PROJECT M
 

Compounding Kiwis and interest rates

Thousands of miles from the financial world’s hectic hubs, New Zealanders understand compound interest and inflation better than many others. But levels of financial literacy are still dangerously low according to a study

Christian Gressner

Compounding Kiwis and interest rates

Thousands of miles from the financial world’s hectic hubs, New Zealanders understand compound interest and inflation better than many others. But levels of financial literacy are still dangerously low according to a study

Christian Gressner

Watch how a cartoonist explains financial literacy

The survey’s methodology

The study asked the following questions:

  • Interest compounding: Suppose you had $100 in your savings account and the interest rate was 2% per year. After five 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.
  • Inflation: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? More than today. Exactly the same. Less than today.
  • Risk diversification: Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund”. True. False.

Lusardi and Mitchell have also collaborated with in-depth studies of financial literacy in each of the 50 US states, and they look forward to collaborating with emerging economies seeking to inform their citizens.

Comments