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Are You Financially Literate?

27323325_sEach year I teach a one-day class on financial basics to the graduating cadets at my alma mater, Massachusetts Maritime Academy. I love having the opportunity to teach these fine young men and women the fundamental financial skills that so many do not otherwise learn during school.
 
I always try to teach it during the month of April because April is National Financial Literacy Month. Do you know about National Financial Literacy Month? Very few do, so let me tell you what it is. National Financial Literacy Month is recognized to highlight the importance of financial literacy and teach Americans how to establish and maintain healthy financial habits.
 
It is my hope that we all strive for financial literacy year round, rather than just during one month a year, but it’s never a bad idea to recognize a cause nationally to give it some momentum.
 
In honor of National Financial Literacy Month, San Diego State University (SDSU) set out to test the financial literacy of the younger generation of Americans. They asked 20-somethings three basic financial questions. The results were not stellar.
 
Now these are not advanced questions filled with technical jargon. They are questions involving some of the most basic financial concepts that are crucial to a successful saving strategy.
 
So I challenge you, Cutter Family Finance readers, to test yourself, and if you have kids, test them too. You might be surprised at how little your kids know about financial concepts. (Check out the answers to each of the questions at the end of the article… no peeking).
 
1. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.
 
2. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow: More than $102, exactly $102, or less than $102?
 
3. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
 
The average respondent to the SDSU study could answer only 1.8 of the above questions correctly—and only 25 percent got all three correct. What’s more startling than the results of the survey are the behaviors of that age group and their lack of financial responsibility. The average young person surveyed showed responsible behavior in only one of the following three categories; paying off debts on time, budgeting and living within one’s means, or having any retirement savings at all. Only 2 percent of all respondents showed responsible behavior in all three categories.
 
Now this leads me to the famous quandary, “What came first, the chicken or the egg?” Are these young people lacking fiscal responsibility because they are lacking fiscal knowledge? Or are they lacking interest in gaining any fiscal knowledge because they are fiscally irresponsible?
 
I’d feel safe assuming it’s a little of both.
 
But here’s the bright side: the survey also revealed that one of the biggest impacts on whether a young person is fiscally responsible and literate is their family’s commitment to that same responsibility and literacy. So I have no doubt that the young people in your lives, Cutter Family Finance readers, are ahead of the curve.
 
Folks, I have never spoken to a pre-retiree or retiree who has felt that they started saving for retirement “too soon.” We all know the greatest asset in financial planning is time, and that is an asset that these young people have in spades, but they are losing out on its power every day.
 
Don’t let this time slip from our young people’s hands. With age comes the wisdom of knowing that financial literacy deserves much more than a one month tribute, but by recognizing National Financial Literacy Month, we are reminded to talk to the younger people around us to ensure they are gaining the knowledge they need to be financially literate and responsible.
 
We, as adults, have a responsibility to teach our youth how to create a bedrock foundation of financial success. Use those three questions as a starting point. Make sure the young folk you talk to understand basic investment vehicles and the advantages of each. Make sure they understand the value of growth, compounding growth, and time. And make sure they understand that if they aren’t using their money to grow, its power is being leached by inflation more and more each day.
 
Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.” Start with the basics. But start today.
 
Be vigilant and stay alert, because you deserve more.
 
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Answers: 1. False; 2. More than $102; and 3. Less than today.