Financial Literacy Riddle

April 04, 2019

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Nate Geraci, president of The ETF Store Inc. and host of ETF Prime Podcast, heard here.

The majority of Americans cannot pass a basic financial literacy quiz featuring questions like:

A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less. True or false?

Go ahead and try it yourself. Only 14% of people are able to answer all five questions correctly and only 37% are able to answer at least four questions correctly.

Last September, which marked 10 years since the depths of the financial crisis, and with stocks up nearly 200%, Barron’s reported:

“Of the 2,000 people who recently took a survey commissioned by robo-advisory firm Betterment, 48% thought the stock market had not gone up at all in the past 10 years, while 18% actually said it had gone down.”

We Have A Problem

In other words, with stocks tripling, 66% of survey respondents thought the market was flat or down over the past 10 years! And 49% of Americans don’t know what an index fund is, while 44% can’t cover a $400 out-of-pocket expense. And 52% have no retirement savings. When all households are included, not just those with retirement accounts, the median retirement account balance is $2,500. I could go on, but you get the point. We have a problem with financial literacy and preparedness in this country.

There’s a lot of blame to go around, but poor financial education in our schools is an obvious culprit.

Earlier Education Needed

Only 17 states require a personal finance course to graduate high school, with a mere five requiring a semester-long, stand-alone course. Of the 13 million high school students in the U.S. in 2017, only 16.4% were required to take a personal finance course to graduate.

How can we expect people to understand the basics of personal finance if we don’t teach them?

While adding financial education to the school curriculum seems like a clear solution, there has actually been pushback on the idea. Studies on the benefits have been mixed. The Wall Street Journal recently cited a common rebuttal:

“It is a serious mistake to spend money on all-purpose financial-education courses in high school because the vast majority of the education pertains to topics that the students will not have a chance to act on for years.”

Forgetful Education

Famed behavioral economist Robert Thaler has echoed this sentiment:

“In some ways, the finding that financial education doesn’t provide long-term payoffs is hardly surprising. After all, how much do you remember from your high school chemistry class? Unless you use chemistry at work, you probably don’t recall much about iconic bonding.”

Other studies have suggested financial education might actually make people worse off. From the incomparable Jason Zweig:

“Taking a fin-lit class might well give the least financially knowledgeable people just enough confidence to make them think they can safely take extra risks. (That might also explain why the victims of fraud tend, on average, to be more financially literate than those who aren’t victimized.)”

Each of these arguments against financial education may hold some weight, but ask yourself the following (and may my high school teachers forgive me!).

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