The Hindu Business Line : Financial capacity and political perspicacity are inversely correlated

Which is the greatest cause of serious financial difficulty: Bad luck, not enough savings, buying too much on credit, or not following a financial plan?

We all know that inflation can cause difficulty in many ways. But do we know "which group would have the greatest problem during periods of high inflation that last several years"? Would it be: "a) Young couples with no children who both work; b) Young working couples with children; c) Older, working couples saving for retirement; d) Older people living on fixed retirement income?"

Try one more question: "Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?" Your choices are: "a) When some clothes you like go on sale; b) When the interest on the loan is greater than the interest you get on your savings; c) When you need to buy a car to get a much better paying job; d) When you really need a week vacation."

These are but two of the 51 questions that Jump$tart Coalition for Personal Financial Literacy (www.jumpstart.org) recently posed to `5775 high school students in 37 states' in the US. The survey aimed at measuring "12th graders' level of knowledge of personal finance basics". Similar studies had been conducted in 2004, 2002, 2000 and 1997; and the questions were "administered by individual teachers in classes other than finance and management, mostly English and Social Studies classes," as the Jump$tart's press release informs.

Financial literacy is a newsy topic. For instance, `April Is Financial Literacy Month & Tax Time,' says Bolsamania.com, Spain. "Reconciliation Australia says that access to financial services and financial literacy also need to be considered in promoting better money management in Indigenous communities," reports www9.sbs.com.au. And Bloomberg alerted on April 5, "Federal Reserve Chairman Ben Bernanke is expected to announce the results of a financial literacy survey at 9:30 a.m. in Washington without taking any questions from the audience." Bernanke, however, didn't forget to emphasise during that occasion the importance of improving financial education for the future of the US economy.

Reporting the survey results, www.usatoday.com ran the headline `US teenagers lack financial literacy.' A saving, though, was in the final paragraph of the story: "Students aren't the only ones whose financial literacy is lacking. In a survey of 1,000 adults conducted last month for the Financial Services Forum, only 57 per cent said they knew `quite a bit' or `a great deal' about managing their personal finances and retirement savings."

Financial literacy and real life

Jump$tart's questions weren't merely academic; there were new questions to check how far students could find finance decisions relevant to their lives. Question 48 was one such. "Which of the following do you feel is the greatest cause of serious financial difficulty, where families can't pay their bills?" it read. Options were: "a) Bad luck, such as unexpected illness or job loss; b) Not enough savings; c) Buying too much on credit; d) Not following a financial plan; and e) Not being able to earn enough money."

Those who blamed it on the bad luck option had average financial literacy scores of 49 per cent, while those who felt that serious financial difficulty was due to buying too much on credit had average scores of 55 per cent. Insightful.

Another question probed thus: "How bad do you think it is for families who don't have enough money to pay their bills?" The alternatives were: "a) Not so bad, a lot of families go through this; b) Pretty bad, it is painful to experience; and c) Very bad, it is one of the worst things that can happen to a family." Revealingly, those who said it was `not so bad... ' had average financial literacy scores of 43.2 per cent.

More posers to check out

"If you have caused an accident, which type of automobile insurance would cover damage to your own car?" is the opening question, where you can choose from `term, collision, comprehensive, and liability'. "If you went to college and earned a 4-year degree, how much more money could you expect to earn than if you only had a high school diploma?" is another query. Options: "a) A little more; about 20 per cent more; b) A lot more; about 70 per cent more; c) About 10 times as much; and d) No more; I would make about the same either way." The correct answer is `b'.

"If each of the following persons had the same amount of take-home pay, who would need the greatest amount of life insurance? a) A young single woman with two young children; b) A young single woman without children; c) An elderly retired man, with a wife who is also retired; d) A young married man without children." About 4 per cent chose each of `b' and `d', while 30 per cent said `c'. The correct answer, however, is `a', which 61 per cent got right.

Some questions were easy. Such as: "Which of the following instruments is NOT typically associated with spending: a) Cash; b) Credit card; c) Debit card; d) Certificate of deposit." The right option, as you know, is `d', chosen by 93.5 per cent of school candidates. And this: "Which of the following best describes the primary sources of income for most people age 20-35? a) Profits from business; b) Rents; c) Dividends and interest; d) Salaries, wages, tips." About 7 to 8 per cent of respondents chose each of the first three options; more than three-fourths opted for `d', the correct one.

Interesting questions

"What is your best estimate of your parents' total income last year? Consider annual income from all sources before taxes," read question 34. Nearly a fifth said, `Don't know.' Question 36 posed a simple question: "What is the highest level of schooling your father or mother completed?" Nearly 4 per cent said, `Don't know,' and they were the ones with the lowest financial literacy score.

Another toughie was `What type of work do you intend to do when you finish school?' The first option was `manual work such as truck driver, labourer, farm worker,' chosen by the ones who had 41 per cent financial literacy score. As a choice of those at a higher level of financial literacy of 48 per cent came `skilled trade such as plumber, electrician'. Those with 55 per cent financial literacy score wished to be `professional worker such as nurse, computer programmer.'

Returning to the questions we started off with, what are the correct answers? For the first, the last option (that is, `older people living on fixed retirement income') is the right answer; more than a third of the respondents said, `Young working couples with children.' To the other question, nearly 7 per cent wanted to borrow money to buy clothes coming up on sale; about 4 per cent wished to take a loan to fund a week-long vacation. Queerly, almost one in three said yes to loan `When the interest on the loan is greater than the interest you get on your savings'; the correct answer was to go for credit `When you need to buy a car to get a much better paying job.'

Wish the Institute of Chartered Accountants of India put together such modules of questions for our school students to hone their financial literacy. John Kenneth Galbraith would, however, rue that throughout history, "financial capacity and political perspicacity are inversely correlated." Not to worry, though, because he'd also said, "Politics is not the art of the possible. It consists of choosing between the disastrous and the unpalatable."

http://AccountSpeak.blogspot.com

D. Murali

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