Many Americans are financially illiterate as shown by a recent five-question quiz from by Standard & Poor's, Gallup, and The World Bank.

In this video segment, Fool contributors John Maxfield and analyst Gaby Lapera discuss at length the results of the quiz worldwide and then focus on results from the United States. They explore some of the misunderstandings that Americans have about consumer debt and personal finance, and how it will adversely affect them in the long-term.

Listen to the full podcast by clicking here. A full transcript follows the video.


This podcast was recorded on 11/23/2015.

Gaby Lapera: Congratulations you are super financially literate!

John Maxfield: Wow, wow.

Lapera: That was it. That was the difficulty level of the questions we're talking about for this survey.

Maxfield: OK and so you're telling me that ... oh so can you talk about the results.

Lapera: Yeah.

Maxfield: So most people did not pass that? Is that what you said?

Lapera: So most people did, 57% to be exact did. So that is not really the vast majority. And we are ranked actually 14th in the world for financial literacy. So we didn't do all that great if you think about it.

Maxfield: Yeah. You know here's the interesting thing about financial literacy in the United States specifically. When we talk about financial literacy, it is a really important thing to know, right? I mean I think that that's what we do for living, right? We try to educate people about financial literacy. So obviously we are biased, that is really important thing.

Lapera: That's a good thing you passed that test.

Maxfield: It really is a good thing that I passed that. If it was a more difficult test, I'm afraid I probably wouldn't have. But what's important to keep in mind is that the biggest piece of financial literacy is really about just saving money for retirement, right? This is particularly as pensions have gone out and then we more as individuals largely responsible for our own retirement. So it's saving and then figuring out what to do with your money.

And what's interesting is that when you look at the United States economy, what is it? I think the stat is something like 70% of our economy. Our GDP is a function of consumer purchases, right? And then our savings rate is some abysmal level something like 4% or 2% which is much, much lower than most other developed countries. Well, one of the reasons that our GDP is so healthy historically is because our consumers have spent more money more of their income in a lot of other place. I mean there's other reasons that our GDP is awesome too. We have great natural resources and a variety of other things.

But on a country level, you don't want your people necessarily saving so much. But on the individual level, it is absolutely critical that you not only save, but that you do so early because of, and this kind of relates to a question in that test, because of the power, the time value of money.

Lapera: Of compounding interest.

Maxfield: Another way of putting that is compounding returns. So you know, you want to save, save early, invest that, allow compounding returns to boost your returns multiple-fold over multiple decades.

Lapera: Do you want to know the question that people had the most difficulty with in the United States?

Maxfield: The compounding returns?

Lapera: No the question about interest -- which is less to pay back, $105 or $100 plus 3%.

Maxfield: No kidding?

Lapera: That's the question people had the most trouble with which is crazy if you consider how much for example student debt there is out there or how much credit card debt is. 60% of adults in America have a credit card and they don't understand how interest works which is crazy. If you're not paying off your balance every month, then I mean you're pretty much giving money away.

Maxfield: Yeah and those interest rates are in the 20%.

Lapera: Absolutely.

Maxfield: Yeah. I mean if you don't know how interest works, yeah I mean that would be certainly an important thing that you'd want to get up to ... and it would take you five minutes to get up to speed on how it works. But it's certainly an important thing to know.

Lapera: So of the people who have a credit card in the United States only 57% of the people who answered that survey question, answered it correctly which is crazy.

Maxfield: There you go.

Lapera: So anyway I think that's pretty much it. Do you have anything else you want to say?

Maxfield: No I think that you kind of wrapped it up really, really well. I mean yeah people carrying these huge balances on their credit card, they don't know how interest works, I mean it really does fit nicely how that works.

Lapera: Yeah, so financial literacy, kids. It's important. Stay in school. If only schools taught financial literacy that would make it even better.