May 30, 2019
Can you answer these six basic financial questions?
Most people answer only two questions correctly. Let’s see how well you do.
Basic Financial Literacy Questions
These six questions on credit history, net worth, interest rates, and student loans were developed by Annamaria Lusardi, Director of the Global Financial Literacy Excellence Center (GFLEC) at The George Washington University. They were included as part of a survey conducted by education company, EVERFI, which found in prior research that on average, respondents only answered two of the six questions correctly.
- As a general rule, how many months’ expenses do financial planners recommend that you set aside in an emergency fund?
- a) 1 to 3 months
- b) 3 to 6 months
- c) 6 to 12 months
- d) 12 to 15 months
Correct Answer: The correct answer is C, which is “6 to 12 months.”
% Correct: 14% of respondents answered this question correctly.
Advice: According to a recent survey, 23% of respondents say they put 0% of their monthly paycheck toward savings. Whether it’s an unforeseen medical expense, home repair or unemployment, you never know when an emergency will strike. Put aside at least six months (and preferably more) of funds in a separate savings account to save for a rainy day. Even if you can’t do this now, save as much as you can each month.
- If you have too many credit cards, what should you do?
- a) close as many as possible
- b) request a higher credit limit
- c) be cautious about closing credit cards
- d) close the cards with the lowest balances
Correct Answer: The correct answer is C, which is “be cautious about closing credit cards.”
% Correct: 29% of respondents answered this question correctly.
Advice: If you have no credit card debt, it’s not necessarily a bad thing to have multiple credit cards. More credit can help improve your credit utilization, which is how much credit you spend relative to the amount of credit you have. The lower your credit utilization, the better.
- If a late payment is sent to a collections agency, how long will it remain on your credit history even if you have paid it off?
- a) less than a year
- b) 1 to 3 years
- c) 4 to 5 years
- d) 6 to 7 years
Correct Answer: The correct answer is D, which is “6 to 7 years.”
% Correct: 62% of respondents answered this question correctly.
Advice: If you think you might miss a payment or make a late payment, try to contact your lender in advance to alert them of your situation. You may be able to develop an alternative payment plan before your credit score is adversely impacted.
- What is the formula for calculating your net worth?
- a) assets minus liabilities
- b) liabilities minus assets
- c) assets plus liabilities
- d) assets divided by liabilities
Correct Answer: The correct answer is A, which is “assets minus liabilities.”
% Correct: 47% of respondents answered this question correctly.
Advice: Even if you haven’t taken an accounting class, remember this: assets (what you own) and liabilities (what you owe) appear on the balance sheet. They are different than expenses, which appear on an income statement. Debt is not necessarily a bad thing. If you borrow debt to acquire an asset, it can be a good thing. Think: borrowing a mortgage to buy a house that will appreciate in value over time.
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would your ability to buy something with the money in this account be:
- a) more than today
- b) less than today
- c) exactly the same
- d) don’t know
Correct Answer: The correct answer is B, which is “less than today.”
% Correct: 16% of respondents answered this question correctly.
Advice: Inflation can erode your money and decrease your purchasing power. Focus on investment opportunities that offer a financial return that exceeds the inflation rate.
For Americans only:
- Which of the following about Federal student loans is NOT true?
- a) For certain federal loan programs, the interest on your loan is paid by the government while you are in school or during grace periods.
- b) Your parents must sign a promissory note before loan funds are distributed.
- c) Entrance loan counseling for all first-time borrowers is required.
Correct Answer: The correct answer is B, which is “your parents must sign a promissory note before loan funds are distributed.”
% Correct: 34% of respondents answered this question correctly.
Advice: The more important financial literacy topic is this: make sure you understand the terms of your student loans. Understand your monthly payment, how interest is calculated, whether you have a fixed interest rate or variable interest rate, and how to pay off student loans faster. Use a student loan refinancing calculator to see how much money you can save. Make sure you understand your student loan repayment options.