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January 28, 2007
Educating the Family CFO
I talk a lot about the concept of the Family CFO. It is a fairly new concept born of the unprecedented and ever-increasing responsibility individuals face for their own economic well being. The complexity of the personal finance landscape intensifies every day with more information, more products, and frankly, more bullshit.
Studies indicate our financial literacy isn't keeping pace with the demands being put on us. This is especially true of women, minorities, young people and the less educated. But the problem is certainly not limited to those groups. In fact, those we would expect to score highest in financial literacy - near retirees who have presumably made a great number of financial decisions during their lifetime - don't understand basic concepts necessary to make sound financial decisions. They are in desperate need of financial education.
The urgency of financial literacy started to get the attention of researchers in the mid-1990s. Since then, quite a few studies have been done. In a 2004 study, early Baby Boomers aged 51 to 56 were asked the following questions:
1) “If the chance of getting a disease is 10 percent, how many people out of 1,000
would be expected to get the disease?”
2) “If 5 people all have the winning number in the lottery and the prize is 2
million dollars, how much will each of them get?”
Anyone who answered either of the first two questions correctly was asked a third question:
3) “Let’s say you have 200 dollars in a savings account. The account earns 10
percent interest per year. How much would you have in the account at the end of
two years?”
80% were able to correctly determine that 10% of 1000 is 100. Only half could divide 2 million by 5 to get the lottery question right. Only 18% could compute the compound return over two years in the third question.
I have mentioned the University of Washington study in previous posts that found very little understanding of financial instruments. Most people have no idea that bond prices fall as interest rates rise for example. Many did not know what a no-load mutual fund was, or that mutual funds do not pay a guaranteed rate of return. More than one-third did not know that stocks had returned more than bonds over the last forty years, and many did not the basic concept of diversification to spread risk.
This is relevant because the research has established a clear link between those that understand things like simple percentage calculations and compound interest and those who save and plan for retirement. There is a clear link between financial education and economic behavior.
The Council for Economic Cooperation and Development defines financial education as:
The process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.
Clearly the need for financial education is great. My question is the extent to which individuals realize they need to augment their skill set and the profound implications a small investment in education can have on their future standard of living?
What do you think? Leave your thoughts and comments below.
PROPS:
I found this abstract for the research paper which is the basis for this post on Barry Barnitz's very utilitarian Financial Page blog. Thanks Barry for all that you do.
SOURCE:
1. Lusardi, Annamaria and Mitchell, Olivia S., "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs" (January 2007). Available at SSRN: http://ssrn.com/abstract=957796
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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