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How Financially Literate are You?

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financial literacyNot too long ago, FINRA Investor Education Foundation released the results of a survey conducted on financial literacy.

The results aren’t pretty.

First of all, the Foundation measured financial capability in the respondents and found that:

  • 41% of Americans spend less than they earn.
  • 56% of Americans have NO rainy-day fund capable of covering three months expenses.
  • 34% of Americans only pay the minimum on their credit cards.


As you can see, less than half of Americans are living within their means, and more than half don’t have adequate emergency savings. On top of that, the national average for respondents answering five simple questions about financial literacy was 2.88 correct.

At first glance, it seems fairly clear that financial literacy is not something Americans have a lot of. Yet the FINRA survey discovered that almost 75% of respondents gave themselves high marks for financial literacy. There seems to be a disconnect between how financially literate Americans are, and how financially literate they think they are.

Why Do Americans Struggle with Financial Literacy?

One of the reasons that Americans struggle with financial literacy, says Marcy Maslov, CPA, MBA, and Certified Professional Coactive Coach, is that our electronic system distances consumers from their financial decisions. (That could explain the fact that most Americans aren’t living within their means.)

“Because everything is electronic,” Maslov explains, “it’s easy to push a button to pay a bill or purchase something. What’s not happening is the connection of that button pushing to the transactions that happen beneath the surface.”

“They buy something with a credit card and poof! the expense is magically deducted from their balances! They do not know how this happens or who does the work,” she continues. “People are not taking an active role in budgeting their expenses or balancing their bank accounts.”

Maslov says that when most students come to her to learn accounting essentials and get their finances in order, many of them have no clue. “They don’t like math and the don’t generally write down a budget or balance their bank accounts.”

While you don’t have to like math to properly manage your accounts, it does help if you take the time to learn the basics of tracking your spending and reconciling your accounts. When so few Americans actually understand how their money flows through their personal economy, it is clear why there are so many problems with finances in the United States.

So, how do we fix this problem? Maslov thinks that the key is to teach the basics of financial literacy in school as part of the curriculum. But here’s the key: “We need to offer budgeting classes where students do NOT use a computer, but rather old-fashioned paper and pencil,” she says.

I think she has a point. While I use personal finance software to track my spending, I do it manually, rather than have an app do it automatically for me. There’s something about getting in there and getting involved with your money that helps you better manage it and pay attention to it. Just getting people to pay attention to their choices, and be more involved in the process could lead to better financial literacy.

What do you think? Is there a financial literacy problem in the United States? How would you fix it?

Financial Literacy Quiz

Below are the basic questions asked by FINRA in their quiz. Only 14% of respondents answered all five questions right. How did you do?

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

  • More than $102
  • Exactly $102
  • Less than $102
  • Don’t know
  • Prefer not to say

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

  • More than today
  • Exactly the same
  • Less than today
  • Don’t know
  • Prefer not to say

3. If interest rates rise, what will typically happen to bond prices?

  • They will rise
  • They will fall
  • They will stay the same
  • There is no relationship between bond prices and the interest rate
  • Don’t know
  • Prefer not to say

4. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.

  • True
  • False
  • Don’t know
  • Prefer not to say

5. Buying a single company’s stock usually provides a safer return than a stock mutual fund.

  • True
  • False
  • Don’t know
  • Prefer not to say

Answers:

1. More than $102
2. Less than today
3. They will fall
4. True
5. False

(Photo: HUB)

{ 14 comments, please add your thoughts now! }

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14 Responses to “How Financially Literate are You?”

  1. Thomas says:

    It’s incredible really how many people don’t take control of their finances. It costs them so much money

  2. David S says:

    Well I am one of the 14%!
    I agree that electronic payments makes spending money a lot easier because we don’t really feel the actual transfer of work done to goods received. Once people are able to tie the work they have done to the goods they receive that is the start of financial literacy. After that point one can teach interest, inflation, fractional reserve banking, VAT, taxes, budgeting, and everything else financial.

  3. govenar says:

    The main part of the survey seems to be about “financial capability”, not financial literacy. There’s a difference between knowing that they should pay off their credit cards, and having enough income to be able to.

  4. admiral58 says:

    no matter what your occupation, everyone needs to have a basic understanding of handling their finances correctly. ….wishful thinking

  5. Many companies make great profits based upon the lack of financial literacy in the country. As a result there is a lot of incentive for those in power to keep the status quo.

  6. It’s not just America either. A survey published here in the UK today states that 1 in 5 Britons don’t know the difference between credit and debit cards. Here a campaign is growing for financially literacy to become a compulsory part of the schools curriculum – let’s hope it happens.

  7. JoeTaxpayer says:

    It’s interesting how they worded the observation, “41% of Americans spend less than they earn.” Of course this means that 59% spend more than they earn. (actually, not exactly true. 6% of Americans ‘don’t know’ anything, even when asked how many kids they have.) Still, we financial authors talk about retirement accounts, estate planning, etc, and more than half of the US spend more than they make. For them, it’s not about how to invest at all, but how to get to break-even.

  8. RM says:

    My contention has always been, it does not matter how much money you make, it is how you manage what you make/have that is the most important thing. This can be proven time and time again.

  9. freeby50 says:

    Joetaxpayer, Where do you read that 6% of Americans don’t know how many kids they have? Was that a joke? The underlying FINRA report doesn’t have a ‘don’t know’ answer for that question and the ‘prefer not to say’ answer was 0%.

    • JoeTaxpayer says:

      Yes, joke. When I read X% say something, I don’t subtract from 100%, allowing for the 6%. If this study had no such 6%, I’m impressed.
      By the way, the answer I referenced has responses adding to 96%. Not quite 6% not knowing but 4 is close enough.

  10. Karl says:

    I think people are generally lazy and wimpy. They don’t want to make uncomfortable choices. They spend their money on nonsense. It’s not that they don’t make enough. They don’t want to learn; they want to spend their time and money enjoying things someone else told them they should as long as they have the capability to close the transaction (credit card accepted but bill not paid at end of month).

    How many people that don’t have enough to pay their credit cards:

    -don’t make their own meals
    -don’t shop retail (goodwill, scavenge on garbage day, etc)
    -don’t learn how to buy a basic older car and maintain it
    -have cable
    -are overweight (if they eat less they would spend less)

    I agree that the system is increasingly controlled by 1% of 1% of the people; however most of the reason most people are financially illiterate and poor money managers is due to lack of rational thought, drive and discipline.

  11. Shirley says:

    “… most of the reason most people are financially illiterate and poor money managers is due to lack of rational thought, drive and discipline.”

    Keyword is discipline.

  12. Greg says:

    I think people fail to save because you have to be somewhat financially literate to appreciate the real lifestyle costs of not saving and the real lifestyle benefits of saving.

    Most people who overspend can find ways to borrow money and don’t really appreciate the cost of debt so the stick is pretty weak. They also don’t really (gut level) appreciate the opportunities that savings create for them…even modest savings (due to compounding).

    Lacking clear motivation, why delay gratification?

  13. JayCeezy says:

    Great post. This is really true for governments, as well, except I cannot name a single responsible government of the 192 countries in the world.

    For individuals who spend more than they make, there is a ‘magical thinking’ at work. They believe, somehow, their ‘ship will come in’. Maybe for a few, like medical students, it will come true. But for most, they fulfill present-based wants/needs and kick the can down the road. Wouldn’t wanna be there when they run out of road.


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