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Only 4 percent of Americans can answer these 7 financial questions correctly. Can you?

In the current economy, financial literacy is more important than ever.

Photo credit: Canva

A quiz reveals some holes in Americans' financial literacy.

Financial literacy is always important, but in uncertain economic times, it's vital. The financial world is complex and multi-faceted, and there's no exact gauge of what you need to know in order to be considered informed. There are, however, some financial fundamentals that everyone needs to understand on a basic level in order to avoid making catastrophic money decisions and to be able to follow what's happening with the economy on a larger scale.

Unfortunately, many Americans have never taken an economics class and aren't well-versed in things like inflation, investments, interest rates, and other economic realities. To be fair, economics can be confusing even when you try to learn, but without understanding some basic concepts, it can make a huge difference in your financial wellbeing.

financial literacy, money, finances, economics, economyMany Americans need to increase their financial literacy.Photo credit: Canva

The non-profit FINRA Investor Education Foundation surveyed 25,500 adult Americans and asked them to take a seven-question financial knowledge quiz to test their financial literacy. The results were a bit concerning, as only a small fraction of quiz-takers answered all seven questions correctly.

Here are the questions they asked:

1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?

More than $102

Exactly $102

Less than $102

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?

3. If interest rates rise, what will typically 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 of the loan will be less.

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

6. Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn't pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

a) 0 to 2 years

b) 2 to 4 years

c) 5 to 9 years

d) 10 or more years

e) Don't know

financial literacy, math literacy, economics, finances, money managementSome financial literacy is just math literacy—understanding percentages and probabilities. Photo credit: Canva

7. Which of the following indicates the highest probability of getting a particular disease?

a) There is a one-in-twenty chance of getting the disease

b) 2% of the population will get the disease

c) 25 out of every 1,000 people will get the disease

d) Don't know

"Don't know" was an option for each question, and the average correct score across the Americans who took the quiz was 3.3 out of 7. Nationwide, 27% of people who took the quiz got the right answers on at least five of the questions, and only 4% aced all seven questions.

- YouTubewww.youtube.com

Which states fared the best and worst? Here are the 10 top states by percentage of survey respondents that correctly answered five or more of the quiz question:

1. Minnesota (34.78%)

2. Wisconsin (34.46%)

3. District of Columbia (34.41%)

4. Colorado (33.89%)

5. Wyoming (33.85%)

6. Washington (32.54%)

7. Vermont (32.34%)

8. North Dakota (32.00%)

9. Oregon (31.86%)

10 Kansas (31.44%)

And here are the bottom 5 by the same metric:

New Mexico (23.2%)

West Virginia (21.4%)

Alabama (20.2%)

Mississippi (19.2%)

Louisiana (18.1%)

One piece of good news: Americans' understanding of inflation has increased significantly since the last time FINRA did a similar survey in 2021. (Or maybe that's not such good news, as it's likely a better understanding that came from experiencing an inflation crisis, but learning is learning.)

"Overall, the findings show that knowledge of everyday financial concepts remains a challenge for many Americans. The wide disparities in financial knowledge across states demonstrate that more work is required to empower all Americans with the skills and tools to make informed financial decisions and safeguard their investments,” said Gerri Walsh, President of the FINRA Foundation. "The increase in the number of respondents who correctly answered the question about the impact of inflation on savings is an encouraging sign, likely reflecting the impact of lived experience as well as increased focus on the topic. However, continued efforts are needed to ensure all Americans fully understand the effects of economic factors on their personal finances."

Not only does a lack of financial knowledge have the potential to impact people's personal finances, such as getting into credit card debt trouble or choosing unwise investments, but not understanding how things like inflation and the relationship between interest rates and investment markets can lead people to vote for politicians with questionable economic policies. How can you believe a politician will be good for the economy if you don't understand what factors contribute to keeping the economy stable and strong?

You can take the quiz yourself here and see how your knowledge compares.

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Pop Culture

Old Navy customers share the not-so-subtle fashion trends that show we're headed for a recession

People are noticing some Hunger Games vibes.

via Jo Zimny Photos/Flickr

An Old Navy Retail store.

