Americans’ financial IQ has barely budged over the years, and it’s even worse for African-Americans.
Financial literacy is still a growing challenge in America. Even with the proliferation of user-friendly investing and budgeting apps, adults are still struggling to make informed choices when it comes to personal finances.
Studies repeatedly have shown that financial education makes a significant impact on financial decisions. Improving saving habits, lowering debt levels and increasing rates of asset accumulation, such as purchasing a home, have all been correlated to understanding basic personal finance concepts.
While financial services have become easier to tap into, it can be challenging to find the appropriate resources to get on the right track. When seeking out help to get your finances in order, James Brewer, founder and CEO of Envison Wealth said it’s paramount to enlist the services of qualified professionals.
“Too many people use ‘financial advisor’ but that’s pretty broad,” Brewer, a certified financial planner, told Finurah. “The term means nothing for a specific expectation that someone should have. It sounds like this really nice phrasing,” but, he said, it doesn’t say “anything about the person’s knowledge or ability.”
Personal financial is one of the most important fundamental life skills, but delayed knowledge about money management has had prolonged negative effects on Americans’ financial stability. Advocates have argued that not having financial literacy education as a pre-requisite for students, particularly those from low-income backgrounds, makes them more susceptible to taking out predatory loans and unable to distinguish good debt from bad debt upon reaching adulthood.
“As we work to improve financial literacy for all, we know that there are also demographic differences that can help or hinder those looking to achieve financial wellness, such as age, overall education levels and income distributions,” said TIAA Institute senior economist Paul Yakoboski in a statement.
In recent years, momentum has picked up with states mandating some sort of economics course at the high-school level. Currently, there are 23 states that require high-school students to take a personal financial course in order to graduate. Experts have viewed this as a step forward to ensuring the next generation is more financially equipped.
Gaining the financial knowledge to confidently make important financial decisions is a progressive process. So, whether you’re financially savvy or a newbie when it comes to money management, these questions can give you a jumpstart to leveling up your financial IQ.
- What is a general rule of thumb for how much you should spend on rent?
- No more than 20 percent of your net income
- No more than 30 percent of your gross income
- No more than 50 percent of your gross income
- It depends on what other monthly bills you have
- Which of the following most influences your credit scores?
- The types of credit accounts you have open
- Your payment history
- The amount of credit you’re using compared to the amount available to you
- The length of your credit history
- If you were able to earn interest at 3 percent and you started with $100, how much would you have after 3 years?
4. When it comes to portfolio diversification, ____ is/are a good idea
- Certificate of deposit
- Index funds
- Close-end funds
5. Income accumulated from bitcoin on lottery winnings is taxable. True or false?
6. Inflation means _____________
- your money has less purchasing power
- prices for goods and services is rising
- a loaf of bread that costs $2.50 today, costed $0.23 cents in the 1960s
- All of the above
7. If you earn a yearly salary of $60,000 and your company is contributing 6 percent of your annual salary for your company-sponsored 401k plan which is the maximum match, does that mean you’re maxing out your plan? Yes or No
- Answer: B
Explanation: Conventional wisdom in the financial realms says the 30 percent rule recommends that your monthly rent payment should not be more than 30 percent of your gross monthly income. This provides enough cushion in your budget for other monthly, savings and discretionary spending.
- Answer: B
Explanation: All of the items listed are generally contributing factors when your credit scores are being calculated, but your payment history is typically is the largest factor in most credit scoring models. For more information, check out this infographic.
- Answer: $109.27
- Answer: Index funds
Explanation: Index funds are popular because they provide ownership of a wide variety of stocks, greater diversification and lower risk – usually all at a low cost. Many investors, especially beginner funds, tend to be attractive because they offer a variety of stock investments.
- Answer: False
Explanation: Gambling winnings and cryptocurrency income are subject to federal and state taxes. “There are so many people who don’t understand those lottery winnings, and crypto, like all other assets all get taxed, said Brewer.
- Answer: All of the above
- Answer: No
Explanation: “401ks have two pieces that I think are misunderstood.” He said he hears his African-American clients “all the time say they are ‘maxing’ out their plan, but [they] aren’t,” said Brewer. “You are getting the ‘maximum match’, but you aren’t maxing out your plan because the government allows you to go up to $20,500.”