Hopefully, most CorpGov.net readers know at least some financial basics, otherwise they wouldn’t be interested in the rather arcane subjects we discuss.
Here’s a quick financial literacy test for readers, courtesy of Wharton professor Olivia S. Mitchell, who gave it to a small sample of subjects and came up with a number of conclusions:
1. Suppose you had $100 in a savings account and the interest rate was 2 percent 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
2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
The answer to Question 1 is c “More than $102.” Actually, more than $110 due to “the magic of compounding.”
Question 2: When inflation is very low but rates offered for savings are even lower, you’ll be losing money, so “less than today.”
And most of you know the answer to question 3. A mutual fund, while hardly immune from risk, is safer than buying a single stock. Mitchell asks,
If people can’t understand compound interest or even simple interest, how are they possibly going to understand mortgages, or credit cards, or payday loans, or the question of whether to lease or buy a car?
Less than 13% of those quizzed with less than a high school diploma answered all three questions correctly. 19% of high school graduates, 31% of those with some college, 44% of college graduates and only 64% of those with postgraduate work answered them all correctly… so, if you didn’t answer them all correctly, you weren’t alone.
Take another quiz from the Financial Industry Regulatory Authority (FINRA). This one is a little tougher but still fairly basic.
Academic research found that more than one-third of U.S. wealth inequality could be accounted for by differences in financial knowledge. See Financial Literacy and Economic Outcomes: Evidence and Policy Implications by Olivia S. Mitchell and Annamaria Lusard.