Only thirty percent of Americans could answer the following questions correctly.
If you have $100 in a savings account and the interest rate was 2 percent per year, after five 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) do not know.
If the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year, after one year, would you be able to buy A) more than, B) exactly the same as, C) less than today with the money in this account, or D) do not know?
Answer the following true or false. “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know.
The correct answers are A, C and B. It’s pretty shocking considering the complex financial minefield Americans must travel. But I wonder if financial literacy is just more snake oil. Think about it, we teach reading, writing and arithmetic for 12 years so it’s doubtful a one semester course in high school helps very much.
It’s not what you don’t know that causes financial harm but what you know that’s not so. Seventy percent of Americans rate themselves with above average financial acuity despite the plain evidence, see results above. Taking a financial literacy course or being a CNBC zombie leads to overconfidence and oft times poor results. Despite the elderly having lower scores, perceived financial awareness increases with age.
Perhaps we are hard-wired to make poor financial decisions. In the 1970s, a Stanford researcher tested preschoolers’ willpower. He put them in a room with one cookie and told them they would get another one if they didn’t eat the first one before he returned. Only a third could resist temptation. Years later he followed up and found the ones who resisted eating the treat tended to make better financial decisions throughout their lives. A
The financial literacy movement is funded by the same bunch benefiting from Americans’ lack of financial literacy: the financial services industry. Capitol One on one hand offers financial literacy while on the other hand extends high-fee credit cards to the least credit-worthy. On the subject of financial literacy, look at financial industry CEOs whose companies were bailed out by
Americans’ lack of financial awareness has been blamed for our historical low savings rate, our increasing reliance on credit cards and woeful retirement underfunding. But back in the 1950s no one was studying financial literacy. Back then people made enough money to afford saving eight and 10 percent. Sometimes life throws you curveballs you can’t reach. Bankruptcy is not a sign of character flaw but maybe one bad decision at the wrong time. Blaming Americans for their lack of financial literacy could be an industry smokescreen. (First in a two part series)
Even though Buz Livingston is a fee-only certified financial planner this should not be considered personal advice. For specific advice visit us online at www.livingstonfinancial.net or at our new office in