How much do you know about basic financial concepts that impact your portfolio? Chances are, if you’re reading this article, you know more than most. But that’s not the case for everyone. Since April is Financial Literacy Month, we thought it would be fitting to take a look at the state of financial literacy in our nation and around the globe.
In 2014, McGraw Hill Financial teamed up with Gallup, Inc., the World Bank Development Research Group, and GFLEC to interview over 150,000 adults in over 140 countries. The findings of their S&P Global FinLit Survey were sobering.
The survey covered four basic financial concepts: risk diversification, numeracy, inflation, and interest compounding. Those surveyed had to respond correctly to three out of the four topics to be considered financially literate. How did we do?
Financial Literacy Statistics
Here are some of the survey’s findings: (1)
- In the US, 57% of adults are financially literate.
- Worldwide, only 33% of adults are financially literate.
- The US ranks about the same as Belgium, Switzerland, New Zealand and Singapore.
- Americans with less education and lower incomes have lower financial literacy levels than their counterparts in other wealthy nations.
- College educated adults in the US rank 28 percentage points higher in financial literacy than those with only a high school education.
- Interest is the least understood concept in the US, and of adults who own a credit card, 43% answered it incorrectly.
- Only 58% of adults who save at a financial institution answered the interest topic correctly.
- There is a 10 percentage point financial literacy gap between men and women in the US, which is twice as large as the global gender gap.
- Of the 62% of US women who have a credit card, only half of them answered the interest topic correctly.
- The financial literacy gap based on income is 17 percentage points in the US, compared to 9 percentage points globally.
- Almost 10% of US adults have borrowed money to pay for school fees in the last year, but only half of them correctly answered the interest topic.
- In the US, about a third of adults finance their houses, but only 62% of them answered the interest topic correctly.
Why Does Financial Literacy Matter?
It’s clear that we have a financial illiteracy problem here in the US and worldwide. But what’s the big deal? Does financial literacy really matter that much?
Consider these statistics:
- Though we are the wealthiest nation, the US ranks 14th in financial literacy worldwide. (2)
- Finances are the #1 cause of stress in America, with 72% of adults saying that they feel stressed about money some of the time. (3)
- Money is the #1 cause of arguments between spouses. (4)
- Too much conflict or arguing is the second most commonly named “major” reason for divorce. (5)
When you consider how stress affects health, causing headaches, upset stomach, elevated blood pressure, chest pain, problems sleeping, (6) and increasing the likelihood of engaging in unhealthy behaviors like alcohol, tobacco or overeating, it is even more alarming.
Why is financial literacy important? Because it affects our relationships, our health, every area of our lives.
How Financially Literate Are You?
By now you’re probably curious about how you would do on the survey. How do you compare? Do you know as much as you think you do? Answer the following questions to find out:
- Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
A- One
B- Multiple
C- Don’t Know
- Suppose over the next 10 years the prices of the things you buy double. If your income ALSO doubles, will you be able to buy less than you can buy today, the same as you can buy today, OR more than you can buy today?
A- Less
B- The Same
C- More
D- Don’t Know
- Suppose you need to borrow 100 dollars. Which is the lower amount to pay back: 105 dollars or 100 dollars plus three percent?
A- 105
B- 100 + 3%
C- Don’t Know
- Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add MORE money to your account the second year than it did the first year, or will it add the SAME amount of money both years?
A- More
B- The Same
C- Don’t Know
- Suppose you had 100 dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account: more than 150 dollars, exactly 150 dollars, or less than 150 dollars?
A- More Than 150
B- Exactly 150
C- Less Than 150
D- Don’t Know
ANSWERS
- B- Multiple
This question is about risk diversification, and 69% of US adults answered correctly.
- B- The Same
This question is about inflation, and 63% of US adults answered correctly.
- B- 100 + 3%
This question is about interest, and 52% of US adults answered this question correctly.
- A- More
- A- More Than 150
The last two questions are about compound interest, and 61% of US adults answered this section correctly.
How We Can Help
What were your results? Are you already jumping on Google to brush up on some areas? With the internet, it is easy to find financial information to fill in the gaps in your knowledge. But that only works if you have a strong foundation of financial literacy to work from.
If you need more help, you can reach out to a professional. Here at Fiduciary Wealth Management, we see ourselves as guides and educators. Beyond financial planning and investment management, we educate you on your options, explaining the pros and cons and speaking to you in real terms, not financial jargon. Once you understand the facts, you are empowered to make the best decisions for you and your family. If you want to improve your financial literacy or review your portfolio to make sure your choices line up with your values, schedule a phone call now!
About Rocklin Senavinin, CFP®
With nearly 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long-term. To learn more, connect with Roc onLinkedIn or visitwww.fidwm.com. If you have questions, feel free toschedule a phone call using this link.
DISCLOSURES
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
Additional information, including management fees and expenses, is provided on Fiduciary Wealth Management, LLC’s Form ADV Part 2, which is available upon request.
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(1) http://gflec.org/wp-content/uploads/2015/11/3313-Finlit_Report_FINAL-5.11.16.pdf?x28148
(2) https://www.spglobal.com/corporate-responsibility/global-financial-literacy-survey
(3) https://www.apa.org/news/press/releases/stress/2014/stress-report.pdf
(4) http://time.com/money/2800576/love-money-by-the-numbers/
(5) http://www.smartmarriages.com/nms.pdf
(6) http://www.webmd.com/balance/stress-management/effects-of-stress-on-your-body