Here’s a loaded question: How financially literate are you?
We Americans mostly master the “3 Rs” of reading, writing, and arithmetic in our teens. Unfortunately, as we begin to build our financial lives with income, savings, bill payment, and borrowing, we are often blindsided by how best to optimize our net worth given the complexities of investing, inflation, compound interest, debt management, and retirement planning.
If you feel a bit uneasy on those latter topics, you’re not alone. According to Investors in the United States: A Report of the National Financial Capability Study by FINRA Investor Education Foundation, a non-profit organization dedicated to protecting investors from market vulnerabilities, only about a third of Americans (37 percent) could correctly answer more than three questions on a five-question financial literacy quiz.
Where do you fit into the mix? Try the five-question FINRA Financial Literacy Quiz and find out.
FINRA has seen the same frustrating lack of financial literacy nationwide since launching its first of four investor surveys in 2009. American investors fared just as poorly on the 10-question investor version, with only a third able to correctly answer more than half the questions put to them.
You say you aren’t an investor? If you’re saving for retirement through a workplace 401(k), you are an investor -- and you need to know how to choose the best fund for you.
In general, while survey results show slow growth in financial literacy among women and African-Americans, one geographic trend seems hardwired: City folks tend to manage their money better than country folks.
FINRA President Gerri Walsh, who also serves as Senior Vice President for Investor Education, says that while financial circumstances may have caused that urban/rural divide, education can help dissolve it.
“For example, when a state mandates that financial education be a requirement for graduation from high school, you start to see within a year or two that students and young people in that state have higher credit scores and a lesser likelihood of being burdened with credit card debt. Now, did the financial education cause that? It’s difficult to establish that causal connection. But is it likely that that was a factor? Absolutely.” Gerri Walsh
Want to ace the next financial literacy test? Here are seven shrewd financial moves to make the best use of your money.
Begin with a budget
To take a road trip, you start with a map. To manage your money, you start with a budget that shows at a glance your monthly income, monthly bills, and your investment goals.
Get a grip on compound interest
One common way we both earn money and lose money is the interest that banks and credit card companies add (or compound) onto the interest we either earn (i.e., on a bank deposit) or owe (i.e., on a credit card bill or loan). Learn now how to make it work for you.
“If there was one thing that I wish all consumers understood, it’s the impact of compound interest, both positive and negative; the power that it offers with respect to savings and the potential for an endless cycle of debt with respect to borrowing. A substantial portion of Americans don’t pay off their credit cards on time and in full, and those people are experiencing the negative consequences of compound interest.” Gerri Walsh
Launch an emergency fund
As the meme goes, life comes at you fast. Plan for it by laying aside a portion of your spare cash in a savings account best configured for long-term growth. Think of it as GoFundMe campaign for your financial life.
“The interest you earn on your savings gets capitalized into your principle so that you’re growing your asset base as well as continuously earning money on that money that you’ve made. It’s one of the hardest formulas to learn but one of the greatest benefits that you feel.” Gerri Walsh
Pick a card, any card
In the unlikely event you haven’t already, pick a credit card. Not randomly, mind you, but by learning how credit lenders use interest terms, fees, and rewards to win your business. The more you learn about credit cards now, the more money you’ll save later.
Set a student loan strategy
Congrats on landing the student loan funds, but don’t bank on your future job to clear your tab. Walsh avoided the hard landing she might have faced 20 years ago on a student loan in the 9 to 12 percent range by, in essence, paying it forward.
“I made a decision that I wasn’t going to live in my own apartment, I wasn’t going to have a car. I was instead going to live in a shared house with a number of roommates, I was going to eat in, and I was going to pay off my loans in five years,” she said proudly. “And that’s what I did.” Gerri Walsh
For parents or grandparents who want to help their kids long before they’re ready to go off to college, Education Savings Accounts (ESAs) and 529 Plans can come in handy as well.
Enroll in Mortgage 101
Ready to purchase your first home? Start by creating your own mortgage cram course. Once you understand how mortgages work, bounce your remaining questions off your Realtor for a happy landing.
Bond with a financial advisor
Although saving for retirement sounds easy, it’s anything but, what with the mind-numbing products, practices and vocabulary of the stock and bond markets, and the difficulty grasping what inflation can do to a humble portfolio. What’s your best money move when your assets are sufficient to begin to plan your back nine? Elementary: Make contact with a dedicated financial planner and investment advisor you like and trust, who will treat your retirement cash with the same care as they would their own.
About the writer: Jay MacDonald is an award-winning freelance writer based in Florida. His work has been published on Bankrate.com, CreditCards.com, MoneyWise.com, and many other media outlets.