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Can You Pass This Money Quiz?

Steve Pomeranz, Money Quiz

Americans’ Rising Confidence In Financial Literacy Is Misplaced

Many of us who are reasonably educated and financially “with it” think we have a fair idea about money: how to earn it, how to spend it, how to save it. In fact, surveys show that Americans have grown more confident about their financial acumen since the market meltdown that ended in 2009, perhaps because many of them were scared enough to take a good hard look at their finances, to read up a little on how to protect their finances, and are now under the impression that they are much more aware of money matters. But, in reality, they seem to know less about the subject than they did then.

I just read some troubling conclusions from a long-running study by the FINRA Investment Education Foundation, which has been assessing American’s financial knowledge, attitudes, and well-being for years. The Financial Capability in the United States 2016 study is based on an online survey of more than 25,000 people. While it contains some positive news about household finances, many of its findings are discomfiting and suggest that misplaced self-confidence is putting millions of people at risk, making them vulnerable to major missteps and to exploitation by financial industry so-called “professionals” who may not have their best interests at heart.

“Money Quiz” Measures Financial Literacy: Take the Quiz Now!

Overall, the study found that most Americans have relatively low levels of financial literacy. It included the results of a basic six-question, multiple-choice quiz on fundamental financial issues. The questions were intended to be very basic and thus easy, and yet the average person got only about half the answers right. I think it’s a good idea for you, my listeners, to also take this test and see how you do. The test has six simple questions and takes less than five minutes.  Click here to take the money quiz.

Five of the questions have been on this quiz for years, which makes it easy to see how many people get them right or wrong over an extended period of time. It’s a good gauge of the progress we are making on financial literacy as it relates to everyday money matters and makes statistical comparisons possible. Alas, the trend is not encouraging.

The worst performance was on a question about how bond prices respond to rising interest rates. Think you know the answer? Only 28 percent of people in 2015 got that one right. I know I have spoken extensively about the connection between bond prices and interest rates, so I am sure many of my listeners will get that one right. I won’t give you the correct answer now because I want you to go to the site and see how you do.

I’ll give you a hint: Long-term government bonds earned over 15% in the last 3 months. How do you think that happened?

The sixth new question added to this year’s quiz focuses on a problem that lands many people in trouble when they pay only the minimum amount due each month on their credit card balances—compound interest.

Here’s the question: “Suppose you owe $1,000 on a loan, and the interest rate you are charged is 20 percent per year compounded annually. If you didn’t pay anything off, at this 20% interest rate, how many years would it take for the amount you owe to double?”

Again, I won’t give you the answer but will say that most people thought it took much longer than that for your loan amount to double, grossly underestimating the impact of interest charges. This lack of knowledge could really hurt you. When interest rates rise, if you ignore compound interest, you can drown in debt.

Signs of Overconfidence Show Disconnect From Reality

An alarming aspect of the study is that, although most people knew very little, they felt great about what they knew — or thought they knew. “Americans tend to have positively biased self-perceptions of their financial knowledge,” and the positive bias has been increasing.

The study found that 76 percent gave themselves a very high rating on financial knowledge in 2015, which is up from previous years. And while 81 percent of Americans rated their own financial behavior positively, the study found a “potential disconnect between perceptions and actions in day-to-day financial matters.”

Large numbers of people, for example, said they were running up late fees and interest payments on credit cards, overdrawing bank accounts, and borrowing money from costly nonbank sources.

Financial Conditions Improved Since 2009, and Households Learned Some Lessons

The good news is that many households are in better financial shape than they were in 2009—but they ought to be because financial conditions are much better. In 2009, the prices of homes and most other assets had fallen sharply, foreclosures were rife, and unemployment was soaring. People had been taking financial risks and they paid for it. In that period, as an example, only 24 percent of home buyers paid more than 20 percent of the purchase price as a down payment. By 2015, people were behaving more conservatively, a third managed to make that big a down payment. And in 2015, fewer people were having trouble paying their bills and more people said they were comfortable with their financial condition.

Still, the survey found that significant hardships continued, and large segments of society continue to face financial difficulties, particularly minority populations and those without a college education.

Next Recession Could Expose Weak Financial Fundamentals and Literacy

Most Americans are still worried that they won’t have enough money to retire, but only 39 percent have ever tried to figure out how much they will need. When financial conditions worsen — and whenever the next recession hits — indicators of financial well-being will decline. Unless the state of financial literacy improves radically, vast numbers of people will not be equipped to deal with these problems.

That’s also why financial literacy programs in schools are helpful, so future generations are financially better prepared.

In the world we live, misplaced self-confidence is dangerous. So please take the financial literacy quiz, do all you can to educate yourself on financial issues relevant to your life situation, read financial columns in newspapers where readers get answers to some pretty basic everyday questions, and always feel to get in touch with me by clicking here.

Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice.  Please contact your financial advisor with questions about your specific needs and circumstances.  There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal.  All data quoted in this piece is for informational purposes only, and author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the data. All data are driven from publicly available information and has not been independently verified by the author.

I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.