Americans have become numb to financial intelligence. This is no more evident than a recent Sallie Mae survey, which indicated that college graduates can’t even answer simple questions about financial concepts, such as interest.
The statistics are not looking good for the United States, a nation deeply indebted, addicted to consumerism, and woefully ignorant about it all. Not long ago, SHTFPlan reported that a mere 1 in 10 Americans is actually capable of getting an A on a basic financial security test.
And even college graduates, who are likely tens of thousands (if not more) dollars in debt because of school, learned little to nothing about handling their personal finances. The big red flag comes from consumer banking firm Sallie Mae. The firm released its new “Majoring in Money” study which asked hundreds of current and recently graduated college students up to age 29 about basic financial concepts. The results are worrisome.
Sallie Mae asked these individuals four questions related to credit and interest, and fewer than one in four got all four of these correct.
1. Interest accumulation:
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Not sure
2. Effects of payment behavior on credit cost:
Assuming the following individuals have the same credit card with the same interest rate and balance, which will pay the most in interest on their credit card purchases over time?
a. Joe, who makes the minimum payment on his credit card bill every month
b. Jane, who pays the balance on her credit card in full every month
c. Joyce, who sometimes pays the minimum, sometimes pays less than the minimum and missed one payment on her credit card bill
d. All of them will pay the same amount in interest over time
e. Not sure
3. Impact of repayment term on cost of credit:
Imagine that there are two options when it comes to paying back a loan and both come with the same interest rate. Provided you have the needed funds, which option would you select to minimize your total costs over the life of the loan (i.e., all of your payments combined until the loan is completely paid off)?
a. Option 1 allows you to take 10 years to pay back the loan
b. Option 2 allows you to take 20 years to pay back the loan
c. Both options have the same out-of-pocket cost over the life of the loan
d. Not sure
4. Interest terminology:
Which of the following best defines the term “interest capitalization”?
a. The type of interest charged on high-balance loans
b. The addition of unpaid interest to the principal balance of a loan
c. Interest that is charged when you postpone payments on your loan
The answers are 1: A, 2:C, 3:A, and 4:B
The fact that we have an entire generation, largely college educated, who cannot answer these questions does not bode well for our future as a society. Not knowing the answers to these could end up costing people a lot of money down the road. According to Market Watch, 83% of college grads carry a credit card as revealed by Sallie Mae, but only about six in 10 say they pay the balance(s) in full and on time each month. Coupled with the fact that nearly seven in 10 college students take out student loans, graduating with an average of nearly $30,000 in debt, the decline in financial intelligence is evident.
There are ways to learn the basics of personal finance. Dave Ramsey’s Total Money Makeover book was of the most help to many people, and Ramsey is perhaps the most well-known personal finance guru out there. He takes a strick “no debt” approach that has worked not only for himself, buy countless others. He also offers an easy to follow guide which he’s dubbed “the baby steps” that will get people on the path to financial freedom.
Other resources are those such as Robert Kiyosaki’s Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!
Both books are excellent resources that teach the very basics about money and personal finance that no one is learning about in their public school educations.