A new study by two economists gives Americans a C-minus in financial literacy. A large percentage of us have a partial or woefully incomplete understanding of personal money management — such matters as savings, debt, interest, investments, and leveraging of assets.
Most of us need the new federal Consumer Financial Protection Bureau, run by former Ohio attorney general Richard Cordray. We need protection from ourselves. This is not an ideal situation for a free people in a free-market system.
The two economists asked:
● “Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account 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 per year and inflation was 2 percent per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
● “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.”
Just half of respondents were able to answer the first two questions correctly (more than and less than, respectively). Fewer than a third answered all three correctly (the answer to the third question: false)
We all know young people who have a put-it-on-my-tab attitude toward student loans, but have no understanding of what interest rates mean. Many people are victimized by a car salesman who gets them to focus on the monthly payment they can afford, while they lose track of years of payment, the best possible interest rate, and total cost.
At some point, Americans are going to have to take responsibility for their own ignorance. Financial literacy classes offered at community colleges and other local institutions might help. Knowledge is power, and those who are most often ripped off are the powerless — poor and elderly people.
Young people would be helped by a basic course in economics and finance in high school. Just as we should stress civics in schools, we should teach economic decision making and understanding.
You could make a case that economics is the master social science, because we put a dollar value on most experience and all commodities. A high school graduate should know what inflation is and how a car loan works.
Not all the news is bad. The Los Angeles Times reports that many young people between the ages of 20 and 30 (so-called millennials) have given up their credit cards. Or having seen what the cards and their interest rates did to their parents, they never acquired cards.
That’s a good sign. Some young people, even if they have not been schooled in economics or finance, get it. On at least one key issue of financial literacy, they clearly see the hunters and the hunted.
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