Financial literacy is understanding and using financial information and products to make sound financial decisions. It includes knowledge about various financial topics, such as budgeting, saving, investing, credit, and retirement planning. Financial literacy should also include understanding financial instruments such as bonds, stocks, crypto, and ETFs and apply in the real world to achieve financial success.
People with strong financial literacy skills can make informed decisions about their money, leading to improved financial well-being. Financial literacy is especially important in today’s world, where many financial products and services are available.
According to the TIAA Institute and the Global Financial Literacy Excellence Center’s Personal Finance Index, only 50% of American adults answered the survey’s questions correctly in 2022.
Unfortunately, many people lack basic financial literacy skills. A recent study by the Financial Industry Regulatory Authority (FINRA) found that only 24% of Americans could correctly answer the following questions:
- Suppose you had $100 in a savings account, and the interest rate was 2% per year. After 5 years, how much would you have?
- You obtained a 30-year fixed-rate mortgage for $200,000 at 4.5% interest to buy a house. What is the monthly payment?
- You just won a $10,000 lottery prize. After taxes, you will end up with $6,700. What is the effective annual yield on your investment?
- Suppose you are saving for retirement and have $50,000 invested in a mutual fund that earned 7% last year. How much will you have in the fund at the end of 20 years?
- A bond has a $1,000 face value and pays interest of 5% per year, paid semi-annually. If the current market interest rate is 6%, what is the bond’s price?