Financial literacy is distressingly low among young people in the U.S., according to a study by the National Bureau of Economic Research.
The study, headed by professor Annamarie Lusardi of Dartmouth College, examined the proportion of young Americans who were able to answer three basic financial questions. Researchers broke the results down by gender, ethnicity, and family and peer situations to evaluate in which ways financial education should be altered or improved.
Young People Struggle With 3 Key Questions
The results of the study hinged on three simple questions meant to gauge basic financial literacy:
Question: “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 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? (Do not know, refuse to answer)”
Answer: More than $102. If you started with $100 and added 2% each year, you would have a bit more than $110 after five years. After one year, you would have $102.
Results: Nearly 80% of respondents answered correctly.
Question: “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account? (Do not know, refuse to answer)”
Answer: Less than. If your savings appreciated by 1% in a year while the value of money inflated by 2%, the money in your account would be worth slightly less than it was a year earlier, despite the interest.
Results: Just 54% of the young people gave the correct answer.
Question: “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.’ (Do not know, refuse to answer)”
Answer: False. Buying stock in a single company is riskier than diversifying your investments with a stock mutual fund. Your investment’s performance depends on the health of just one company when you purchase stock in only that company. A mutual fund spreads your investment and is managed by a professional manager.
Results: Fewer than half, or 47%, of young people answered this question correctly, and 38% reported they did not know the answer.
Findings Point to Gaps in Education
The study found only 27% of young people answered all three questions correctly. Women were 13% less likely to answer the inflation and risk diversification questions correctly, while Black and Hispanic respondents were about 10% less likely to answer those questions accurately. Those children with better-educated or wealthy parents also answered the questions correctly more often.
The study suggested schools and educational programs take additional steps, using the information at hand, to educate children before they faced the financial decisions of the real world.
“While young workers face or will soon face decisions about mortgages, college funds, and retirement savings, their financial knowledge seems dangerously low and potentially inadequate to deal with the complexity of current financial markets and products,” the paper said.
To access the study, click here.