Study says many Americans are in the dark on basic financial concepts

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The Boston Globe

By: Humberto Cruz

January 16, 2010


So you think you're good at dealing with day-to-day financial matters. Seventy percent of Americans rate their financial knowledge as high.

But Americans, including many who give themselves high marks on math and finances, make common mistakes that cost them a bundle in needless charges, penalties, and fees. They also have trouble answering five simple questions:


1) Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, would you have more than $102, exactly $102, or less than $102?


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?


3) If interest rates rise, what will happen to bond prices? Rise, fall, stay the same, or is there no relationship?


4) True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life will be less.


5) True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.


These questions were part of a National Financial Capability Study commissioned by the Financial Industry Regulatory Authority Investor Education Foundation. The correct answers, and the percentage of Americans who got them right are: 1) More than $102, 65 percent; 2) Less than today, 64 percent; 3) Fall, 21 percent; 4) True, 70 percent and 5) False, 52 percent.


This translates to an average of just 2.72 correct answers out of five. That's a score of just 54.4 percent, or an "F'' on a typical grading scale.


The survey was developed in consultation with the Department of the Treasury and the President's Advisory Council on Financial Literacy. By exploring how people manage their resources and how they make financial decisions, the foundation and others can best extend the reach of financial education programs in communities across the country.


The need is enormous. Survey results were discouraging in four key components of financial capability: making ends meet, planning ahead, managing financial products, and financial knowledge and decision-making.


Nearly half of survey respondents reported difficulties in covering monthly expenses. Most lack a "rainy day'' fund for emergencies and do not plan for events, such as their children's college education or their own retirement.


Even among those who said they were good with finances, many bounced checks and were late with credit card payments, among other things.


Few compared the terms of financial products or shopped around. One in 10 people with a mortgage did not know the interest rate they are paying and 17 percent of investors in retirement plans did not know how much of their portfolio is in stocks or stock mutual funds.

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