via Moak: Are you financially literate?, clarionledger.com
Would you consider yourself financially literate? While most of us would probably answer yes, it’s likely that we would overestimate our own financial prowess. Today’s financial landscape is a complicated one. Most consumers face a bewildering array of choices, ranging from the simple (choosing one brand of soup over another) to complex (deciding how to invest your retirement savings).
While some organizations, such as the Mississippi Council on Economic Education, are doing a great job with getting financial literacy training into our schools, many young people still find themselves graduating high school or college without learning even rudimentary skills like comparing prices, buying insurance or understanding how the Law of Compounding can help or hurt you.
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The stakes are high. Even making a simple mistake, such as not paying your credit card bill on time or overdrawing your checking account, can upset your carefully loaded financial apple cart. Since April is Financial Capability Month, I decided to investigate a tool I had seen previously on the website Wallethub.com. The Wallet Literacy Quiz (https://wallethub.com/wallet-literacy-score/) will take you a few minutes, but IT casts a wide net to gauge just how well you understand the basics. I took the test, which doesn’t require any registration, cost or login.
Before I answered any of the 30 questions, the quiz asked me to assess my Financial Literacy level. I gave myself a B, because I have never really considered math — or money management — my strong point, yet I have gained a good deal of knowledge over the years through my work. It turned out I scored an A-minus, which was actually a little better than I’d thought I’d do.
Here are a few highlights:
Credit Scores. The quiz asks you to rank which of these five things are most important when credit bureaus calculate your credit scores:
- Credit inquiries and amounts owed.
- Payment history and amounts owed.
- Types of credit in use and payment history.
- Length of credit history and amounts owed.
I correctly answered payment history and amounts owed. When credit bureaus calculate your credit scores, they look at all of these pieces of information, but the largest contributing factor (almost a third of the total score) is how diligent you have been about paying your bills, and how much you owe (measured against your available credit).
Interest Rates/Compounding. The question was: “If you put $100 in a savings account with an interest rate of 5 percent per year and left the money in the account for five years, how much would you have in the account at the end of the fifth year?” For a math-challenged person like me, this one took me back to the anxious days of high school pop quizzes (sweaty palms and all). However, I correctly deduced that the answer would be “more than $125,” because of compounding. Basically, if no interest went into the total against which interest was compounded, it would be $125 ($100 principal, plus $25 interest). However, that’s not how it works. The total amount would be more than $125 ($127.63, to be exact), because the interest goes back into the principal, and future interest builds the principal.
Car Insurance. (I got a big red “X” on this one; shhh…please don’t tell my insurance agent). If there is an area that needs more public education, it’s this one. Many people — excluding insurance agents — would be mystified if you asked them the difference between “comprehensive” and “collision” coverage on an auto policy. Here is how it went: Which type of car insurance coverage will pay for damage to your car from an accident that you cause? I incorrectly guessed “liability,” when the answer was “collision.” According to Wallethub, “Collision insurance covers your car if it is damaged or destroyed in an accident. Types of covered accidents typically include hitting another car or hitting a stationary object (like a bridge or a tree). Collision insurance may also cover damage to your car if someone or something else hits it while it is parked.” Liability covers damages to another person (or their property) resulting from an accident you cause. Obviously, I should have read the question more carefully.
These are just three of the questions on the quiz. I’d urge everyone to go and see how well you do. It might help you identify areas in which you might need a little better understanding of some things. Ultimately, if we’re to be better-educated consumers, it’s up to us to make it happen.