Recently, the FINRA Investor Education Foundation commissioned a study to determine the financial capability / literacy of Americans. For me, the results explain a lot.
The study looked at a number of items, but included a little quiz:
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?
A - More than $102
B - Exactly $102
C - Less than $102
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?
A - More than today
B - Exactly the same
C - Less than today
3. If interest rates rise, what will typically happen to bond prices?
A - They will rise
B - They will fall
C - They will stay the same
D - There is no relationship between bond prices and the interest rate
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.
A - True
B - False
5. Buying a single company’s stock usually provides a safer return than a stock mutual fund.
A - True
B - False
So how’d you do? According to the results, the average score was a 2.72 correct, or a 54% - otherwise known as an ‘F’. Of the questions, most people got question #4 right (70% correct), and the fewest people got question #3 correct (21% correct).
However, if happen to get all of them correct, consider yourself in rarified air. Less than 10% of all respondents got every question right.
So what does this mean?
Well, you can draw your own conclusions, but it shows that while people may be very good in their occupation, that doesn’t necessarily translate into expertise in managing money. Think about it – people are busy with their careers, spending time with family, etc. Not many people take time away from enjoying those things to catch up on the latest tax code changes.
Yawn…
Well, people don’t know what they don’t know. We think we know. But what we don’t know can cost us money.
And according to this study, the average American really doesn’t know a lot…
Answers to quiz: 1 – A. 2 – C. 3 – B. 4 – A / True. 5 – B / False.
Answer to last week’s trivia question: B – Two. With fewer workers to support each retiree, that means only two choices. Either benefits are cut – which is unlikely – or payroll taxes have to go up. Either way it’s bad.
This week’s trivia question: Since many financial decisions involved at least basic math, the percentage of people who rated themselves very good at math (top 2 survey categories) was 54%. But what percentage rated themselves as very knowledgeable about finances? Was it?
A – 17%
B – 20%
C – 25%
D – 37%
