Why we need financial education: Students underestimate power of compound interest and think savings accounts earn the highest returns

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May 08, 2019
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Compound Interest, Investing, Financial Literacy

The answers to these two questions from a recent workshop are a great demonstration of the need for financial education:

  • When asked which of these investments would earn the highest returns, the most common answer was....Savings Accounts and 34% got the right answer: 

  • When asked the question about how $1,000 growing at 7% annually would grow over 40 years (I read the question and emphasized ANNUALLY several times as Kahoot limits the characters in the question)....23 skipped the question and about 30% got the right answer of nearly $15,000

 

With an average interest rate of about 0.25% today, those stashing their money in savings accounts are actually LOSING money, as in, losing ground to inflation which is hovering around 2%. I was heartened when one student described how his parents helped him set up a Roth IRA and explained the power of compounding and how much the money he was putting away today would be worth in retirement. Unfortunately, that was one student in a sea of a hundred students, many of who had part-time jobs. We can do better! 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.