Many young people never learn money basics. Less than half of U.S. states require high school students to take a personal finance class before they graduate, for example.
And results on surveys and retirement IQ tests show a lack of financial literacy.
If you were able to set aside $50 each month for retirement, how much would that end up becoming 25 years from now, including interest, if it grew at the historical stock market average?
A. About $15,000
B. About $30,000
C. About $40,000
D. About $60,000
E. More than $60,000
The correct answer is C: about $40,000, assuming a 7 percent rate of return. Only 16 percent of the 2,000 respondents answered correctly.
Suppose you have $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
D. I don't know
The correct answer is A. You'd have $102 after the first year. Over the next four years, interest will grow on that $102, meaning you'll have more than $102. It's a phenomenon known as compound interest.
Imagine that the interest rate on your savings account was one percent per year and inflation was two percent per year. After one year, how much would you be able to buy with the money in this account?
A. More than today
B. Exactly the same as today
C. Less than today
D. I don't know
The correct answer is C: less than today. "If inflation is 2 percent, prices go up 2 percent," says Lusardi. "But if you only earned 1 percent in your saving account, you basically can buy less."
Do you think the following statement is true or false: Buying a single company stock usually provides a safer return than a stock mutual fund.
The answer is false. "A single company is a lot riskier than a basket of stocks," says Lusardi. "Don't put all of your eggs in one basket."
What is a fiduciary?
Furthermore, 20 percent of survey respondents believed that "fiduciary" and "financial advisor" were synonymous, and 27 percent didn't know what a fiduciary was at all.
If these five questions tripped you up, you're not alone.
To boost your financial literacy, check out the smartest things to do with your money in your 30s, a definitive guide to retirement savings accounts and the smartest way to invest your money.
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