How important is financial literacy?

At the end of 2020, the FINRA Investor Education Foundation published a report that found, “…financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline financial characteristics and a wide set of demographic and individual characteristics that influence financial decision making.”

In fact, financial literacy may be more important today than it has ever been. That’s because the responsibility for saving, investing, and generating income for retirement has shifted from companies (that managed defined benefit plan assets) to individuals (who manage 401(k), 403(b), and other defined contribution plan assets).

The researchers administered a quiz at the beginning and end of the research period (six years). The quiz included questions that were a lot like these, which are derived from questions asked by the National Financial Capability Study:

1. Suppose you have $100 in a savings account and it is earning 2 percent a year. After five years, how much money will be in the account?
   1. More than $102
   2. Exactly $102
   3. Less than $102
   4. I don’t know
      
2. Now, suppose the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, will the money in the account buy more than it does today, exactly the same as it does today, or less than it does today?
   1. More
   2. Same
   3. Less
   4. I don’t know

 When interest rates increase, what typically happens to bond prices? Do they rise, fall, or stay the same? Or is there no relationship between interest rates and bond prices?

3. 1. Rise
   2. Fall
   3. Stay the same
   4. No relationship
   5. I don’t know
      
4. Suppose you owe $1,000 on a loan and the interest rate you are paying is 20 percent per year, compounded annually. If you don't pay anything on the loan, how many years will it take for the amount you owe to double?
   1. Less than two years
   2. Two to four years
   3. Five to nine years
   4. Ten or more years
   5. I don’t know

If these answers generate questions for you, please give us a call.

Answers:

1. A – More than $102.
2. C – Less.
3. B – Fall.
4. B – Two to four years.

Photo by: Handwriting text Financial Literacy. Concept meaning Understand and knowledgeable on how money works. © Artur Szczybylo | Dreamstime.com