The State of Financial Literacy: America Needs to Study Harder

America! We may be the land of the free and the home of the brave but when it comes to financial literacy, we’ve got work to do.

Last year, the FINRA Investor Education Foundation gave two thirds of Americans failing grades on its National Financial Capability Test. The test, taken by over 25,000 people, focused on credit cards, interest, preparedness and living within one’s income. The results revealed that we’re still struggling to understand how to manage our money.

But what about our knowledge around growing our money?

In 2017, Stash administered a financial literacy quiz* to assess whether Americans, (both Stash customers and the general population) had a solid understanding of key financial terms. Over 27,000 people answered questions about inflation, interest rates and investing. 

Take the Quiz! 

Financial literacy in America: Here’s what we found out

1 out of 4 people think investing is a way to get rich quick.

A quarter of Americans think the financial markets are a place to super-size your money. 25% of those surveyed said that if they had $1,000 to invest in a moderate risk fund, they expected a whopping 16% return after one year.

We hate to disappoint: the number can be more like 3-6%.

38% of survey respondents don’t understand the concept of compounding.

People understand that compounding allows your money to work for you. They just don’t understand exactly how.

We posed this question: If you deposit $100 in a savings account paying 10% interest, compounded annually (and don’t take anything out), how much money will you have in the account in five years? 21% believed they’d earn exactly $150. Over 8% thought that they’d earn less than $150. And another 8% just didn’t know exactly what compounding was.

Didn’t know the answer? It’s over $150 — $161.05, to be exact.

Nearly 40% of people don’t understand how inflation works.

Inflation impacts how much one’s dollar is worth. We posed this question: If your savings account is earning 1% per year and inflation is 2% per year (both compounded annually) how much would you be able to buy with the money in this account after a year?

13% believed they’d be able to buy more with the money in their account. 7% thought they’d be able to buy the same amount with the money in their account. 19% just didn’t know how inflation worked.

Answer: You’ll be able to buy less with the money in your account

16% of people would prefer a higher (vs. lower) interest rate on their mortgage.

At least, according to our survey takers’ understanding of mortgages and interest. We posed this true or false scenario: A 15-year fixed-rate mortgage typically requires higher monthly payments than a 30-year fixed-rate mortgage, but the total interest over the life of the 15-year will be less than the 30-year.

6% believed that this statement was false. 11% just weren’t familiar with how interest rates mortgages worked.

Diversification? 41% of people don’t understand it.

When it comes to investing, not everyone understands that you shouldn’t put all your eggs in one basket. We posed this true or false scenario: Buying a single company’s stock generally provides a lower risk return than an equity exchange-traded fund (ETF).

11% of those surveyed believed that it was less risky to own a single stock versus an equity exchange-traded fund (ETF). Nearly 30% just didn’t know how to measure one investment against the other.

Financial literacy: Stashers are Smarter

We’re proud: Stashers are more financially literate than non-Stashers. They scored higher than non-Stashers when it came to their knowledge of basic investing terms like diversification, interest rates and investment risk.

Read more about how Stashers’ fin-lit is lit .

Keep readingYou Can Do It! Start Saving for Retirement Now



Footnotes
* Stash surveyed over 27,000 individuals across the United States. This question asked "If you had $1,000 to invest in a moderate risk fund, what would you expect the average rate of return to be after 1 year? (based on historical performance)." Possible answers were 0-15%, 16- 31%, or greater than 31%. 23.98% of respondents answered 16-30%, and 1.94% of respondents answered greater than 31%.



Author:
Lindsay Goldwert is Senior Editor at Stash.



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