Increasing Financial Literacy

According to a recent survey, only a third of Americans overage 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 thecomplexity of our modern economy.  Oneapproach gaining steam is to include household finance in basic high schoolcurriculum.  However, a new paper bythree business school professors concludes that financial education is notparticularly 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 withstudent loans, mortgages, and retirement; however, those most in need of suchhelp would be unlikely to seek it out.

Another approach is to develop simple rules of thumb thatwould 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 tomake 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 tohelp people make sounder financial decisions.

See Richard H.Thaler, Financial Literacy, Beyond theClassroom, The New York Times, Oct. 5, 2013. 

Special thanks toJim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringingthis article to my attention.