Are You Financially Literate? Take the Test!


1. Americans Fail Financial Literacy Test

2. First, the Good News From the Study

3. Financial Illiteracy Leads to Poor Decisions

4. Where is Our Educational System?

5. The Family Connection is Critical

Americans Fail Financial Literacy Test

For over a decade, numerous studies have found that most Americans are lacking in their basic knowledge regarding finance and investments. I first reported on this back in 2003 and have done so every few years since then. Unfortunately, things have not gotten better over the years, despite the fact that we went through a major financial crisis in 2008-2009.

In late May of this year, the US Financial Investment Regulatory Authority, or “FINRA,” published the results of its 2012 study showing that the average American is still lacking basic knowledge about finance and investments. The National Financial Capability Study found that, as a nation, we scored lower in financial literacy in 2012 than we did in 2009. On FINRA’s basic five-question test, the average number of correct answers fell to 2.88 in 2012 from 3.0 in 2009.

Are you financially literate? Click here to find out.

In today’s E-Letter, I’m going to discuss the findings of FINRA’s 2012 investor literacy study. Aside from the investor knowledge component, there was actually some good news, but you have to look pretty hard to find it.

Finally, we’ll discuss why high schools and universities are pumping out graduates who have little or no financial know-how. Why do our educational institutions continue to produce graduates able to grasp complex ideas and theories but have little common sense about such things as money management? How can we fix it? The answer might surprise you.

This is one of those E-Letters that you need to share with your friends and relatives, especially those who are young and just starting out. It may also be a good idea to forward it to your local school’s administration along with a suggestion to include more basic financial education in its curriculum.

Take the Test Yourself

The original test used in the FINRA financial literacy study had just five questions that covered some very basic investment topics. We have reproduced the FINRA test at the link below, but we included seven additional questions that we thought should be part of any assessment of basic financial knowledge.

For scoring purposes, the first five questions are those from the FINRA Study, while the remaining questions are from us. You can use this expanded test to help you determine your own financial literacy and then forward it on to your family and friends. While I feel that my readers will easily be able to pass this test, I encourage you to take it anyway. Here’s the link:

How did you do? It was pretty basic, wasn’t it? That makes it even more troubling that a large majority of Americans can’t answer all, or even most, of the five FINRA questions correctly. Perhaps that explains why so many Baby Boomers are reaching retirement with little or no nest egg and why millions of families are drowning in debt.

I urge you to forward this E-Letter to your adult children and grandchildren, encourage them to take the test and then ask them to tell you how they did.

As in my past articles about financial literacy, I would be very interested to hear your feedback on how you and your relatives and friends did on the test, especially on the last seven questions we added. Feel free to send an e-mail to me at[email protected]to let me know the outcome of all who took the test. Just put “Test Results” in the subject line of your e-mail.

First, the Good News From the Study

As usual, when FINRA released the results of its 2012 National Financial Capability Study, the financial media went directly to the bad news. Fortunately, there was actually some good news about the state of US household finances in 2012 versus 2009.

For example, the Study found that American families are finding it easier to make ends meet now than in 2009. As a result, more participants were able to accumulate “rainy day funds.” Obviously, this puts these households in a better position to deal with unexpected expenses.

The 2012 Study also showed an improvement in the number of people who are satisfied with the status of their personal finances compared to the 2009 Study. Perhaps most importantly, the latest Study found that those who had a greater degree of financial knowledge tended to have a higher net worth.

The 2012 Study also found that respondents showed a marked increase in their perception of their own financial knowledge, from 67% in 2009 to 73% in 2012, even as actual test results fell. This should be good news, except that researchers found “ …a disconnect between self-perceptions and actions in day-to-day financial matters.” In other words, many people think they know more about financial matters than they actually do. Unfortunately, these folks may conclude that they do not need any additional financial education.

Financial Illiteracy Leads to Poor Decisions

The FINRA Study sought to measure financial capability in four areas, both on a state-by-state and national average basis:

  1. Making ends meet;
  2. Planning ahead;
  3. Managing financial products; and
  4. Financial knowledge and decision making.

