A quiz reveals some holes in Americans' financial literacy.
Financial literacy is always important, but in uncertain economic times, it's vital. The financial world is complex and multi-faceted, and there's no exact gauge of what you need to know in order to be considered informed. There are, however, some financial fundamentals that everyone needs to understand on a basic level in order to avoid making catastrophic money decisions and to be able to follow what's happening with the economy on a larger scale.
Unfortunately, many Americans have never taken an economics class and aren't well-versed in things like inflation, investments, interest rates, and other economic realities. To be fair, economics can be confusing even when you try to learn, but without understanding some basic concepts, it can make a huge difference in your financial wellbeing.
Many Americans need to increase their financial literacy.Photo credit: Canva
The non-profit FINRA Investor Education Foundation surveyed 25,500 adult Americans and asked them to take a seven-question financial knowledge quiz to test their financial literacy. The results were a bit concerning, as only a small fraction of quiz-takers answered all seven questions correctly.
Here are the questions they asked:
1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
More than $102
Exactly $102
Less than $102
Don't Know
2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
4.True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
5. True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.
6. Suppose you owe $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 owe to double?
a) 0 to 2 years
b) 2 to 4 years
c) 5 to 9 years
d) 10 or more years
e) Don't know
Some financial literacy is just math literacy—understanding percentages and probabilities. Photo credit: Canva
7. Which of the following indicates the highest probability of getting a particular disease?
a) There is a one-in-twenty chance of getting the disease
b) 2% of the population will get the disease
c) 25 out of every 1,000 people will get the disease
d) Don't know
"Don't know" was an option for each question, and the average correct score across the Americans who took the quiz was 3.3 out of 7. Nationwide, 27% of people who took the quiz got the right answers on at least five of the questions, and only 4% aced all seven questions.
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Which states fared the best and worst? Here are the 10 top states by percentage of survey respondents that correctly answered five or more of the quiz question:
1. Minnesota (34.78%)
2. Wisconsin (34.46%)
3. District of Columbia (34.41%)
4. Colorado (33.89%)
5. Wyoming (33.85%)
6. Washington (32.54%)
7. Vermont (32.34%)
8. North Dakota (32.00%)
9. Oregon (31.86%)
10 Kansas (31.44%)
And here are the bottom 5 by the same metric:
New Mexico (23.2%)
West Virginia (21.4%)
Alabama (20.2%)
Mississippi (19.2%)
Louisiana (18.1%)
One piece of good news: Americans' understanding of inflation has increased significantly since the last time FINRA did a similar survey in 2021. (Or maybe that's not such good news, as it's likely a better understanding that came from experiencing an inflation crisis, but learning is learning.)
"Overall, the findings show that knowledge of everyday financial concepts remains a challenge for many Americans. The wide disparities in financial knowledge across states demonstrate that more work is required to empower all Americans with the skills and tools to make informed financial decisions and safeguard their investments,” said Gerri Walsh, President of the FINRA Foundation. "The increase in the number of respondents who correctly answered the question about the impact of inflation on savings is an encouraging sign, likely reflecting the impact of lived experience as well as increased focus on the topic. However, continued efforts are needed to ensure all Americans fully understand the effects of economic factors on their personal finances."
Not only does a lack of financial knowledge have the potential to impact people's personal finances, such as getting into credit card debt trouble or choosing unwise investments, but not understanding how things like inflation and the relationship between interest rates and investment markets can lead people to vote for politicians with questionable economic policies. How can you believe a politician will be good for the economy if you don't understand what factors contribute to keeping the economy stable and strong?
You can take the quiz yourself here and see how your knowledge compares.
A young woman is stressed about her future.via