How knowledgeable are you on basic finance and math questions? While a small number of Americans readily admit even the simplest of “number” questions stump them, a whopping 75% have “positive perceptions” of their own financial knowledge and math skills, according to the Financial Industry Regulatory Authority (FINRA). How does that stack up against reality? Well, see how you do on this quick five question test. While there are numbers on the test, no math is required to correctly answer all five questions.
1) Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
a) More than $102
b) Exactly $102
c) Less than $102
d) 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?
d) Don’t know
3) If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same or is there no relationship?
c) Stay the same
d) No relationship
e) Don’t know
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.
c) Don’t know
5) True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
c) Don’t know
Answers will follow at the end of this article. But first, Question 6); How many of the 50,000 adults across all 50 states and over a 3-year period answered all five questions correctly? The answer is 14%.
FINRA has also surveyed what they term “financial capability” of adults across states and age groups, and drew some interesting conclusions:
Only 41% of Americans surveyed spend less than their income.
Over a quarter (26%) have unpaid medical bills. That number is actually higher for younger Americans – 31% of those age 18-34 compared to 17% of those 55 and older.
56% do not have enough in “rainy-day” savings, to cover expenses for just three months if they were to lose their income or have a large unanticipated financial emergency.
Over a third (34%) made only the minimum payment on a credit card during the past year.
As far as the five-question test, the national average was 2.88 correct answers, or 58%.
“This survey reveals that many Americans continue to struggle to make ends meet, plan ahead, and make sound financial decisions, and that financial literacy levels remain low, especially among our youngest workers,” says FINRA Foundation Chairman Richard Ketchum.
Another problem is that many financial advisors are not concerned about filling that void in literacy and decision making, according to fiduciary advocate Ron Rhoades, program chair of the Alfred State Financial Planning Program. “Sadly, 80% or more of ‘financial advice’ and ‘investment advice’ provided today is not provided in the best interests of consumers, but rather is – often unknown to the consumer – designed to sell expensive investment products to unsuspecting consumers,” he says.
Adapted from an article in Financial Planning magazine: Many Clients Lost Without Financial Planners by Paula Vasan, May 30, 2013
Quiz answers: 1) a. 2) c. 3) b. 4) a. 5) b.