James Surowiecki (over at the New Yorker), wrote about financial illiteracy in the issue from a couple of weeks ago. The bad news is that we Americans are clueless about finance, and particularly, our personal finances:
The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is. [link]
That’s the bad news. The good news is that as Managerial Finance students, you are already a couple of steps ahead. You know what compound interest is! We will soon learn what interest rates are all about, and you will also be able to figure out how to calculate your own mortgage payment, and lots, lots more.
So just in case you find yourself wondering why in the world we are learning all these things, take a look at this:
The point isn’t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that. [link]
I couldn’t have put it any better myself. Remember that when studying for your exam!
Good luck and drop me a line if you have any questions.