Here’s a frightening fact via The Atlantic’s Moises Naim. Roughly half of the world can’t answer these three questions correctly:
1. 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? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.
2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent 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?; D) do not know; refuse to answer.
3. 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.” A) true; B) false; C) do not know; refuse to answer.
Even worse – 70% of Americans can’t answer all three questions correctly. And we wonder why the world seems to have so many persistent financial problems. We don’t even come close to understanding the construct of money or how it should be used. The world desperately needs to become better educated on the topic of money, finance and economics. It certainly won’t solve all of our financial problems, but information really is power when it comes to money. Unfortunately, we don’t even teach basic finance in most schools and economists can’t even agree on what “money” is in the first place. We have a long road ahead of us but it’s not too late to get started….
* answers (which no one reading Pragcap should need) are 1-A; 2-C; and 3-B.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.