Research tells us that if you’re a confident math wiz, making sound financial decisions is easier.
Those cool red shoes you like cost $69.95. Then you spot a 25% discount tag. You have $50 in your pocket. Can you afford the shoes? Did you take out your phone to figure out the right answer?
If this question makes you sweat, you may suffer from math anxiety. And you wouldn't be the only one: a study in the Journal of Psychoeducational Assessment concludes that around 17% of us suffer from this type of anxiety. When confronted with a mathematical problem, you may get the shakes, feel your confidence plummet, or even choose to just go home to avoid the stress of doing sums. Sadly, math anxiety – and lack of actual mathematical skills, have great impact on our financial savviness.
Case in point: businesses and governments pour billions into financial literacy classes, with the aim of making young and old alike better at making sound financial choices. But do they work? The short answer: we're not sure. Unfortunately, just because we know what a sound financial decision should be, doesn't mean we make those decisions in our own lives.
In an interesting piece of Swedish research, scientists did a hands-on inquiry into the reasons behind why financial literacy classes fail. They found that students who excelled in numeracy (that is, adding and subtracting, probability, ratios) had higher scores for financial literacy.
"This shouldn’t be too much of a surprise. After all, we test financial savviness with three questions that involve not only financial concepts. They also ask for a firm grasp on numbers, percentages and calculation."
FYI, you can find these three questions in Aegon's Retirement Readiness reports.
The Swedish research, therefore, found that the driving force behind becoming financially literate is simply understanding numbers. What's more, feeling confidence in handling mathematical problems (i.e. not having math anxiety) was also predictive of higher financial literacy. So, if you felt confident calculating the discount on our pair of shoes, you're doing well in terms of numeracy and fortunately don't suffer from math anxiety.
Becoming more math savvy may not be such a difficult problem to solve. Some universities, including the University of Leeds and Open University, have designed simple numeracy programs for adults.
And in case you were wondering – regardless of the additional sales tax, you were unable to buy the pair of shoes with the money in your pocket. That's because 25% of 69.95 is 17.49. 69.95 minus 17.49 equals 52.46, so you would be $2.46 short.