Abstract
Financial illiteracy is widespread and leads to bad financial decisions. Individuals cannot answer basic questions about inflation, compounding, and diversification. This article argues that financial literacy programs should be complemented with a new class of financial instruments that embed goal-specific compounding and inflation protection. These income-only real bonds, with a forward start date, would pay investors for the period required for the respective goal. Further, there is ample potential supply from natural issuers. This innovation trivializes the investment problem to just simple multiplication or division, thereby addressing the challenge of financial illiteracy with financial innovation across a range of saving/investment goals.
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