A Test Of Your Financial Smarts
To make good financial decisions, people need to not only have a basic knowledge of finances, but also be equipped with the skills to apply this knowledge.
The FINRA Investor Education Program recently gave a five-question financial quiz. Seventy-five percent of U.S. adults taking the test stated that they were pros at managing their finances, but only 14 percent could get all five questions right! In other words, 86 percent of Americans flunked the test! The test was given in all states, with more than 25,000 people taking it.
The five questions cover principles of interest rates and inflation, risk and diversification, relationship between bond prices and interest rates, and the effect of time on total interest payments over the life of a mortgage.
The average U.S. adult got 2.88 out of five questions right, where the average person in Hawaii got 3.07 questions right.
Can you do better? Take this test; answers are at the end of the article. Please visit artofthinkingsmart.com to see the explanation of each answer.
1) Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
a. More than $102
b. Exactly $102
c. Less than $102
d. Don’t Know
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?
d. Don’t know
3) If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same or is there no relationship?
c. Stay the Same
d. No relationship
e. Don’t know
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 of the loan will be less.
c. Don’t know
5) True or False: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
c. Don’t know
Answers: 1: A. 2: C. 3: B. 4: A. 5: B.