What thought immediately comes to your mind when you read this question? Maybe it’s – “Are you kidding, I don’t have a clue!” Maybe it’s – “My plan may need some tweaks, but I am confident I’ll be fine.” Perhaps you are one of those people who believe in living day to day, and the future will take care of itself.
Does the question make you anxious perhaps even fearful? You are not alone!
A Basic Financial Literacy Assessment
Let’s start with some financial basics. Over 20 years ago, a quick, three question financial literacy assessment was developed by two college professors, Lusardi and Mitchell. The assessment has become the standard for measuring financial literacy in the United States and is used in many other countries as well. See how you do. The answers are at the end of this article, but please do not cheat. This is one of those times that you need to be brutally honest with yourself.
1. Suppose you had $100 in a savings account, and the interest rate was 2% per year. After five 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
D. Do not know; refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one 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
D. Do not know; refuse to answer
3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
A. True
B. False
C. Do not know; refuse to answer
What the Test Means
The concepts described in the above questions are compound interest, inflation, and risk diversification, in that order. (If you want to learn more about each of the above concepts, watch for my upcoming blog.)
It may comfort you that only 43% of Americans who were surveyed answered all three questions correctly – 29% of women and 43% of men. Women were much more likely than men to respond that they do not know the answer to at least one of the questions, particularly the last question on risk diversification.
Education level played a role, too. The percentage of responders with perfect scores with a college degree – 65%; some college education – 38%; and high school diploma – 29%. However, more than a third of those with college degrees did not answer one or more questions.
Among age groups, as could be expected, younger responders scored the lowest. One-third of those ages 18-29 answered all three questions correctly. Financial literacy peaks in ages 50-59 with about half answering correctly but drops again – to 44% among those age 70+.
Financial Literacy Help
We clearly have a long way to go to create basic financial literacy across our population, and in the world. So how does a person start? The language may seem foreign and even daunting. There are good resources, however, that start at a basic level in language you can understand.
If your employer offers a company retirement plan, the company or the plan representatives may offer classes or one-on-one sessions to explain the basics and answer questions. A local community college or university may offer outreach programs. Some likely topics are Retirement Planning or Basics of Investing. Look through a list of blogs on my website. I have written on many investment topics such as Learn the Language with a link to a short quiz, and focus on the basics.
With the holidays coming up, I created a Financial Literacy Gift Guide. Go to my website and send me a note to request your copy. Scroll to the bottom of the page. If you are a beginning investor, or if you have started investing but want to know if you are on the right track, look for my book: How to Dress a Naked Portfolio: A Tailored Introduction to Investing for Women. The book is full of understandable financial information to get you started, and it is packed with helpful resources. It is available on Amazon in paperback or eBook versions.
Assistance from a Fiduciary Financial Professional
Your money and financial health are important! This is not the time to let your ego get in the way of progress. If you are overwhelmed, seek the help of a financial advisor.The right advisor will not make you feel uncomfortable or stupid. He or she will encourage your questions and answer them in language that you understand. If they don’t, walk away and find someone else.
Please don’t seek investment advice from cousin Vinnie or Aunt Bea, or even your boss or coworker. Even if you think they are smart and know what they are doing, no one is exactly like you – your age, family status, income, expenses, goals, comfort with risk, etc. You are unique, and a professional will assess those factors and more. Plus, an advisor has a better perspective than someone who is emotionally attached to you.
If you want to make sure that the advisor has a mandate, both legal and ethical, to act in your best interest, seek a fiduciary. You can find an advisor who is a fiduciary, a CERTIFIED FINANCIAL PLANNER®, close to you at www.letsmakeaplan.org. (My blog, Should I Hire a Financial Advisor, has more on this topic.)
Answers: A, C, B.
Let’s Have a Conversation:
How did you do on the financial literacy quiz? How did you learn about financial terms and concepts? Have you had formal instruction in financial literacy?
