Everyone likes to think that they know how to manage their money, but the truth is that most people don't know as much as they think they do.
Only around 34% of people could answer four out of five questions correctly when asked to take a quiz about basic financial concepts, according to a report from the FINRA Investor Education Foundation, down from 42% in 2009. What's more troubling, however, is that a whopping 71% of those same survey participants gave themselves a high rating when it came to how much they think they know about financial topics.
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The quiz tested participants' knowledge about concepts such as compound interest, interest rates, mortgages, inflation, and diversification. While on average participants shined in the areas of mortgages and interest rates (with around three-quarters of respondents answering correctly), they struggled in other areas -- particularly regarding compound interest and bond prices, with less than a third of people answering those questions correctly.
The report also broke down the results by state, demonstrating that there is a distinct gap between the states with the highest and lowest financial literacy rates. In this context, a passing grade means participants were able to answer at least four of the five questions correctly, and the report examined the percentage of participants in the state who earned a passing grade.
States With the Highest Rates of Financial Literacy
In these states, nearly half of those who took the quiz earned a passing grade, answering at least four questions correctly.
1. South Dakota: 43%
2. Utah: 43%
3. Montana: 42%
4. Minnesota: 41%
5. Nebraska: 41%
(Honorable Mention): North Dakota: 41%, New Hampshire: 41%
Somewhat surprisingly, however, having high rates of financial literacy doesn't necessarily equate to better overall financial health. In Utah, for instance, although the state is tied for having the highest financial literacy rate in the country, 22% of survey participants admitted to spending more money than they earned over the past year -- higher than the national average of 19%. And in South Dakota, only around 48% of individuals have an emergency fund -- compared to 49% of all U.S. adults.
In other words, simply knowing more about finance doesn't always mean people are better off financially. Having a lot of knowledge about these topics is only one piece of the puzzle, and it's just as important to use that knowledge to make smart decisions with your money.
States With the Lowest Rates of Financial Literacy
In the states with the lowest rates of financial literacy, the vast majority of survey participants answered less than four out of five questions correctly. However, that doesn't mean there weren't bright spots in the data.
1. Alabama: 24%
2. Mississippi: 28%
3. Georgia: 28%
4. Texas: 29%
5. West Virginia: 29%
Although these states didn't fare as well in the financial literacy department, they still shine in other areas. Alabama, for instance, has a higher-than-average percentage of people who shop around for credit cards before choosing one -- with 43% of people saying they compare offers to find the best deals, compared to just 38% of all U.S. adults who do the same. And in Georgia, only 16% of people admitted to spending more than they earned in the last year, compared to the 19% national average.
So how important is financial literacy, really?
These statistics may imply that financial literacy really isn't all that important. After all, it's one thing to know a lot about financial concepts, but it's another to actually put that knowledge to good use. If you know what you're supposed to do to make the most of your money but you don't do it, you may not be better off than someone who doesn't have as much financial knowledge.
That said, financial literacy is the key to making better decisions. You can choose whether or not to take full advantage of that knowledge, but it never hurts to learn as much as you can about various financial concepts.
In many cases, learning more about topics related to finance -- and especially retirement -- can help you save money in the long run. For example, 72% of Americans admit they don't fully understand how Medicare works, and 53% mistakenly believe coverage is completely free, according to a survey from the Nationwide Retirement Institute. If you go into retirement thinking you won't pay a dime for healthcare, you're going to be in for a rude awakening. But understanding what Medicare covers and what costs you'll be responsible for can help you prepare your retirement budget accordingly.
Or, for another example, consider the number of people who have no idea what they're paying in 401(k) fees. Everyone pays retirement account fees, but only 27% people say they know how much they're paying, a survey from TD Ameritrade found. Considering the average worker will pay around $138,000 over their lifetime in retirement account fees, according to a study from the Center for American Progress, having some basic knowledge about what you're paying in fees could save you some money.
There are several components to living a healthy financial lifestyle, and a strong grasp on basic financial concepts is the foundation for success. You don't need to be an expert, but the more you know, the better prepared you'll be to tackle all of life's financial challenges.
