Shocking Stats: What Americans Don’t Know is Hurting Them

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A significant number of Americans have a thing or two to learn about managing their money. According to a Financial Industry Regulatory Authority (FINRA) report, most Americans are economically illiterate. Almost two-thirds of us haven’t a clue about finances. And, in this day and age, that’s frightening especially in times of excessive global volatility and uncertainty.

Using a sample population of 27,500 people, tested over five months, up to 61% could not get more than 60% of the questions right regarding compound interest, inflation, risk and diversification, bond prices and interest rates, as well as mortgage-related questions.

Bond questions were the most difficult. Only 28% of the sample population could correctly tell you that bond prices rise when interest rates fall. Less than half of the sample could answer a basic question about risk tolerance.

That’s scary. People are leaving school without a basic understanding of money and how money works, or even how to make money work for them. In my opinion, there are no excuses for that. It’s why I always teach my own children the ins and outs of money. It’s essential to their growth.

The other week, I spoke about the importance of compounding interest and the importance of managing money with IRAs, ROTH IRAs, and 401k retirement plans, especially if your employer is matching funds.

Here are the some (basic) important rules every American should understand.

  1. You have to earn more than you spend to remain solvent
  2. Save early enough in life for retirement, emergencies, college, etc. so you can make your money work for you.
  3. Diversify portfolios to help decrease your risk.
  4. Be able to answer a simple question, such as, “If I have $1,000 in my savings. account with a 2% interest rate, how much would I have after five years?”
  5. Understand your FICO score. A score of 760 or more puts you in a desirable category, allowing you to get lower rates.
  6. Know your max 401k or ROTH 401k contributions.
  7. Know your adjusted gross income and tax rules.
  8. Understand your living expenses and healthcare costs.
  9. Understand your mortgage rates, and debt service costs.
  10. Know how much interest you’re money can earn in a retirement account, as compared to the low interest rates earned on savings.

Financial distress is nothing new. But it’s fixable.

Unfortunately, it’s also an indication of why a majority of Americans are on financial thin iceAccording to The Washington Post, 46% of Americans (as represented by a sample size of 5,000 people) said they did not have enough money to even cover a $400 emergency. Instead, they’d have to use a credit card, borrow it, or simply not cover it.

These are startling statistics. However, it’s never too late to learn how to become financially sound. The more you know, the better.