While some of these categories did improve from 2009 to 2012, the overall report still showed a dismal picture of financial capability in the US. Only 41% of respondents reported spending less than their income each month, and 56% have no money set aside for emergencies. Over one-third of Americans reported paying only the minimum credit card payment each month, and 26% reported having outstanding medical bills.

Underscoring the fragile condition of most household finances, it was no surprise to learn that 40% of those surveyed indicated that they either probably or definitely couldn’t come up with $2,000 to cover an unexpected expense or emergency.

As for planning ahead for retirement, it’s not happening in many US households. The Study reported that 59% of those surveyed have not tried to calculate how much money they need to save for retirement. There are retirement calculators all over the Internet, so why aren’t people using these free services more?

Perhaps the worst news was in regard to non-bank borrowing. The Study found that 43% of 18 to 34 year olds have used high-cost methods of borrowing such as automobile title loans, pawn shop or payday loans or rent-to-own stores. Aside from the often astronomical interest rates on such borrowing, they are often also indicative of poor credit histories, which limit access to more traditional forms of borrowing.

The part of the FINRA Study that got the most press was the financial literacy test and its implications. Based on a simple, five-question test, only 14% of respondents were able to answer all questions correctly. As noted above, the average number of correct answers to the five questions dropped from 3.0 in 2009 to 2.88 in 2012.

One of the more interesting statistics was the relation of scores on the financial literacy test to the age of the respondent. Given access to education and coverage by 401(k) plans that allow participants to select their own investments, you might think that younger people, as a rule, would do better on the financial literacy test, right? Wrong. The average score for respondents in the 18 to 34 age bracket was only 2.3, while those in the 55+ category fared better with a 3.3 average score. Even so, that’s still not very good.

You can review more detailed information about theFINRA Study, including a state-by-state analysis and the complete report on national findings.

Where Is Our Educational System?

One solution to improving financial literacy would be more education. The 2012 FINRA Study included new questions regarding past financial education experiences. Although 29% of respondents said they had been offered financial education at the school, college or workplace level, only 19% report having participated. Yet when asked if financial education should be taught in schools, a whopping 89% of respondents said “YES.” We couldn’t agree more!

One of the architects of the FINRA financial literacy test is Dr. Annamaria Lusardi, a professor at George Washington University and director of its Global Center for Financial Literacy. Dr. Lusardi has been involved in financial literacy for many years and is a long-time proponent of addressing financial literacy through high school classes designed to teach the basics.

I wholeheartedly agree with her approach and believe it should be a required course. Unfortunately, only 16 states require that some sort of financial education be offered in high schools, and only 15 of those states require a financial education course for graduation, according to the Council for Economic Education.

The Council reports that it continues to work with state affiliates to bring about greater access to financial education and you may be able to play a part. If you are concerned about students in your state not receiving sufficient (or any) financial education, feel free to forward this E-Letter to your local school board, administration and even your state representative along with a note encouraging more financial education.

The Role of the Family

One of the most consistent findings of financial literacy studies I have seen over the years is that the education and financial habits of parents largely influenced the financial literacy of their children. In other words, children learn financial management best at home and by example. While Dr. Lusardi’s suggestion for high school financial classes is a good one, the best place to start that learning is at home.

Over the years, I have written a number ofE-Lettersdiscussing ways to teach children and grandchildren about saving and investing. This has been one of my recurring themes, and I have found that it is always appreciated by my readers. As a parent or grandparent, you might be theonly source of financial instruction for your children or grandchildren.

The FINRA Studies and others demonstrate that you should not assume that young people will get all the basic financial education they need in high school, or even in college. Young people need to know how to manage their own money in the real world like – how to buy a car, get a mortgage, manage credit card debt, avoid pawn shops and payday loans, etc., etc. You won’t find this basic level of instruction in most high schools, and even in some business schools.

