Are you Financially Literate?

A recent article from  MarketWatch titled, “Americans Need A Simpler Retirement System” discusses two studies that Richard Thaler (a pioneer in behavioral economics) reported on, regarding financial literacy. One of the studies demonstrated the extent of the problem and the other documenting the lack of success to date of educational efforts to improve financial literacy. 

The key point in the article is that a surprising number of Americans seem to struggle with the most basic of financial questions.

Let’s see how well you can answer these three questions: 

1) Suppose you had $100 in a savings account and the interest was 2% per year.  After five years, how much do you think you would have in the account if you left your money to grow?  
(a) More than $102
(b) exactly $102
(c) less than $102

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year.  After one year, how much would you be able to buy with the money in the account?  
(a) More than today
(b) exactly the same
(c)less than today

3) Buying a single company’s stock usually provides a safer return than a stock mutual fund.  True or false?

In the financial world these three questions seem pretty simple. However, "for those ages 51 to 65, the percent answering three questions correctly was 69%, 78%, and 60%, respectively.  Only 41% got all three right. (The results were worse for those younger and older!)"

What that tells us is that in the financial world, we assume far too much about your overall understanding of financial issues. It tells us that we need to continue to work on making what are sometimes complex topics, simple to help increase your understanding.

Here are the answers:
#1.  The correct answer is (a), more than $102.
#2.  The correct answer is (c), less than today.
#3.  The correct answer is (false).  Single company stock is always more volatile than a collection of companies in a mutual fund.

If you got them all three correct, congratulations! If you got one (or more) of them wrong and would like to know why, feel free to call our office at 775-853-9033.  

Chris Abts