One of the most intimidating things about entering the real world after years of school is handling your own finances -- paychecks, taxes, investments, flexible spending accounts, pre-tax deductions, bills bills bills. The reams of financial papers that get thrown at the working American is staggering, and -- according to new research -- twentysomethings are having a particularly tough time with personal finance.
The study appeared in the Journal of Consumer Affairs and examined how financial knowledge, parental influence and psychology affect young adults' money-handling.
Turns out this is not how a loan works:
Researchers at San Diego State University found that the average young adult couldn't answer two out of three basic finance questions correctly. Only 25% of respondents got all three right.
What's more, the researchers designated three basic tenets of money management -- paying off debts, budgeting and saving -- and a meager 2% of participants showed responsible behavior across the three categories.
The three questions were as follows (answers are at the bottom of the post so you can see how you stack up):
1. 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.
2. 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, or less than $102?
3. 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?
The study recommends financial education programs take into account social, gender and individual psychological factors when developing a curriculum. The thing is, this assumes that young people were previously exposed to personal finance or accounting classes. So, it seems like a simple way to end this cycle of financial cluelessness would be to require such classes in high school, right? Well, not exactly.
According to Time, the study found that financial knowledge had little to no effect on young adults' financial behavior. The silver lining is that women show an increased likelihood of actually benefiting from financial knowledge and parental influence.
Ultimately, study co-author Nina Tang suggests the best way to improve a person's budgeting prowess is by increasing financial knowledge while promoting better organization and self-awareness. After all, half the battle is keeping all the files straight and knowing what you can afford.
And if all else fails? Just let these cats rolling in money teach you the basics of personal wealth.
Answers: 1. False; 2. More than $102; 3. Less than today.