That being said, let’s discuss some ways that you might approach the younger members of your family regarding financial matters:

1. The first and most obvious thing to do is talk about it. It seems that financial topics are sometimes taboo among members of the same family. Just make your talk a conversation and not a lecture. Also remember the discussion above about how many people think they know more about financial matters than they actually do. That’s why having your adult children or grandchildren take thefinancial literacy testis a good idea. It just might prove to them that they aren’t as financially savvy as they think they are.

2. Don’t worry about not being qualified to talk about financial matters with your child. We’re talking about how to handle basic financial matters, and you have plenty of experience doing that. If you know how to handle your own financial situation, you should be able to easily communicate that to your teenagers and/or adult children.

3. Help your children set goals and participate in monitoring their progress, but resist the temptation to do it for them. Just stay on the sidelines and offer advice.

4. Encourage investing as early as possible. Teenagers and adult children may run off a list of reasons why they can’t start investing right now. However, the power of compound interest is strongest when savings and investing are started at an early age. Try using this example:

Hypothetical value at age 65 assuming 8% compounded growth:

$50 per month investment beginning at age 18 = $283,377
$50 per month investment beginning at age 28 = $127,060
Gain lost from waiting 10 years to begin: $156,317
(Note: 8% compounded growth is for illustration purposes only, is not

guaranteed and does not reflect the performance of an actual investment.)

5. Teach by example. Perhaps the best way to influence your adult child’s financial behavior is by providing a good example. This includes not only sharing methods and strategies for financial matters, but also includes discussing some of the challenges you have encountered over your lifetime.

6. Our 12-questionfinancial literacy testalso contains a link to allow those who take the test to sign up for a subscription to my weekly Forecasts & Trends E-Letter. Encourage your friends and loved ones to sign up for the E-Letter on their own so they can stay informed. It’s timely, informative and FREE !

Political Implications

I strongly believe that household financial capability and politics go hand-in-hand, especially as we wrestle with trillion-dollar budget deficits, a $16+trillion national debt and the Fed printing money by the trillions. As we evaluate those who run for office, financial literacy is a must, in my opinion.

Should Americans vote for the person who promises the most government benefits regardless of cost, or the one who supports balancing our budget? Those who are financially illiterate likely don’t know that we can’t run trillion-dollar deficits forever, and may be inclined to vote for the pork-barrel candidate.

Look at it this way – I and other writers have complained that the federal government should live within its means just like everyday Americans have to do. However, if most people aren’t living within their means, then they may assume that the government can just continue running up debt just like they do, and vote accordingly.

If that’s the case and most Americans don’t have a clue as to basic economics or finance, then we could be going headlong into a financial education crash course known as Depression 2.0.


The financial literacy statistics are disturbing on a number of levels. First, we know that lack of financial sophistication can lead to poor economic choices for families. This subjects them to higher interest rates, fees and oftentimes inferior products. Worst of all, it increases these costs for those who can least afford it.

Problems stemming from the lack of financial literacy can also spill over into the economy as a whole. We are still recovering from one such economic consequence in the form of the subprime mortgage debacle, which I believe was in large part caused by the lack of financial literacy on the part of many borrowers.

A final potential effect of financial illiteracy is in the political realm. Financial literacy likely affects who we elect to represent us. How can we expect Americans to elect fiscally conservative candidates when a majority of Americans lack even basic financial understanding?

The answer, I believe, is in educating voters so that they can balance social benefits with fiscal responsibility. I applaud Dr. Lusardi and the Council for Economic Education for their efforts to have financial literacy taught in schools. Yet studies show that financial education is most effectively taught at home and by example.

So I encourage you to share your financial wisdom with those in your family who may need help in this area. And I hope you will share this week’s E-Letter with anyone you think it could help – especially your own children, loved ones, and friends or co-workers. Here’s the link again:

Are you financially literate? Click here to find out.

Hoping for a financially literate America,

Gary D. Halbert

© Halbert Wealth Management

© Halbert Wealth Management

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