Can You Pass The (Financial Literacy) Test?

April is Financial Literacy Month, so let’s take a moment to recognize why it’s important for all Americans to understand the basic financial concepts affecting our daily lives.

“People with a high degree of financial literacy are more likely to plan for retirement, and …  people who plan for retirement have more than double the wealth of people who don’t.  Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products,” says Roger W. Ferguson, Jr., CEO of financial giant TIAA-CREF, writing in a Time magazine op-ed.

Most Americans are already fuzzy on financial basics, and Ferguson says the problem will only get worse since the younger Gen X and Y Americans have even weaker skills than their older counterparts.  Only 14 states require high schools to offer financial literacy classes.  It’s not surprising, therefore, that two-thirds of college students reportedly don’t even understand the terms of their loans. 

Annamaria Lusardi, an economics professor at George Washington University’s School of Business and a leading researcher on financial literacy, hints that those who don’t speak the language of basic finance will get left behind.  “Just as it was not possible to live in an industrialized society without print literacy—the ability to read and write—so it is not possible to live in today’s world without being financially literate.”

You can encourage financial literacy in your own home by involving your kids in hands-on discussions involving money, and giving them experience with budgeting and saving.  “Give them an allowance, get them to save at an early age and have them get jobs when they’re a little older,” says Carrie Schwab-Pomerantz, daughter of financial pioneer Charles Schwab, mother of three, and financial literacy advocate. She also recommends having  kids develop their credit and spending skills with a credit card at a young age, and suggests they open a Roth IRA or other investment account to get comfortable with investment concepts. 

Parents can ask older kids to prepare a monthly budget so they understand the true cost of owning and operating a car, paying a cell phone bill, and covering monthly entertainment expenses.  Give kids an allowance and let them pay their own expenses out of their bank account. For big-ticket items, offer to pay half  if your kids raise the other half (this technique also works well with young adults making their first IRA or Roth contributions).   And for college students, before they overextend themselves with loans, make sure they compare expected annual salaries after graduation with monthly payments needed to repay debt.

Want a more light-hearted look at financial literacy? See if you can you pass AARP’s financial literacy quiz Here’s the first question (OK–I confess.  I had no idea what the answer to this was, but as it turned out, I guessed right):

1.     America’s financial epicenter — Wall Street — is named after:

  • The Wall Street Journal
  • James Haverford Wall, who conceived the short-lived $3 bill
  • The wooden wall built by Dutch colonists to defend New York against invaders

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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