Measuring and Wasting Financial IQ
I wasn’t planning on writing anything today but I came across an article from the Associated Press that provoked me into changing my mind. I had to say something about it, if only briefly. It’s about measring and using our financial IQ.
Measuring Your Money Intelligence
I’ve pulled a lot of my money out of the stock market waiting for a good time to reinvest. The best sign of a market turnaround, telling me to get back in is:
(a) A huge spike in trading volume meaning lots of people are getting back in at once
(b) Several days in which volatility has stabilized
(c) Markets continue to climb despite news or other events putting downward pressure on them
(d) Nobody really knows
Is there any doubt about the correct answer to this question?
These “are you smart about money” tests can have one positive benefit. If they cause those who are completely clueless about money to recognize and then seek to remedy their financial ignorance, that is a good thing. I doubt that ever happens.
Looking at the Wrong Financial Data Set
The real weakness with financial IQ self-assessments is that they measure the wrong thing. In doing so, they can create false confidence. More to the point, doing well on a money intelligence test can cause the test-taker to mistakenly believe that he or she is destined to succeed financially.
While it’s true that the U.S. is chock-full of adults who lack basic money management skills, it’s also the case that millions of consumers have money knowledge but refuse to act in accordance with that knowledge. Not only do they ignore the basic rules of saving, spending, investing, and use of credit, they refuse to learn from their own mistakes.
Even in the world of those who blog about personal finance, I regularly find evidence of those who don’t follow their own advice. (And those are just the bloggers who are willing to write about it!)
In short, many of us are wasting our financial IQ.
The hard truth is that the financial IQ tests are amusing but are measuring the wrong data. These tests should force readers to examine their actual money behavior. It doesn’t help to know how smart you are about money if you are not also challenged to show that your actions conform to your level of money intelligence.
In fact, you could probably red flag a lot of the folks who score well but waste their financial IQ by including a simple question like this:
How much did your net worth change this past year?
a. It decreased by more than 5%
b. It increased by more than 5%.
c. I don’t care – I only track my credit score.
d. I’m afraid to look.
Of course, if someone is willing to take a test of money behavior, the trick is to direct those who score poorly in a new direction. They best way to do that is to let them suffer the consequences of their bad decisions. Unfortunately, our government seems unwilling to let that happen.
Image credit: Lusi