Most People Know Nothing About Personal Finance

Although it sounds very strong, most people don’t know how to manage their money.

We are using it everyday, how is it that we know so little about it?

In our capitalist society this should, at least, be of concern. It’s like playing a board game without knowing the rules, we are destined to lose (ruin in this case).

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I write this article because I read yesterday the following study: The Economic Importance of Financial Literacy: Theory and Evidence, conducted by two economists, Annamaria Lusardi and Olivia Mitchell.

In this study, they ask the following 3 questions to people in many countries around the world:

1. Suppose you had $100 in a savings account and the annual interest rate is 2%. After 5 years, how much do you think you would have in the account if you have not touch it since then?

a) More than $102

b) Exactly $102

c) Less than $102

2. Suppose the annual interest rate on your savings account is 1% and the annual inflation is 2%. After 1 year, you will be able to buy

a) More than

b) Same as

c) Less than

today with the money from that account.

3. Say whether the following statement is true or false. “Buying the stock of a company usually provides a safer performance than an investment fund.”

a) True

b) False

If you answered 1-a), 2-c) and 3-b) congratulations, according to the study, only 30% of Americans interviewed answered correctly the 3 questions.

Other results are; 25% of Italians, 21% of Swedes, 4% of Russians, 31% of French, 47% of Germans…

This high level of financial ignorance is going to be more dangerous than before because nowadays is easier for small investors to access global markets, there are new investement instruments, more and more credit companies, thousands of mortgages are signed everyday…

And everyday we use money we have in a bank (probably) and that we do not know how it works (different investment instruments, compound interest, etc.) and what things influence it (inflation, interest rates, etc.).

The old phrase of “I get my payroll in the bank everymonth and use my credit card to buy the things I want, everything is perfect, and when I stop working I will get my retirement pension and continue to do the same” is not valid anymore.

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Maybe it was valid when most people worked for the same company all their lives and the retirement pension system was sustainable, but not today, there is no safe job and the pension system will collapse or increase continouslly the required age.

Having a daily operations account, an emergency account and a investment account is something very basic that almost nobody does, and only care about it when you need it, or worse, never know even if needed …

This post was written more than 6 months ago, maybe things have changed or I don't think the same way anymore