Budgeting 2012 - Part 3

Barbie: "Math is hard, let's go shopping!" Ken: "Math is hard, let's go play basketball!"

The above comments were part of an article and commentary on why most Americans lack financial literacy. It may be at the heart of the problem individuals have with budgeting.

Dartmouth Professor and economist Annamaria Lusardi has been conducting studies of the financial literacy of Americans. She has prepared reports for the Social Security Administration. She has concluded that we have a problem. For example, many Americans can't calculate simple interest.

Here is an example question: "Let's say you have 100 dollars in a savings account. The account earns 5 percent interest per year. How much would you have in the account at the end of two years?" You can use a calculator if you wish.

Most did not get the answer correct to this and other similar questions in a financial study by Prof. Lusardi. "These are pretty dismal findings, considering the complexities of the calculations involved in many financial decisions."

Professor Lusardi has a blog for those who are interested in her perspective and general knowledge on the subject and what Dartmouth College is doing about it:  "Financial Literacy and Ignorance,  What Do People Actually Know About Personal Finance? Not Much It Seems..."

Clicking here will open a New Window> annalusardi.blogspot.com

Financial literacy programs may create more problems than they solve. How is that? According to Lauren Willis at Loyola Law School, financial literacy programs can increase confidence without improving ability! (Note 1).

So what's the solution? Let me quote Fool.com analyst Morgan Housel: "We do need more financial education that teaches basic numeracy, but that education should first and foremost teach the emotional constraints of finance. After all, it doesn't help to know what APR is unless also taught that bankers selling loans rarely have your best interest at heart." "Understanding compound interest won't help without conquering the social pressures that prevent people from saving money in the first place."

"Common sense is not so common." Voltaire

Notes:

1. Lauren E. Willis, Associate Professor at Loyola Law School in Los Angeles published a paper in 2008 entitled "Against Financial-Literacy Education." That paper points out the problems faced by one attempting to achieve financial literacy, and possible consequences of recent government policies. I am not certain I agree with the professor's position but I do agree that most are not currently up to the task of negotiating on their financial behalf. The paper is at PDF copy of "Against Financial-Literacy Education
2. For Mr. Housel's article at Fool.com entitled "I Was Told There Would Be No Math" click on this link: I Was Told There Would Be No Math