Monday, July 14, 2014

Test Makers Fail Financial Literacy Test

So news was recently going around about a Financial Literacy Test made by the OECD. The Wall Street Journal provided 5 sample questions from the test and I must say that the OECD fails it's own question.

First of all I'm switching the "zeds" to $ for typing purposes. So Mrs Jones current loan balance is $7400, it has a 15% interest rate with monthly payments of $150. This means that the loan will take 78 payments (months) to payoff and TOTAL INTEREST paid over the life of the loan will be $4,178 (yes below it equals $4,180 due to rounding).

However, if she decides to take out a new larger loan of $10,000 at an interest rate of 13% while repaying at the same $150 rate then it will take 119 payments (months) to payoff and TOTAL INTEREST paid over the life of the loan will be $7,832. In other words she will be paying $3,654 MORE INTEREST.

Despite these facts OECD says the answer is as follows
Clearly A, as I showed earlier, is not correct. Therefore C is also wrong. While she is paying a lower interest RATE, she is clearly paying HIGHER INTEREST in total ($7,832 vs $4,178). B is in fact correct, she will have more money available but she will be paying interest on that money and unless she has an investment that is going to earn her more then the cost of funds (13%) she would be better off taking a smaller loan.

Why am I not surprised that the OECD would come up with this clearly incorrect answer regarding interest paid? Because they seem to encourage over-leveraged economies at every opportunity, so here they are teaching incorrect information, helping everyone become slaves to debt through bad information.


  1. Whether you're buying yourWisconsin Home Loans first home or moving up to a bigger one, the basic steps in the purchase process are the same.Best Wisconsin Mortgage Broker Our Purchase Service guides you throughFannie Mae Home this process, ensuring that you are Ill-prepared andFreddie Mac open access receiving great advice every step of the way.

  2. various other products and services regarding true estate professional indemnity insurance present various kinds regarding coverage. AND ALSO regardless of whether This really is ones initial night out in order to invest throughout these types of insurance, you have to know your extent connected with coverage your insurance will certainly supply the ones practice. Below are a number of of your civil liabilities the professional indemnity insurance regarding true estate agents In the event cover.Truckers Insurance

  3. Confusion is the one thing we apparently include plenty of currently on the subject of health care insurance. People indepedent Honest Option agent will let you with the misunderstandings in order to make the right conclusion pertaining to you and your family.trucking insurance

  4. Much thanks to you for setting aside an ideal opportunity to distribute this data exceptionally valuable!

  5. Have you ever wondered that why there is b buzz about insurance services, why these services are important and exactly what are these?you can try this out

  6. Wisconsin Mortgage Corporation has been providing quality home loans across Wisconsin.Meet our loan officers. Please choose the loan officer that you were referred to view their personal page and apply online.Wisconsin FHA Each loan officer's page includes the following services.