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Financial Literacy and Income Inequality

Marginal Revolution posted a link to a study by Lusardi and Mitchell regarding financial literacy.  Unfortunately, the findings do not deviate from other studies in finding that most households are not financially astute; or, more accurately, households are not as astute as they believe themselves to be.  Some of the questions asked are as follows:

  1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow:More than $102. Exactly $102,. Less than $102? Do not know. Refuse to answer.
  2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:More than, exactly the same as, or less than today with the money in this account? Do not know. Refuse to answer.
  3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’T. F. Do not know. Refuse to answer

The entire quiz may be found here.

Earning power can be correlated to education.  Statistically, the more education you have, the higher your earnings will be before plateauing once a certain level is attained. Many economists on both sides of the table point to education as a factor in the earnings gap.  On the other hand, rarely do we ever see research linking dearth of financial education as an indicator for low income or wealth.  For that matter, the abundance of financial education for those at the opposite end of the spectrum is rarely explicitly mentioned as a contributor to higher income.  Is that odd?

Being excellent with money compared to being poor handlers of money are not discussed politically – only the end results of annual income, which groups the financially literate and illiterate together demonizing the former and sympathizing with the latter.  Why do you think this the case?

Before being bashed, I am not stating that financial literacy is the only factor in earning power as there are many others.  However, I would expect this to be a substantial factor in accumulating income and wealth – wouldn’t you?

Maybe it’s luck…

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