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Plan Well, Retire Well

Saving and investing your money

The Tricky Business of Measuring Financial Knowledge


Many times when I read a survey that's designed to measure financial knowledge, I come away skeptical. Too often I feel that the survey questions measure financial jargon, rather than measuring useful knowledge or financial literacy. The FINRA Foundation's Financial Capability Survey seems different to me. And, their results show that people need to increase their financial knowledge.

I found this survey to be especially interesting as it asked people just five questions. In a related paper, Annamaria Lusardi and Olivia S. Mitchell state, "A set of basic concepts sits at the heart of financial decision-making. Those concepts include: (i) numeracy and an understanding of interest rates and interest compounding; (ii) an understanding of inflation; and (iii) an understanding of risk diversification." I agree that these are concepts we all need to understand.

In Illinois, 63% of the survey participants answered three or less of the five financial literacy questions correctly. I'm betting that readers of our blog can do better than average! Would you like to take the quiz? Here are the questions:

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; Do not 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? More than today; Exactly the same; Less than today; Do not know.

3) If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship? Rise; Fall; Stay the same; No relationship; Do not know.

4) 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. True; False; Do not know.

5) Buying a single company's stock usually provides a safer return than a stock mutual fund. True; False; Do not know.

Here are the answers to the Financial Capability Survey: Question 1) More than $102; 2) Less than today; 3) Fall; 4) True; 5) False. So, how did you do? Let us know by clicking on the Comments link below. Do you think these are the right questions to be asking or would you ask different questions? If so, what questions?

For an explanation of the answers, and more information about the survey, go to the FINRA Investor Education Foundation National Financial Capability Study website. Learning, especially about finances, is a continuing experience.



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COMMENTS



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I attended several financial seminars given by Karen Chan at the southside UI Extention Office. She was excellent. I knew the correct answers because of the information she provided at the seminars. If you know the basics you can make informed decisions.
by Maggie Stanton on Monday 8/26/2013

Thank you for the positive feedback about the seminars you attended. I agree that Karen is a wonderful educator!
by Kathy Sweedler on Wednesday 8/28/2013

I got them all correct. The only one that I wasn't completely sure of was #3. Thanks for the information. Always helpful.
by Karen Moore on Thursday 8/29/2013

Always nice to have your feedback :) Glad to hear you did well on the survey!
by Kathy Sweedler on Monday 9/2/2013