“Human behavior flows from three main sources: desire, emotion, and knowledge.” Those wise words from Plato are certainly evident when discussing personal finance. All three sources are significant, but a lack of knowledge has the power to drive behavior and cause the most damage to your financial health. Unfortunately, America’s upcoming generation is displaying low levels of financial literacy.
Millennials — generally considered those born after 1978 — are engaging in problematic financial behaviors and express concerns about their debt. According to a recent study by the Financial Industry Regulatory Authority (FINRA), only 24 percent of millennials are able to answer four or five questions on a simple five-question financial literacy quiz correctly. That figure drops to just 18 percent among those from 18 to 26.
“Many millennials began their adult lives in the midst of the worst economic downturn in generations, and our survey reveals just how deeply and broadly the Great Recession has marked the financial lives of this generation of Americans. Unfortunately, far too many millennials trying to cope with these economic conditions have low levels of financial literacy and are wrestling with concerns about their debt,” said FINRA Foundation President Gerri Walsh in a press release.
According to the study, 46 percent of millennials are concerned they have too much debt, slightly less but on par with generation X (50 percent). In comparison, only 38 percent of baby boomers are worried about too much debt. Making matters worse, 43 percent of millennials engaged in non-traditional borrowing in the past five years, including pawn shops and pay-day lenders.
There are some glimmers of hope. Despite the worrisome findings, 36 percent of millennials have a rainy day fund, compared to only 32 percent of generation Xers. Furthermore, 23 percent of millennials are satisfied with their personal financial conditions, and 40 percent are saving for retirement.
The five questions used in the financial literacy quiz are listed below, with the answers appearing at the bottom of the page. If you had difficulty answering the questions, it may be time to improve your financial literacy.
- 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, or don’t know?
- 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?
- If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
- 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.
- True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
More From Wall St. Cheat Sheet:
- 3 Generations Face the Retirement Crisis in America
- Top 10 Cities With the Most Debt
- 5 Rookie Investing Mistakes to Avoid
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[Answers: More, Less, Fall, True, False]