23% of Americans bomb this financial quiz. Can you do better?

By | December 20, 2023

A woman looks over her finances. An annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business found that on average, adults could answer only half of questions correctly, a troubling figure that has held steady in recent years stayed. time.

Despite the vast amount of information and education available today, financial literacy among U.S. adults is not improving. A financial advisor can help you improve your financial literacy to better understand your money. Find a fiduciary advisor today.

On average, American adults answered only 50% of questions correctly in the 2022 Personal Finance Index, an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business.

Since researchers at TIAA and George Washington University began measuring financial literacy among adults in 2017, functional knowledge has not improved. The area where people struggle the most? Understanding financial risks. Here you will find an overview of the research findings and some questions that were asked.

Financial literacy is not improving

An annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business found that on average, adults could answer only half of questions correctly, a troubling figure that has held steady in recent years stayed.  time.An annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business found that on average, adults could answer only half of questions correctly, a troubling figure that has held steady in recent years stayed.  time.

An annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business found that on average, adults could answer only half of questions correctly, a troubling figure that has held steady in recent years stayed. time.

Unfortunately, this year’s survey and previous studies have shown that many U.S. adults function with a poor understanding of financial topics. On average, American adults answered only 50% of index questions correctly in 2022, a figure that has remained stable since 2017.

While only 18% of respondents could answer between 76% and 100% of the 28 questions asked in this year’s survey correctly, almost a quarter of adults (23%) answered at least 75% of the questions incorrectly . What’s worse is that the percentage of adults with poor financial literacy is rising. In 2020, only 17% of respondents got three-quarters of the questions wrong.

Assessing financial risk is the one area where functional knowledge is consistently lowest among American adults, the study found. Only 36% of questions related to risk were answered correctly, a decrease of 3% from the first survey in 2017.

“For example, understanding risk involves understanding that the expected outcome in a given scenario depends on the range of possible outcomes, the financial implications associated with each outcome, and the probability of each outcome occurring,” the study said.

What financial topic are American adults most knowledgeable about? Borrow money. On average, 60% of the questions about borrowing were answered correctly, followed by questions about saving (53%) and consumption (52%), the survey showed.

Can you answer these questions correctly?

TIAA shared with SmartAsset a selection of the questions respondents were asked as part of the 2022 survey. The questions relate to financial risks, but also to the way interest is accrued on savings and what impact this has on the balance of a loan. Here are three questions that were part of the 2022 survey:

  1. There is a 50/50 chance that Malik’s car will need engine repairs within the next six months, which will cost $1,000. At the same time, there is a 10% chance that he will need to replace the air conditioning in his house, which would cost $4,000. What poses the biggest financial risk to Malik?

  2. Anna saves $500 every year for ten years and then stops saving. At the same time, Charlie saves nothing for ten years, but then receives a gift of $5,000, which he decides to save. If both Anna and Charlie earn a 5% return each year, who will have more savings after twenty years?

  3. Jose owes $1,000 on a loan with an interest rate of 20% per year, compounded annually. If he doesn’t pay off the loan, at this interest rate, how many years will it take for the amount he owes to double? (Possible answers: less than 5 years; 5 to 10 years; more than 10 years; I don’t know)

Answers:

1. Although the air conditioning repair may cost Malik $4,000, the odds of a $1,000 car repair are much higher, meaning it poses a greater financial risk.

2. Anna would have more money than Charlie after twenty years, since her savings would have a ten-year head start to accrue interest.

3. If your answer to the third question was “less than five years,” you were among the respondents who answered this question correctly. If he defaulted on his car loan, Jose’s loan balance would double within four years.

Why financial literacy is important

A man looks over his finances. A man looks over his finances.

A man looks over his finances.

The TIAA-GFLEC points to a direct correlation between financial literacy and financial well-being. The more knowledge adults have about money, the better off they are.

The research shows that people with low levels of financial literacy are six times more likely to struggle to make ends meet compared to adults with high levels of financial literacy. They are also five times more likely to have insufficient savings to cover one month’s expenses, and three times more likely to be unable to withstand a $2,000 financial shock.

“It is again clear that greater financial literacy tends to translate into higher financial well-being, and lower financial literacy is generally associated with lower financial well-being,” the study authors concluded.

Meanwhile, a separate study calculated how much a lack of financial literacy could actually cost someone. In late 2021, the National Financial Educators Council (NFEC) conducted a survey of 3,389 adults and found that the average adult loses approximately $1,389 annually due to a lack of financial literacy, including personal finance and investments.

In short

Unfortunately, financial literacy among American adults is not improving. On average, respondents to the 2022 TIAA Institute-GFLEC Personal Finance Index answered only half of the questions correctly, a troubling figure that has not improved since the survey’s first year in 2017. Understanding financial risk is the only area where adults information needs the most improvement, as only 36% of questions related to risk were answered correctly in 2022.

Tips for improving your financial literacy

  • Working with a financial advisor is one of the best ways to improve your understanding of financial topics, including investing, saving and planning for retirement. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • SmartAsset has a wealth of reference articles to help you better understand your finances, as well as guides specifically focused on certain topics, including investing, estate planning, taxes and more.

Photo credits: ©iStock.com/ilona titova, ©iStock.com/designer491, ©iStock.com/damircudic

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