Financial Literacy

Here is one for ya...

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Annamaria Lusardi is an econ professor at Dartmouth. Ms. Lusardi is fighting the good fight against financial illiteracy. Through research, academia, & the Dartmouth clout, she is bringing awareness to financial illiteracy with a passion. I solute her, for her efforts. Of course, simplecents.org is right behind her. In a recent post Ms. Lusardi proposed a three question test, to gauge your financial literacy. The questions are as follows:

1) 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?
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know

2) 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?
a) More than today
b) Exactly the same as today
c) Less than today
d) 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) Do not know

Because the battle against financial literacy is most notably present in the lives of the 50+ crowd, much of Lusardi's research has been geared toward the baby boomer generation. Lusardi has found that of people 50+ in age, only 50% of those surveyed responded correctly to the first two questions. Of the same respondents, only 1/3 of those surveyed corrected answered all three questions. This is astounding.

Stephen Dubner is the coauthor of a fabulous book entitled, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. The book is fantastic. That's why it has made the highly coveted, "Simple's Recommended Reading" list. I know, its impressive - but I digress.

On the Freakonomics blog, Stephen wrote some interesting commentary on Lusardi's work. Keep in mind that Dubner is the author of a New York Times bestseller.

I’d like to think I’m at least adequate in taking care of my family’s finances and everything that includes in the modern world: real-estate and insurance decisions, saving for college and retirement, investing and tax planning, etc. But it has been a bit of trial-by-error mixed with trial-by-fire — and to be honest, I was very fortunate to have an older brother who is smart, frugal, patient, and who worked for many years in finance. If it weren’t for him, I’d be in considerably sadder shape.

But here’s my point: I’m not exactly undereducated. I had 13 years of public schooling, 4 years of college, and another 2 years of graduate school — and after all that schooling, I don’t know if I learned enough to answer all three of Lusardi’s questions correctly. The subjects simply didn’t come up. Just as they apparently didn’t for the two-thirds of the older respondents to Lusardi’s questions.

Oh, by the way, here are the answers to the test:

1. a) More than $102
2. c) Less than today
3. b) False