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A Test of Financial Literacy Draws Mixed Conclusions

April 13 – Two-thirds of adults (62 percent) consider their own financial literacy to be good or excellent, according to a new survey conducted for the American Bankers Association. However, their perception of the average American isn’t quite as favorable. Only 29 percent of respondents perceive the average American’s financial literacy as good or excellent. Reality falls somewhere in between.

An S&P Global study found that 57 percent of American adults could be classified as financially literate – putting the United States in 14th place for financial literacy behind countries like Israel, Canada and Germany.

“Financial knowledge is a critical component to leading a successful and stable life,” said Corey Carlisle, executive director of the ABA Foundation. “It’s also an area of improvement for many Americans. By taking the time to brush up on our money management skills, we can put ourselves on a path toward a stronger financial future.

“Credit, interest, compounding interest, diversification and inflation are real-world financial concepts that must be understood in order to be financially capable,” Carlisle said.

In recognition of April as Financial Literacy Month, the ABA Foundation is asking five questions to test consumers’ knowledge of key financial concepts. The five questions and suggested answers follow:

Q: What is generally considered a good credit score?

A: Credit scores can range from 300 to 850. Generally, anything over 700 is considered a good score. Factors like payment history, types of credit, and outstanding debt can influence your score.

Q: Let’s say you need to borrow $200. Would you rather pay back $205 or $200 plus 5 percent interest?

A: You’d rather pay back $205 because $200 plus 5 percent interest comes out to $210.

Q: You have $1,000 in a savings account earning 2 percent interest a year. After two years, how much would you have?

A: The savings account would grow to $1,040.40 by the end of the second year because your interest will compound over time. That means the account holder earns interest not only on the money they’ve saved but also on the interest earned in prior years.

Q: If you’re investing money, is it safer to put that money into a single asset or into multiple assets?

A: It’s safer to put money into multiple assets. This is the investment principle of diversification. Your risk of losing money decreases when money is spread across multiple investments.

Q: Over the next 15 years, the cost of living and your income double. Will you be able to buy more, the same or less than you can today?

A: You will be able to buy the same amount of things as you do today. Inflation, or the rate at which the price of goods and services rises, causes cost of living to go up. Your buying power stays the same when inflation and your income rise at the same rate.

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