Are You Financially Literate?

By: Brittany DeDiego, Fall 2014 Intern

gradeMost Americans are financially illiterate. According to the President’s Advisory Council on Financial Literacy, financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. Financial education is defined as the process by which people improve their understanding of financial products, services, and concepts, so they are empowered to make informed choices, avoid pitfalls, know where to go for help and take other actions to improve their present and long-term financial well-being.

In 2009 and 2012, the FINRA Investor Education Foundation conducted a study about the financial capability in the United States. To test participants on their financial literacy, respondents were asked a series of questions covering fundamental concepts of economics and finance expressed in everyday life, including questions about interest rates, inflation, and the impact of a shorter payment term on a mortgage. The results showed that only 14% of respondents were able to answer all five questions correctly, and 39% were able to answer at least 4 of 5 questions correctly.

The study also tested respondents’ self-perceptions of their own financial literacy. Overall, the respondents had positively biased self-perceptions of their financial knowledge. In fact, 73% of respondents gave themselves high marks (5 to 7 on a 7-point scale, with 7 being very high). This disconnect shows that even if you think you are financially literate, there is still room for improvement.

For more information about this study and the methodology used go here. To test your own financial literacy, take the FINRA financial literacy quiz here.