Thanks to the financial crisis, many Americans have learned some hard lessons about the dangers of excessive borrowing, predatory lending, and debt in general.
But unfortunately, 25% of Americans still can't figure out this simple financial problem, according to the recent National Financial Capability Study from the FINRA Foundation:
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
a. More than $102
b. Exactly $102
c. Less than $102
d. Don’t Know
Out of those who didn't answer correctly, 12 percent didn't even try to solve the problem, selecting the "Don't Know" option (the correct answer is "A"). This is shocking, considering it only requires simple math.
Nearly two-thirds of Americans couldn't pass the basic five-question quiz (by answering four out of five questions correctly), part of a downward trend in financial literacy. In 2009, 42 percent of Americans passed, compared to only 37 percent in 2015.
As the study notes, the biggest drops in performance were on the inflation and risk questions, with middle-income participants displaying the largest decrease in performance on these questions. The researchers speculate “the trends in financial literacy scores suggest a shrinking class of moderately financially literate citizens, just as growing income inequality has led to a shrinking middle class.”
A lack of knowledge in this area could have serious consequences on someone's personal finances.
Interest is an important element in several areas of personal finance.
The average American is in credit card debt, and only 35 percent of credit card holders pay off their balance each month, as they should. That means nearly two-thirds of us are dealing with accruing interest, which can quickly turn a small loan into a huge debt.
Millennials who have pursued higher education are facing additional debt. Total student debt in the United States has exceeded $1.4 trillion, and 2016 college graduates will carry an average $37,172 of student debt, according to data analysis by higher-education expert Mark Kantrowitz.
The current interest rate on undergraduate loans, both subsidized and unsubsidized, is 4.29 percent, while the average annual percentage rate (or APR), the amount of interest on your total loan amount paid annually, is 15.18 percent. If you're not diligent about paying off your credit card, a $10,000 balance can lead to racking up $1,518 in interest.
Financial knowledge isn't always easy to come by.
Money can be a taboo topic, rarely discussed amongst friends or family members. Parents may be uncomfortable teaching their children about money management, and some may not have the best financial knowledge to pass on, according to U.S. News.
Chances are, you won't get a Money 101 class in school, either. A recent survey by the Council for Economic Education found "the number of states that require high school students to complete a course in economics has dropped over the last two years, and mandates for personal finance education in the upper grades remain stagnant," according to CNBC.
In the three states with mandatory financial education (Idaho, Georgia, and Texas), the research showed “notable improvements” in credit outcomes for 18- to 22-year-olds, notes CNBC. Additionally, many leaders in higher education believe in the power of comprehensive financial literacy programs to combat runaway student loan debt.
While financial education should be taught in schools, it's also a personal responsibility. If you're interested in brushing up on personal finance topics, from investing to paying off debt, check out these podcasts and blogs: Planet Money, Listen Money Matters, Money Girl, Broke Millennial, The Penny Hoarder, and Mo' Money.