Recent shake-ups in U.S. trade policy have caused many to fear that the United States economy may fall into a recession this year after remaining surprisingly resilient after the COVID-19 pandemic. Recently, J.P. Morgan research raised the probability of a global recession to 40%. On March 19, Federal Reserve Chair Jerome Powell said the chance of an upcoming recession is rising, but the probability is still not high.

Is the economy headed for a recession?

A recession occurs when the economy slows down for two consecutive quarters. The last time the U.S. economy hit a recession was a brief period from February to April 2020 because of the COVID-19 pandemic. Even though the U.S. economy has yet to cross the line into recession, two savvy shoppers at Old Navy believe that the signs are all there when it comes to new clothing on the shelves.

TikToker Zoe (@zoezoezoezand) made her case in a viral video with over 790,000 views. “We're at Old Navy and we're pretty sure that they've got some recession predictors out here, so I'm gonna show you what we're talking about,” she said before pointing out that a frock was giving her Hunger Games vibes.

@zoezoezoezand

Old Navy wants us back in the factories y’all #oldnavy #recessioncore #recessionindicator #recession

“We're starting fresh with our District 12 frock, it's made out of a nice uh rough material that's what you want, it's a nice oatmeal color just like you want it,” Zoe jokes. For those of you who aren’t familiar with the Hunger Games series of books and films, District 12, located in Appalachia, was the smallest and poorest of the 13 districts.

Zoe added that another vintage-looking pair of pants was a sign that people will have to quit their cushy service jobs and return to working with their hands soon. “I know what you're thinking, those little pants aren't that bad, and they're not. I actually think they're kinda cute,” she said. “But what do they make you think of? Right, a sailor or perhaps Rosie the Riveter. They're trying to get us prepared to get back out to work.”

welders, female workers, 1940s, us history, steel, factory workers, alloy steel,A team of welders at the Tubular Alloy Steel Corporation. via M. Marshall/Wikimedia Commons

What is the Hemline Index?

While shopping at your local Old Navy may not give you the best economic indicators, there has been a correlation between women’s attire and the economy in American history. The “Hemline Index,” a theory that suggests hemlines get higher when the economy is good and lower when it turns sour.

InStyle notes that hemlines rose in the 1920s before the stock market crash that helped lead to the Great Depression in 1929. They rose again during the wartime boom of the 1940s and dropped again during the recession of 1949. A slow and steadily growing economy led to the creation of the mini shirt in the late ‘60s, which once again became longer after the 1987 crash.


Hopefully, the U.S. economy doesn’t go into a recession so that Americans and our friends worldwide don’t have to suffer through the belt-tightening that comes from a downturn. But, interestingly, history shows how today’s styles might indicate tomorrow’s economic signals. Because, as Zoe’s video shows, economies aren’t just random numbers on stock tickers and forecasts but actual indicators of how people think, feel, and behave.

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Learning

In two sentences, finance guy crushes the idea of buying a new car. But people disagree.

Here's why people are still doing it.

via Canva/Photos

A woman gets the keys to her new car.

There are many reasons to be squeamish about spending money in today’s economy. Interest rates are high, trade wars may drive inflation, and financial experts say we may be headed for a recession. That comes after the post-COVID period, when the process of everyday necessities, such as rent and groceries, went sky-high.

There’s a lot of economic uncertainty out there, but that won’t stop some of us from needing a car. And, of course, those are getting more expensive, too. The average car cost $49,740 in January, nearly an all-time high. Part of that is inflation, but it’s also because Americans love buying nice cars, and more are choosing luxury models. So now, to purchase a new car at $49,740, with zero dollars down and a 5-year loan, would cost over $950 a month. That’s a lot of money for something that will only decrease in value.

Real estate expert and author of “Retire FIlthy Rich,“ Ravi Sharma, wasn’t shy about sharing his thoughts about buying a new car on TikTok. The post received over 1.2 million views.

"Controversial topic: That $50,000 car loan that you finally paid off after 5 years cost you $62,000 (due to interest). That car is now worth $20,000 due to depreciation. Losing $42,000 in 5 years would be seen as a bad investment, yet people are still buying new cars. Thoughts?"

