Ignorance is Expensive!

Economics
Retirement
By
John R. Brock, Ph.D., Vice President

Given the importance of making informed decisions about spending, saving, borrowing, and nest-egg sustainability, low financial literacy is troubling.  In surveys administered to adults in the U.S., researchers have used a three-question module focused on key personal finance concepts:

·   Suppose you had $100 in a savings account and the interest rate was 2% per year.  After five 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; or (c) less than $102?

·   If the interest rate on your savings account was 1% per year and inflation was 2% per year, after one year, would you be able to buy:  (a) more than, (b) exactly the same as, or (c) 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.”

Only about 1/3 of U.S. adults answer all three questions correctly, and almost 1/3 got one or none correct.  The general conclusion is that financial literacy in the U.S. is rather low.  (By the way, the correct answers are:  (a), (c) and false, and we think our clients would do vastly better than the general public.)

Low financial literacy is prevalent in other countries as well.  Since 1998, I have been working with educators in emerging economies to strengthen their understanding of economic concepts and to improve methods for teaching economics.  Until the financial crisis of 2008, the focus was almost exclusively on traditional topics in economics.  However, since the crisis, the emphasis throughout the world has shifted more toward personal finance.  Over the past year, for example, I have taught personal finance workshops to teachers in Indonesia, Ukraine and Uruguay.

An increasing emphasis on personal finance education has been equally pronounced in our own country.  With the increasing complexity of financial products, including student loans, mortgages, credit cards, and pension accounts, people who lack a basic understanding of economics and personal finance are ill-equipped to successfully manage their financial responsibilities.  Furthermore, as the pension landscape continues to shift from defined-benefit to defined-contribution plans, added responsibility for saving, investing, and nest-egg management has shifted to workers and retirees.

Since 2007, 10 states have added a personal finance course to required high school curricula, and three states have added K-12 standards in personal finance, increasing to 43 the number of states requiring personal finance instruction in schools.  Since 2009, in cooper­ation with the Colorado Council for Economic Education, I have annually conducted a one-week teacher workshop entitled “Methods for Teaching Personal Financial Literacy with Economic Reasoning” and have seen increasing interest among teachers.

Personal finance education is essential, because researchers report that financially-literate individuals are more likely to participate in financial markets and invest in equities, thus building larger retirement nest eggs.  At J.V. Bruni and Company, we aim to be a positive force toward financial literacy, because we’re mindful of former Harvard President Derek Bok’s counsel, “If you think education is expensive, try ignorance.”