The ability to understand basic financial concepts such as interest (simple and compound), residential mortgages, and inflation is essential for achieving financial well-being. Without an appreciation of the power of compound interest, for example, people are likely to make poor financial decisions such as under-saving for retirement and amassing high-interest debt. FINRA Investor Education Foundation offers a quick, five question quiz to assess financial literacy. FINRA recently reported the results from a larger, representative survey of 25,509 respondents who took this same quiz. In 2012, respondents nationwide answered on average 2.88 questions correctly out of five. This average is down slightly from 2.99 correct answers when the survey was last conducted in 2009.
Taken together, these two surveys indicate that the US population struggles with some basic concepts that should impact their financial decisions, and that this understanding hasn’t improved with the economic downturn of the last four years.