Here are two math problems to solve (and yes, you may use a calculator).
1. How would you compute the total interest paid on this loan? (You could also answer by providing the actual total interest paid.)
- Home equity loan: 14.25% annual percentage rate
- Ten year term, fixed rate
- $10,000 financed
- Monthly payment: $156.77
2. What are the miles per gallon for this final tank of gas?
- $8,812.40 ($156.77 payments x 120 months = $18,812.40 – $10,000 amount financed = $8,812.40 total interest)
- 25.0 (14650 end miles – 14350 start miles = 300 miles divided by 12.0 gallons = 25.0 mpg)
These questions were asked as part of a National Assessment of Adult Literacy exam and were testing basic (high school) level math skills in adults. Of the thousands of adults tested, only 40 percent of adults answered question No.1 correctly, only 29 percent could calculate mpg and only 22 percent knew how to compute the total interest.
Think about that. Even with the help of a calculator, 60 percent to 80 percent of adults could not answer these basic math questions. And yet the financial industry delights in creating spreadsheets and illustrations to show the consumer why the beta of 1.5 is creating a very attractive alpha intercept on that fund, or how a Himalayan option strategy may be better than a rainbow crediting method on the index annuity, without seeming to care that the math skills of 71 percent of retirees are rated basic or below.