The Personal Finance Index: A Comparison with Previous Surveys
A comparison with previous surveys
Several questions in the P-Fin Index can be compared with other surveys. One of the questions used by the P-Fin Index to assess knowledge with respect to borrowing tests understanding of interest compounding in the context of debt:
Jose owes $1,000 on a loan that has an interest rate of 20% per year compounded annually. If he makes no payments on the loan, at this interest rate, how many years will it take for the amount he owes to double?
Less than 5 years (correct answer; chosen by 43% of respondents)
5 to 10 years (chosen by 20% of respondents)
More than 10 years (chosen by 8% of respondents)
Don’t know (chosen by 28% of respondents)
This question, like others in the P-Fin Index, shows that the data compare well with other surveys. Approximately two in five respondents answered this question correctly and, consistent with other studies, about thirty percent overestimated the time it takes for debt to double—for example, in the 2009 TNS Survey, 32 percent replied that it would take more than 5 years for a $1,000 debt with a 20% annual interest rate to double. The DNK response rate here is also consistent with the 2015 National Financial Capability Study (NFCS) where 25% of survey participants responded that they did not know the answer. It’s clear that many Americans do not understand the implications of compounding interest, despite the ramifications for debt payments, as well as savings accumulation.