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Financially Illiterate? You aren’t alone.

Updated: Apr 23

Financial Knowledge

The financial realm seems to have a language all its own.  Terms, concepts, and jargon that may seem, to the outsider, as unintelligible fill the financial world.  Turn to the finance pages of your local paper, or tune into Fox Business, Bloomberg, or CNBC.  Do you understand everything discussed, or are there gaps? If you’re like the majority of Americans, the gaps exist.

The proof is in the numbers

In 2016, FINRA released the Financial Capability in the United States 2016 study.  The results were compiled from survey of 27,564 Americans, between June and October of 2015.

A part of that study was a short survey designed to evaluate the nation’s financial literacy, their level of financial knowledge.  Respondents were given questions covering fundamentals like economics and finance that they could, and likely would, face in everyday life—such as interest rates.

Why don’t you take the test yourself? It’s quick, only six questions:

  1. Supposed you have $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?

  2. More than $102

  3. Exactly $102

  4. Less than $102

  5. Don’t know

  6. Prefer not to say

  7. 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?

  8. More than today

  9. Exactly the same

  10. Less than today

  11. Don’t know

  12. Prefer not to say

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

  14. They will rise

  15. They will fall

  16. They will stay the same

  17. There is not relationship between bond prices and the interest rate

  18. Don’t know

  19. Prefer not to say

  20. Suppose you own $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you own to double?

  21. Less than 2 years

  22. At least 2 years but less than 5 years

  23. At least 5 years but less than 10 years

  24. At least 10 years

  25. Don’t know

  26. Prefer not to say

  27. 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.

  28. True

  29. False

  30. Don’t know

  31. Prefer not to say

  32. Buying a single company stock usually provides a safer return than a stock mutual fund.

  33. True

  34. False

  35. Don’t know

  36. Prefer not to say

Answer Key: 1 (1), 2 (3), 3 (2), 4 (2), 5 (1), 6 (2)

How did you do?  Odds are that you didn’t do as well as you imagined.

Only a little over a quarter of respondents answered question three, the bond question, correctly. Barely a third of respondents answered question four, about interest compounding in the context of debt, correctly. That question generated more incorrect answers than any of the other quiz questions.

Only 37 percent of those surveyed were able to answer at least four questions correctly. If you remember your grading scales, four out of six questions puts you at 66 percent. That’s a D. I don’t know about you, but back in my school days a D would have had me grounded. As a nation, based on this quick quiz, we are all but failing in our financial literacy.

What can we do about it?

The average person’s financial knowledge is lacking. They are financially illiterate to varying degrees. Based on the report, which was run in 2009 and 2012 as well, it’s only getting worse. Schools across the country have started to add more ongoing, practical classwork to help with this gap. But that doesn’t help those past school age.

If you are considering your future, and your eventual retirement, being financial illiterate could easily become a problem. The possibilities are endless for what could go wrong. So what are you supposed to go?

You could attempt to bridge the gaps in your knowledge. Run out right now and pick up a few financial books, a newspaper, maybe some magazines. Scour them, and the internet. Keep one of the many financial programs on permanent play on your television. But be careful who you listen to! Not everyone is on the up and up. And not everyone agrees. With all the conflicting information what do you do now? Maybe you even enroll in a class or two. But honestly, is all of this something you want to do? Something you have the time to do? Does learning a new language—finance, and all its dialects and slag—even appeal to you?

If you’re like many, the answer is no.  You don’t want to do it, you hardly have time. And there are so many other ways you’d prefer to spend that time. Your finances isn’t one of them. That’s frustrating, stressful and a little boring. And there is so much at stake. Your future, your children and grandchildren’s college funds, and so much more.

So what do you do? Let’s look at this another way. Imagine you are married, and you and your partner have decided to get a divorce. You don’t go back to school to become a lawyer—you hire one! Why should planning for your retirement be any different? Hire a financial advisor!

A financial planner spends hundreds of hours learning the ropes in their field, and engages in continuing education on an ongoing basis. They also have years of experience to draw on, so they can know that exceptions do happen, and what to do in those cases. Planning for retirement is part of what they do; just as a divorce lawyer draws up dissolution of marriage paperwork, financial planners craft financial plans.

An asset manager works on a different end. They manage your money. It is what they do. They studied, spent hundreds of hours learning about investments. They are supposed to diligently research ways to safeguard and grow your money. What’s right for you, and your goals and values. Let them watch the market and worry for you.

It’s not practical to be an expert at everything. There are many things in life that are out of your knowledge base. That’s not a failing, that’s normal. Being financially illiterate, to any degree, is the norm. It doesn’t mean you’re any less intelligent or capable. And when you make the decision to hire experienced help you’re just proving your intellect.

If you have questions or comments about this article, please call us at 1-317-875-0202 or message us with our contact us form.

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