Wednesday, October 9, 2013
According to a recent survey, only a third of Americans over age 50 could answer these three questions correctly:
- Suppose you had $100 in a savings account and the interest rate was 2 percent a year. After five years, how much do you think you would have 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 percent a year and that inflation was 2 percent. After one year, would you be able to buy more than, the same as or less than you could today with the money?
- Do you think this statement is true or false: “Buying a single company stock usually provides a safer return than a stock mutual fund”?
This lack of financial literacy is troubling given the complexity of our modern economy. One approach gaining steam is to include household finance in basic high school curriculum. However, a new paper by three business school professors concludes that financial education is not particularly helpful.
A viable alternative may include just-in-time education, which provides assistance right before a decision is made. Just-in-time education could help with student loans, mortgages, and retirement; however, those most in need of such help would be unlikely to seek it out.
Another approach is to develop simple rules of thumb that would help people cope with big decisions. Examples could include “invest as much as possible in your 401(k) plan” or “save 15 percent of your income.”
A third approach, and probably the most helpful, would be to make our current financial system more user-friendly. Making it simpler to choose a suitable mortgage, invest in 401(k)s, and use credit cards and checking accounts would have to help people make sounder financial decisions.
See Richard H. Thaler, Financial Literacy, Beyond the Classroom, The New York Times, Oct. 5, 2013.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.