Last week, Merrill Lynch & Co. released results of a survey conducted by Luntz Research Cos. of Arlington, Va., showing that in a sampling of 1,000 Americans, 82 percent could not answer six or more questions out of 10 involving financial matters. Some of the questions: What is the current unemployment rate? Inflation rate? Highest federal income tax bracket? Current 30-year mortgage rate? Largest annual Social Security benefit for a two-person household? Current level of the Dow industrials? Who is chairman of the Federal Reserve?
The results elicited cries of financial illiteracy from various authorities. But what does the test say about how Americans handle their finances?
Mary A. Malgoire
Financial planner, Malgoire Drucker Inc.
The vast majority of people are living paycheck to paycheck. Yes, they are putting money into their pension plan if their employer says they should do that. But they don't need to know who [Federal Reserve Chairman] Alan Greenspan is.
It's sort of like those old IQ tests. We're imposing a set of questions that are developed by the intelligentsia of the financial world on people who are not from that cultural background.
Why do I need to know [the current level of the Dow Jones industrial average] if all I have is a paycheck, a checking account and a credit card? My take on this is that it was designed to make people who are financially astute to feel good about themselves.
We have a great disparity of wealth in this country. And I'll probably get skewered as a socialist, if I say this next statement, but one of the great exercises of the upper class is to get people to think they should belong to it. It's a constant exercise to get people to think they should just save a little more, and do a little bit more work, and get a little more, and get a higher rate of return on their investment and then maybe they can make it, too.
The reality is we need a whole lot of people who make close to nothing in order to make this economy work.
It doesn't surprise me at all. First of all, most Americans are just concerned with how are they going to pay the bills this month and how they going to afford the new car.
It's very difficult for the average person to even plan their own finances and look at what they need to do to send their kids to college. Much less pay attention to issues that may not directly affect them right now, like what a 30-year mortgage rate is, if they lived in their homes for 15 years. Or what do they care who's the chairman of the Federal Reserve Board? They just want to know what kind of interest rate are they going to get when they go to buy that new car next month.
There are an awful lot of people who don't have the basic literacy skills to understand what is going on with their own personal finances, much less monitor what is going in the general public.
Sean A. Kelly
President, Baltimore Association for Financial Planning
Two-thirds of the questions were more on economics, which only at best would give consumers a possible trend in the financial markets. The more revealing questions were the remaining third, and they do directly affect the financial decisions they would make.
It indicated to me the need for greater awareness and focus through education, the sooner the better. It simply shows they are lacking the knowledge and experience, which I think is a nicer way to put it, than to say they can't read and write.
I think it's inappropriate [to use the word "illiterate"].
I do see a trend in our industry that there is a growing hunger or want and there is just a lacking as far as services. But probably the biggest need it shows me is that they have to start focusing sooner, mostly on retirement.
Mary J. Stephenson
Cooperative Extension Service University of Maryland
Those are very technical questions. I wouldn't know the answer to some of those. You wouldn't need to know all those things to manage your own money. That's kind of silly. But at least it points to the fact that we need more education.
I really think it is critical that there be more education in money management, and it probably needs to start in the school system and not wait until people are in debt or something like that.
People don't understand the finance charges on their credit cards. They have no idea how to purchase insurance, so they end up buying the wrong kind of coverage and often times dropping it after a short period of time and losing a lot of money.
They don't understand investments. They probably have an idea they ought to buy mutual funds. But they don't know which one to buy or how to go about reading a prospectus or doing anything like that.