Are you financially literate?

Nov 20, 2012

If you can define compound interest and inflation, then pat yourself on the back!

A recent report by the Securities and Exchange Commission finds that most Americans don't understand such basic concepts.

Commentator Greg Heberlein and KPLU's Dave Meyer talk about financial literacy on this week's Money Matters.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to assess financial literacy in America. The results are a real eye-opener.

Greg was particularly astounded by Northwestern Mutual's Financial Matters Study, which was cited in the Library of Congress report on financial literacy that was commissioned by the SEC.

Northwestern Mutual surveyed more than 1,600 Americans. The company found more than two thirds of respondents weren't able to pass a test on basic financial literacy. Only one percent got an A. Five percent scored a B, ten percent got a C, fifteen percent earned a D, and the rest flunked.

How many questions were there?

Only eight. A few bordered on the difficult. It is not uncommon for individuals to struggle when asked what bonds will do when interest rates decline. In this survey, two out of five respondents said correctly that bond prices rise when interest rates decline. 

There were areas in which respondents did well.

When asked the best way to cut losses when the stock market declines, nearly nine out of 10 checked the box that said have a diversified portfolio. Four out of five also recognized that the term asset allocation means putting money in different investment classes.

What did the SEC conclude from all this?

It shouldn’t be surprising that the SEC said financial knowledge on average is abysmal.

It said classroom instruction at the high-school level doesn’t help a lot, because by the time young adults have enough to invest, they’ve all but forgotten what they learned. The best knowledge resides with those who have the most to invest – older citizens.

The SEC recommended wider availability of private and public means to educate the public on financial matters. It also recommended even more dumbing-down of investment gobbledygook. That includes better and easier-to-understand disclosure on investments. More transparency.

What can we learn from this?  

Well, Forbes columnist Bill Singer called it moronic

But Greg says this is a good reminder that we should continue to educate ourselves about financial matters. Tons of sources are available – books, magazines, newspapers, the Internet, television, even radio. 

A good place to start your financial education is with books by Bill Schultheis, Suze OrmanDave Ramsey and Sylvia Porter.