HRS), a nationally representative longitudinal dataset of Americans over the age of 50, has been designed to address some of these questions by tracking health, assets, liabilities, and patterns of wellbeing in older households.Beginning in 1992, a 90-minute core questionnaire has been administered every two years to age-eligible respondents and their spouses. In addition, a random sample of respondents has also been subjected to very short experimental modules in each wave, aimed at helping researchers assess additional topics of substantive interest. For the 2004 HRS wave, we designed and administered a special module on financial literacy and retirement planning, seeking to assess respondents’ level of financial literacy along with their efforts to budget, calculate, and develop retirement saving plans, in relatively few questions (Lusardi and Mitchell, 2006).
The three questions on financial literacy we designed, which have by now become standard in assessing economic literacy and are included in many other surveys in the United States and abroad, are as follows:
- Suppose you had $100 in a savings account and the interest rate was 2% 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, or less than $102?
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2% 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 you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
The first two items indicate whether respondents are aware of compound interest and inflation, fundamental concepts required for making saving decisions. The third evaluates respondents’ knowledge of risk diversification, also crucial for making informed decisions.
We found strikingly low performance on these basic financial literacy questions. For instance, one-fourth responded incorrectly to the first question. The accuracy rate for the second question was higher (75% correct), but only slightly over half (56%) got both answers correct, indicating a very poor level of basic knowledge in this older population. Moreover, only half (52%) of the respondents correctly answered the risk diversification question, and one-third (34%) said they did not know (Lusardi and Mitchell, 2006). These are important findings since correct responses to these simple questions are strongly associated with successful retirement planning: those who cannot do a simple interest calculation, do not know about inflation and risk diversification are also much less likely to calculate how much they need to save for retirement (Lusardi and Mitchell, 2006, 2008).
“1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
The correct answer is that after taxes the amount will be closer to less than you started with.”
Um, no. You fail. Even at 2%, a person would receive at least 1% after taxes.
How can “I do not know” be counted as an incorrect answer?
In an academic setting, which this was, Q3 is obviously meant to gauge knowledge of the need for diversification. In a commercial setting, hold on to your wallet:
It doesn’t matter. Even in California where the top marginal rate (Federal and state combined) is 51.9%, over five years, for a person in the top tax bracket there would still be about $5 of after-tax interest in the account.
How do they function at all?
They have one important function. Obama, a man with no resume, no accomplishments, no leadership abilities and who surrounds himself with radicals sharing his ideology, is our president.
Excellent point!
RE: Most Americans are not 55 and higher. 34% is not Most of anything.
One would think that those who are 55 and higher would at least be more financially literate than those who are younger...
If this is not the case, then maybe America is not as worse off financially as we think.
But the two time victory of Obama tells me this is not the case.
I don’t care about that stuff - just give me my welfare check.....
Best I could do was 1.56%. I have $25,000 in a checking account at Provident Credit Union earning that.
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