The United States is the land of entrepreneurs, millionaires and… poor financial literacy? Read on to test your knowledge!
If the articles about Americans having a retirement savings crisis did not bring the message home, this recent batch of statistics surely will.
- According to the Organisation for Economic Co-Operation and Development (OECD), 1 in 5 high school students in the US fail to meet the level considered “financially literate“ (a measure that has not changed since 2012).
- Financial Literacy Around the World, a Standard and Poor’s Rating Services Survey, reports that only 57% of Americans received a passing score on a financial literacy assessment. That is not enough to earn the US a spot among the top ten most financial literate countries (it came in at #14).
- The National Capability Study by the FINRA Foundation found that 2 in 3 adults cannot calculate loan interest payments correctly. The same study found that less than 50% of adults can accurately answer basic questions about financial risk.
Think that you can do better than the people who participated in the study? Here is a quick 10-question test. No Googling and no peeking ahead!
Simple financial literacy assessment
Q1. You have $100 in your bank account that pays 10% interest every year. If you do not remove or add any money, how much will you have in the account in 5 years?
- a. Less than $150
- b. Exactly $150
- c. More than $150
Q2. Which of the following does NOT create financial security?
- a. Paying down your debt
- b. Adding money to your 401(k) account
- c. Saving for your kids’ college education
- d. Starting an emergency savings fund
Q3. How much money should you aim to have in your emergency savings account?
- a. $1,000
- b. One month’s rent or mortgage payment
- c. 3-6 months’ total living expenses
- d. $15,000
Q4. Jane has several types of debt: car lease, mortgage payment, federal student loans, credit card balances and an I.O.U. to her parents. In what order should she make the payments?
- a. Smallest balance to largest balance
- b. Largest balance to smallest balance
- /c. Lowest interest rate to highest interest rate
- d. Highest interest rate to lowest interest rate
Q5. Steve is trying to decide whether he should take the standard deduction or itemize on his taxes. How would you explain the difference between the two to Steve?
- a. Itemizing means that you have to hire an accountant to do the taxes for you. Standard deduction means that you can do your own taxes.
- b. Itemizing means you will get picked for an IRS audit. Standard deduction means you will not get audited.
- c. Itemizing means listing out specific deductions. Standard deduction means using one amount as set by the IRS.
- d. Itemizing means you have list all of your property. Standard deduction means you don’t have to list your property.
Q6. All things being equal, who on this list needs life insurance the least?
- a. Married, with children, no debt.
- b. Married, with children, with debt.
- c. Single, no children, no debt.
- d. Single, no children, with debt.
Q7. Lucy is looking for a simple alternative to having a will drawn up by an attorney. Lucy has a checking account, a savings account, a 401(k) account and a life insurance policy. She does not own a house or a car. Which of the options would be “the next best thing” to having a formal will?
- a. Lucy writes her own will.
- b. Lucy designates beneficiaries on all her accounts.
- c. Lucy makes a video telling her husband how the assets should be divided.
- d. Lucy does nothing.
Q8. Jack has to borrow $100 for one year. Which of the two options would be better for Jack (i.e. lowest payment back)?
- a. $105
- b. $100 plus 3% annual interest
- a. Lower than the interest payment for the first year
- b. Exactly the same as the interest payment for the first year
- c. Higher than the interest payment for the first year
- a. You do not have to pay taxes on Social Security income because it comes from the government.
- b. Social Security income may be taxable depending on your combined income from other sources, nontaxable interest and the level of your Social Security benefits.
- c. Social Security income is always 100% taxable.
- Identify your blind spots. Perhaps you know a lot about bank accounts, interest and loans – but do not know much about taxes. Or maybe you wish you understood the difference between stocks and bonds. Big-picture areas of financial literacy include budgeting, interest, understanding debt, the importance of savings, and best practices for identity protection and fraud awareness. Be honest with yourself so that you can focus your efforts for maximum result!
- Locate your resources. Depending on the area of financial literacy that you would like to learn more about, you may find answers in a variety of places. There are many great blogs and websites with useful information about budgets. Check out www.Mint.com, www.MyMoneyMyFuture.com and www.YouNeedABudget.com. Websites like www.GoodFinancialCents.com have a wealth of information on every financial topic.
- Don’t be shy about taking a time out to learn more about financial decisions, especially if they have long-lasting consequences. For example, if you are not very comfortable with loans, interest and mortgage calculations, spend some time online researching optimal mortgage size for your financial situation. New information will stick better if you learn it when it is personally relevant to you, so research-as-needed is a good approach (you must allow yourself the time to do it though!)
Q9. Mary puts $1,000 in the bank for 2 years. The bank promises to pay her 15% every year. The bank’s interest payment in the second year will be
Q10. Which is generally true of Social Security income?
(Here are the answers so that you can check your work: 1c, 2c, 3c, 4d, 5c, 6c, 7b, 8b, 9c, 10b)
Simple steps to improve financial literacy
If you are disappointed by your score, know that there are simple things you can start doing today that will put you on the road to financial literacy – which can translate into peace of mind and better money decisions. Here is your roadmap!
Finally, remember that you do not have to do this on your own. From working with a financial planner to participating in a group financial fitness program (like WeightWatchers®-style Fiscal Fitness Clubs of America, for example) can give you the knowledge you need to make smart decisions and reap the benefits of improved financial literacy, both for yourself and for your family.
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