You may think you have a pretty good grasp on your finances. But how is your overall financial literacy? It may not be as strong as you think.
A recent study found that a majority of Americans could not answer three simple questions about interest rates and investing. Seventy percent of respondents did not get them all correct.
That led one of the study’s co-authors, Annamaria Lusardi, to tell the Freakonomics podcast that Americans are “at a crisis level” in terms of their financial literacy.
So how would you do on this test? We challenge you to take the quiz and see if you can perform better than the rest.
The Money Quiz
Question: The rate of inflation is 2 percent per year. The interest rate on your savings account is 1 percent. How much could you buy after a year using the money in the account?
Less than today
The same as today
More than today
Answer: Less than today. This makes logical sense, since prices are going up at double the rate that your interest is growing.
Question: True or false: Purchasing stock in a single company results in a safer return than a stock mutual fund.
Answer: False. This is the financial equivalent of putting all your eggs in one basket. If the company fails, then you lose everything. If, however, you invest in a low-cost index fund, you get a diverse option.
Question: You put $100 in a savings account with a 2 percent interest rate. If you keep the money there for five years, how much will you have at the end of that span?
Less than $102
More than $102
Answer: You would have more than $102. With compound interest, you would hit $102 after your first year of investment. The next four years, that total would increase.
Improve Your Financial Literacy
So, how did you do? Were you able to answer all of the questions correctly? If you were stumped by any of them, take comfort in the fact that you can improve your financial literacy. In fact, you should make it a priority.
Grasping basic financial concepts will assist you in many ways, including planning for retirement. If you do not have the right information, it makes it difficult to lay out your long-term financial goals and figure out how to achieve them.
Remember, there are things you should be doing each decade until you retire to ensure you have enough money put away. You certainly don’t want to be hit with any financial surprises as you plan for your golden years.
Here are a few simple ways to improve your financial literacy:
Read up on anything related to finance or retirement. The Wall Street Journal, Forbes and Fortune are all reliable resources.
Experiment with financial management tools, such as Mint.com. These will show you where you spend your money.
Practice networking to increase your knowledge. Is another mom on your kid’s soccer team a CPA? Ask her about things you are uncertain about.
Seek professional advice. Talk to experts such as the ones at Go Comprehensive. We can help you figure out the best way to plan for the future.