Most Americans Fail This Financial Literacy Test. Will You?

Only 3-in-10 Americans are financially healthy, according to a study done by the Center for Financial Services Innovation (CFSI).  How can people improve their financial fitness? The solution may be as simple as more personal finance education. After all, research from GuideVine shows 55% of Americans don’t feel confident about their long-term financial plans. 

Think your financial plans are solid? Then take this financial literacy test. Most Americans fail it. See what you know and what you don’t. By the end of this quiz, you should have a better understanding of how to manage your finances. 

What is financial literacy? 

First, let’s start off with a workable definition of financial literacy, or one’s capacity to understand and use financial management skills. Financial management skills include budgeting, investing, and debt management. By boosting your financial literacy, you can become more self-sufficient and financially secure. Who doesn’t want that?  

Now, let’s get to the fun part: the financial literacy test most Americans fail.  

Most Americans can’t pass this financial literacy test 

For this financial literacy test, we’ve selected five important questions that the majority of Americans get wrong. We’ll also put each answer after the question. A glossary of definitions is included, as well as expert recommendations for managing different aspects of your finances. 

1. How many months of living expenses should your emergency fund cover? 

    a.  1–2 months 

    b.  3–6 months 

    c.   0 months 

    d.  9 months 

The correct answer is B. 

Your emergency fund should cover you for 3–6 months. 

Most Americans don’t get this question right. But it’s one they certainly should know the answer to based on life experiences. An emergency fund ensures you don’t have to incur debt when the unexpected happens, like the loss of your job due to the current COVID-19 pandemic. Ideally, you should have more than 6 months worth of savings to live on while you get back on your feet and find a new job. You should be able to easily access these savings as well.  

2. If you qualify for a $15,000 auto loan at an 6% interest rate, what’s the advantage of choosing a 3-year term instead of a 5-year term? 

    a.  The 3-year auto loan will have lower monthly payments 

    b.  The 3-year auto loan can be paid off quicker, though you’ll pay more in interest fees 

    c.  You’ll pay less in interest fees with the 3-year loan 

    d.  The payments will be easier with a 3-year loan 

    e.   Both B and D 

The correct answer is C. 

If you have the option for a three-year auto loan instead of a five-year loan, it can make sense to opt for the three-year loan. In addition to paying less in interest fees (because you pay more off the principal each month), a shorter loan term has other advantages, including:

  • The ability to pay off your loan more quickly 

  • The potential for a lower interest rate 

The potential for a lower interest rate is noteworthy, especially if you’re applying for an auto loan or mortgage. For example, 15-year mortgages have lower interest rates on average than 30-year mortgages. That can save you hundreds of dollars per year, if not thousands. Opting for the shortest possible term isn’t the best option for everyone, though. A shorter term may not be your best choice if: 

  • The monthly payment will make your budget tighter than you want. 

  • You can get a good rate on a longer term loan anyway. 

  • You wish to save money for other important things, such as retirement. 

3. How much term life insurance do you need if you earn $60,000 per year? 

    a.  $100,000–$200,000 

    b.  $300,000–$4000,000 

    c.  $600,000–$900,000 

    d.  >$1,000,000 

The correct answer is C.  

Financial experts recommend that people have 10–15 times their annual income in life insurance, depending on their financial situation. Consult with a financial advisor before getting life insurance. They’ll help you pinpoint the exact amount you need.  

The majority of Americans get this one wrong, but it’s a key part of financial literacy. For many just starting out in their careers, as well as those in their 30s and 40s, term life insurance is a security blanket that guarantees you’ll leave your loved ones with enough resources to support themselves should you pass away.  

4. If you invest $20,000 in a company stock that yields an average return of 10% per year, how much could you have after 10 years?  

    a.  Around $25,000 

    b.  Around $35,000 

    c.  Around $45,000 

    d.  More than $50,000 

    The correct answer is D. 

You would actually have $51,875, to be precise. That means your investment would have earned $31,875 in 10 years. And all you had to do was keep the money there, untouched. 

Too many Americans don’t understand the power of compound interest over time. You build wealth through patient, steady investing. Don’t get caught up trying to trade your way to riches in a single year. The vast majority of millionaires get to where they are by saving and investing over many decades. Do the same and you’re likely to reap the same rewards.  

5. What’s the average inflation of college tuition? 

    a.  8% 

    b.  4% 

    c.   2% 

    d.  12% 

    The correct answer is A. 

The average inflation rate of college tuition is 8%, which is fairly high for recent college grads. Fortunately, just as there are IRAs and 401Ks for retirement, there are tax-advantaged savings accounts for college tuition, notably the 529 college savings plan. By investing ahead of time, you ensure you can keep pace with the rise in tuition costs. Then, when it comes time for you or a child to attend school, the financial burden won’t be as high. Look up your state’s 529 college savings plan if you’d like to learn more. 

Financial literacy for kids 

Raising a family? It’s never too early to teach financial literacy to your kids. It’s a great way for them to learn the connection between work and money and how to manage their own finances. Financial literacy for kids can involve: 

  • Doing chores to earn money at home. 

  • Putting money away into a bank account. 

  • Investing in mutual funds and college savings accounts once they’re old enough.  

  • Working summer jobs once they’re old enough.  

  • Budgeting money to spend on toys, snacks, games, and playing with friends. 

  • Giving money to causes and charities they care about. 

When teaching financial literacy to kids, focus on concepts like “earn”, “save”, “spend”, and “share”. By simplifying these concepts and giving your kids the freedom to manage money themselves, they’ll become financially literate before you know it. Early financial literacy is like having an “edge” in the markets that could set your children up for a lifetime of financial success.  

Improve your financial literacy to improve your life 

Like so many have said before, “Education is the most empowering force in the world.” By improving your financial literacy and learning about things like debt management, budgeting, and investing, you can create a short- and long-term strategy to achieve financial peace. Need help along the way? Check out the resources here at Personify. You’ll find a wealth of information designed to help you navigate the financial landscape. 

The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.