According to numerous studies conducted by a variety of organizations, America needs to improve its financial literacy. Participants in a Financial Industry Regulatory Authority's Investor Education Foundation survey were asked these questions:
- Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? More than $102, exactly $102, less than $102, or don't know?
- Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
- If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
- True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less.
- True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.
Monkey See, Monkey Do
Kids watch what their parents do and learn from what they observe. (Many children believe that money originates from the ATM since they observe parents using ATMs to withdraw cash.) Use cash whenever possible around them so they can see money being exchanged for a good or service (and they can also see when it's spent, it's gone). Hold on to receipts and explain that you need to keep a record of your purchases so you can track your spending. Share, Save, Spend has great tools for parents and kids
Sophia Bera is a financial planner for Millennials and the Founder of Gen Y Planning. You can sign up for the Gen Y Planning newsletter here for more tips on Millennials and money.