How's Your Basic Personal Financial IQ? ... To Find Out, Take the Test ... To Impove It, Make the Effort

Adequate basic personal financial knowledge is sadly lacking throughout America and the rest of the world, too.

And we know it to be a fact. In that regard, in a recent poll most Americans gave themselves a C, D or F grade with respect to their own basic personal financial knowledge.

Lots of room for improvement, in other words. And lots of benefits would result from Americans making the effort to acquire the needed basic improvements in personal financial knowledge, too. The good news is that it's not that hard of a subject to master, and it's like the gift that keeps on giving.

Our admitted lack of knowledge is a shame in a country where personal responsibility, available credit and free market transactions related to borrowing, spending, saving and investing MOM are the norm.

Americans Short on Financial Know How has the summary story and a short and simple self-administered test on inflation, bond pricing, mortgage interest, diversifying stock ownership and the effects of compound interest:

"Some household balance sheets have mended during the recovery but that may be thanks less to fiscal stewardship than the improving economy.

In fact, Americans’ grasp of concepts such as investment risk and inflation has weakened since the recovery began in mid-2009. Research released last week shows that on a five-question test (Take the test here), respondents did worse in 2012 than in 2009. The average number of correct answers fell to 2.9 in 2012 from 3.0 on the test in 2009. . . .

Patterns of spending and saving changed little between the two studies: 41% of respondents still say they spend less than their income, 19% spend more than it and 36% spend roughly what they earn.

In the most recent study, 40% of respondents said they had no trouble covering their monthly expenses, a slight improvement from 36% in 2009.

Although many respondents were short on financial education, they didn’t lack confidence about managing their books. Researchers said they found “a disconnect between self-perceptions and actions in day-to-day financial matters.” Many people who gave themselves high marks for managing their finances also were using non-bank borrowing methods, such as payday loans, or had overdrawn their checking accounts.

The survey focused on four areas of financial capability: making ends meet, planning ahead, managing financial products and financial knowledge and decision-making. (The five-question test was part of the fourth area, financial knowledge.) Researchers sliced the data by age, gender, ethnicity and education as well as census division and state. . . .

“It’s not that people learn because we’re in a financial crisis,” said Ms. Lusardi, a professor at George Washington University and director of the school’s Global Center for Financial Literacy. “We can’t expect people to learn about inflation by osmosis.”

She emphasized that young people in particular need education not only on asset and wealth-building, but on managing debt. The study found that debt remains an acute problem for those with lower incomes and less education — as well as the young. . . .

Young people also are likely to have precarious finances and scant savings socked away for emergencies. When asked if they would be able, in one month, to come up with $2,000 for an unexpected expense such as car repairs, 49% of 18-34-year-old respondents said probably not. That contrasts with 27% of respondents age 55 or older who said they couldn’t, and 42% of those between ages 35 and 54.

Planning for further down the road also got short shrift: 40% of respondents said they had set aside a rainy-day fund that they could live on for three months; 56% said they hadn’t. . . .

“Financial literacy is this new skill and we need to live in this new world of individual responsibility,” Ms. Lusardi said. “Very few countries have taken the initiative to improve financial literacy and capability… If you don’t do that, this is not something that grows with you or that people acquire by their daily lives.”"

Summing Up

Let's get smart about basic finance and encourage our friends and loved ones to do so as well.

It's worth the time and effort.

Especially in a free and market based society.

But even in one with too much government.

We have both.

Thanks. Bob.