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Michigan lawmakers have raised the idea of making financial literacy classes mandatory for the state’s high schoolers. While we are always in favor of imparting practical, real-world knowledge to students, this topic can be tricky. As an example of what we mean, we will analyze the financial literacy quiz presented above, which originated with Bloomberg Opinion columnist Matt Levine. So, what is the correct answer?

Well, someone totally ignorant of financial matters may reason that 10% of $100 is $10, so in three years he would have $30 dollars of interest. Thus, along with the initial $100 deposit, he should have $130 at the end of the period. Therefore, b is the correct answer.

However, someone who has taken a financial literacy class might say, “What about the compounding effect of interest? As time progresses we gain interest on the interest previously earned.” Using the formula he learned in class, he finds that he should have $100*(1.10)3 = $133.10 at the end of three years. So the answer has to be c.

But...  in the real world, any institution that would offer 10% on a risk-free account in the low interest rate environment of 2019 is being deceptive and is likely involved in some sort of Ponzi scheme or similar fraud. There is a very real chance that in three years most of your initial deposit, if not all of it, would be gone. So in actuality, the correct answer to the quiz should be a. For Albert Einstein may have said that “compound interest is the most powerful force in the universe”, but it quickly becomes powerless when confronted with missing funds. Ultimately, obtaining literacy in finance requires more than just the ability to regurgitate arithmetic formulas. It requires the maturity to realize that there are always risks with every potential reward and the ability to recognize that some deals are too good to be true.  And it is this sort of reflection and circumspection that can be very difficult to convey in any classroom setting. Michigan lawmakers have raised the idea of making financial literacy classes mandatory for the state’s high schoolers. While we are always in favor of imparting practical, real-world knowledge to students, this topic can be tricky. As an example of what we mean, we will analyze the financial literacy quiz presented above, which originated with Bloomberg Opinion columnist Matt Levine. So, what is the correct answer?