Wednesday, July 23, 2008

Financial Idiocy

Here's a fantastic post over at Freakonomics.  The conclusion is absolutely astonishing.  The questions are so simple and so elementary that I can't believe people don't answer them correctly.  If people can't answer these simple questions easily, we clearly have something wrong.  Part of it is with our school system.  I know it's not reading, riting, or rithmatic, but every child should have at least a finance unit in one of their classes, if not a finance course in Jr High/High School that explains the basics: FICO credit score, compound interest, inflation/deflation, basic stock market fundamentals. 
I understand if people don't project ahead (for example, at my current projected savings rate, assuming the status quo with my earnings and spend - which is conservative, if you ask me - combined with a reasonable compound interest rate up to the highest realistic compound rate [approximately 2%-10% - again, pretty conservative], I will have millions of dollars for retirement.  I am not even in the same hemisphere as that in my 401(k), UVL, and savings accounts at the moment, but that's the magic of compound interest.), but please have a basic understanding.  Know that if you have 3 loans: a mortgage at 5%, a car at 6%, and a credit card at 18%, you should pay the credit card off first while maintaining your minimum payments elsewhere.  Use the power of the no-interest promotional loan.  Pay off everything but your house (your house gives you special tax advantages that make it adventageous to not pay it off immediately).  For the love of all that is holy, DO NOT GET AN INTEREST ONLY MORTGAGE and/or A VARIABLE RATE MORTGAGE - unless you're going to pay it off during the promotional period.  Those products kill more people than any other.  Work to have 20% down on your house.  This is difficult in a first home, but after your first home, you should always have 20% to put down to avoid a high rate home equity loan or mortgage insurance.  One interesting piece of advice I got was instead of paying off your house with extra income, put that money in an interest bearing account (or bonds would work too) and keep building it up.  When you're done, you'll have kept the tax advantages of a mortgage and built up enough to pay it off in one fell swoop.  Of course, you can go on forever on all the different tricks and this is just a step, but if we could get that initial step taken by a lot of people, we probably wouldn't be in the current mess we're in.

3 comments:

Michael Brady said...

I love how all of the people who posted comments take the time to pat themselves on the back and/or put down anybody who didn't know the answers. What a shallow world. Just be glad that you are smart enough to know something about money.

They're probably all members of MENSA, which is a group of people who take the time to pat themselves on the back and/or put down anybody who doesn't know what MENSA is. I once thought of joining, but decided that it is enough just to be happy with who I am. God doesn't require credentials to enter heaven, but he does require memorization of the 13 articles of faith, going through 6 discussions, then 6 more after being baptized, then accepting calling after calling, getting the priesthood, going on a mission unless you had sex (but you still couldn't go even though you repented because they raised the bar on ye), marrying in the temple, having lots of children, teaching them the 13 articles of faith, making them go on missions, making them marry in the temple, going on a couples mission, doing your genealogy, (btw, you're still doing lots of callings in the meantime)... and while you're doing all of these linearly planned-out tasks, you also need to love your neighbor, join the PTA, write your congressmen, write the missionaries in your ward, keep your temper (even in traffic), know how to bake, avoid tobacco and alcohol (though you can be as fat as you want?), be a good neighbor, wash the car, walk the dog, trim the hedges, destroy the One Ring in the fires of Mt. Doom, pull the sword from the stone, put your right foot in, put your right foot out, win a spelling bee, vote, put a "Save Darfur" sticker on your bumper, help your kids with their homework, set challenging but attainable goals, achieve those goals, go easy on yourself, forgive, own land, have 2.5 children, baptize your neighbor, stop racism, embrace homosexuals but not homosexuality (interpret that however you like), read the Book of Mormon by Dec 31, overcome pornography, write in your journal about how you overcame pornography, beware of pride, lock your heart, organize a road show, grease the squeaky wheel, bridle your tongue, make hajj to Mecca, whistle Dixie, buy local, have a sense of humor, be able to laugh at yourself, save a year-supply of food, save a year-supply of income, get a 4-year degree, get an additional 2-year degree, be A+ certified and w3schools certified, don't try to keep up with the Joneses, cast the beam from your eye, be meek enough to inherit the earth, think you can dance, be smarter than a 5th grader, do the dirty dozen for a full month, be a democrat, not end sentences with prepositions, make your own taffy, not look down on Utah Valley, not look down on Utah, not look up to Satan, do the twist, don't stand so close to me, blame it on the rain, not start the fire, twist and shout, don't kick the dog, don't swear, don't commit adultery, keep them other commandments, own a Plymouth Voyager minivan, know every career stat of Stockton and Malone, own a StocktontoMalone Honda, wax your StocktontoMalone Honda regularly, read Sorro's blog, comment on Sorro's blog, don't shop at Target, finish your vegetables, and last but not least, pray.

But at least I don't have to be a member of MENSA (though we shouldn't look down on the haughtiness of their pride).

Sorro said...

That was epic.

Michael Brady said...

wah!