Remember back in school when you just loved to go to math class? No? Well, if it wasn’t your favorite class, you certainly weren’t alone.
My favorite math class was in seventh grade. It wasn’t the math that I liked as much as it was the teacher. He always started the class off by telling jokes and stories. It really did make a difference in my attitude about that class and math in general.
Well, in the real world, we all know that math plays a big part of our day-to-day living skills. Everything, from how much is 15 percent off that sweater, to how many miles to the gallon does your car get?
But, no general math skills are as important as your “financial math skill” which can play a huge role in your safety and general well-being in life.
I recently came across this article in Market Watch, titled “Americans Need a Simpler Retirement System” (http://blogs.marketwatch.com/encore/2013/10/16/americans-need-a-simpler-retirement-system/).
You can read the entire article if you want, but the key point in the article is that a surprising number of Americans seem to struggle with the most basic of financial questions.
Let’s see how well you can answer these three questions.
1) Suppose you had $100 in a savings account and the interest was 2 percent per year. After five years, how much do you think you would have in the account, if you left your money to grow? (a) more than $102; (b) exactly $102; (c) less than $102.
2) Imagine that the interest rate on your savings account was 1 percent per year, and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in the account? (a) More than today; (b) exactly the same; (c) less than today.
3) Buying a single company’s stock usually provides a safer return than a stock mutual fund. True or false?
In the financial world, an advisor would likely say that these three questions are about as simple as you can get. However, in the study referenced in the article, for the people between the ages of 51 and 65, 69 percent got question 1 correct, 78 percent got question 2 correct and 60 percent got question 3 correct. And only 41 percent got all three correct. Older and younger participants did even worse.
What that should tell advisors in the financial world is that we might be assuming far too much about the overall understanding of financial issues from the general public. I also believe it is telling us that we need to continue to work on making complicated topics easier to understand.
All right, let’s see how you did . . .
1. The correct answer is (a) more than $102.
2. The correct answer is (c) less than today.
3. The correct answer is false. Single company stock is always more volatile than a collection of companies in a mutual fund.
How did you do? If you got them all three correct, congratulations.
If you think you may need a little help with your “financial math skills” just give us a call, we would be happy to help.