@personalfinancewithravi

Controversial Topic - What’s your thoughts about this? 🤔 #personalfinancewithravi

Is it financially smart to buy a new car?

Sharma’s logic is hard to argue with. A car is a depreciating asset that will lose its value over time. In fact, according to Kelly Blue Book, the average new car loses 20% of its value after the first year. That number grows to over 60% after five years. So, why not buy a car that’s five years old, costs less money, and is significantly cheaper to insure?

Strangely, most people in the comments pushed back against Sharma’s logic. "You forgot to factor in the benefit of owning that vehicle and the pleasure of driving it. For most, it's priceless. Not everything in life is about making money," Patty wrote. "I have 3 bad investments and loving them. We only live once. Enjoy,” Rich added. Others noted that even though the car's value goes down, you got use out of the vehicle so it's not a total loss.

new car, finance, ravi sharmaA woman inspects her new car. via Canva/Photos

There were a few people who agreed with Sharma. "Yes! Car payments are one of the top wealth killers. I have always bought used and paid cash,” a commenter wrote. "Amen. I’ve never purchased a brand-new vehicle. If you want to be a millionaire, don’t live like one,” another added. "Just driving the new car off the lot depreciates it by 20-25%. Buying pre-owned, someone else took that depreciation. Don't believe me? Buy a $50k new car then try to sell it tomorrow,” a commenter wrote.

Many people pushed back against Sharma because buying a new vehicle gives them joy. But the real question is, how long does that last before it just becomes your everyday car and no longer has the wow factor it had when you drove it off the lot? Further, going back to our car that cost $49,740 and about $950 a month, what if you bought a car for half the price and invested the $475 a month of the payment in a sensible mutual fund? After 5 years at 6% of growth, that would amount to over $32,000.

new car, finance, ravi sharmaA woman gets the keys to her new car.via Canva/Photos

With the constantly rising cost of living, it’s good to consider what it really means to make a big purchase and whether the joy of something new is worth the loss that comes with spending versus investing. Ultimately, the decision comes down to one’s values and financial priorities. Is short-term satisfaction worth the long-term cost when opting for a used car means more financial freedom tomorrow?

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Pop Culture

Here’s a paycheck for a McDonald’s worker. And here's my jaw dropping to the floor.

So we've all heard the numbers, but what does that mean in reality? Here's one year's wages — yes, *full-time* wages. Woo.

Making a little over 10,000 for a yearly salary.

I've written tons of things about minimum wage, backed up by fact-checkers and economists and scholarly studies. All of them point to raising the minimum wage as a solution to lifting people out of poverty and getting folks off of public assistance. It's slowly happening, and there's much more to be done.

But when it comes right down to it, where the rubber meets the road is what it means for everyday workers who have to live with those wages. I honestly don't know how they do it.

Ask yourself: Could I live on this small of a full-time paycheck? I know what my answer is.

(And note that the minimum wage in many parts of the county is STILL $7.25, so it would be even less than this).

paychecks, McDonalds, corporate power, broken system

One year of work at McDonalds grossed this worker $13,811.18.

assets.rebelmouse.io

The YouTube channel Just Frugal Me discussed the viral paycheck and noted there's absolutely nothing wrong with working at McDonald's. More than 2 million people in the U.S. alone work for the fast food giant. The worker's paycheck shows they put in 72 hours over the pay period making $8.75 per hour. Before taxes, that's $631 for the week. Just Frugal Me's breakdown is even more eye opening, breaking down this person's pay after taxes and weighed across average rent and utility costs. Spoiler Alert: the total costs for basic necessities far outweighs what this person is making even while working 12 hours per day. But they do make too much to qualify for Medicaid, meaning they will have to go out and buy their own health insurance.

Even in states like California, where the state's $20 minimum wage ensures that people earn nearly three times as much as the federal minimum wage, which remains as low as when this paycheck first made the rounds nearly 10 years ago.

Still, even for a worker that maxed out at 40 hours per week and took zero vacation or sick time, that's only a little over $41,000 per year. That's barely half the median wage in the state of $78,000 and far below a sustainable living wage in cities like Los Angeles.


This story originally appeared ten years ago. It has been updated to reflect new information.

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