A 5 question quiz of your financial literacy

Take FF1 and FF2 this fall.

This is a test. This newsletter is conducting a test of your financial literacy. This is only a test.¹

1) 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) Don’t know
E) Prefer not to say

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A) More than today
B) Exactly the same
C) Less than today
D) Don’t know
E)Prefer not to say

3) If interest rates rise, what will typically happen to bond prices?

A) They will rise
B) They will fall
C) They will stay the same
D) There is no relationship between bond prices and the interest rate
E) Don’t know
F) Prefer not to say

4) A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.

A) True
B) False
C) Don’t know
D) Prefer not to say

5) Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A) True
B) False
C) Don’t know
D) Prefer not to say

How did you do? ² 61% of respondents had three or fewer questions correct. The average number of correct answers was only 2.88 out of a total of 5. The funders of the study, FINRA, concluded that these results indicate a severe lack of fundamental financial knowledge and skill amongst Americans.

Removing the poisoned arrow

I know a lot of people who complain about capitalism. But complaining about capitalism without knowing understanding personal finance reminds of Buddha’s parable about suffering: the man who has been shot with a poisoned arrow but refuses to take it out:

It's just as if a man were wounded with an arrow thickly smeared with poison. His friends & companions, kinsmen & relatives would provide him with a surgeon, and the man would say, 'I won't have this arrow removed until I know whether the man who wounded me was a noble warrior, a priest, a merchant, or a worker.' He would say, 'I won't have this arrow removed until I know the given name & clan name of the man who wounded me... until I know whether he was tall, medium, or short... until I know whether he was dark, ruddy-brown, or golden-colored... until I know his home village, town, or city... until I know whether the bow with which I was wounded was a long bow or a crossbow... until I know whether the bowstring with which I was wounded was fiber, bamboo threads, sinew, hemp, or bark... until I know whether the shaft with which I was wounded was wild or cultivated... until I know whether the feathers of the shaft with which I was wounded were those of a vulture, a stork, a hawk, a peacock, or another bird... until I know whether the shaft with which I was wounded was bound with the sinew of an ox, a water buffalo, a langur, or a monkey.' He would say, 'I won't have this arrow removed until I know whether the shaft with which I was wounded was that of a common arrow, a curved arrow, a barbed, a calf-toothed, or an oleander arrow.' The man would die and those things would still remain unknown to him.

Knowledge matters. People with higher financial literacy were more likely to make ends meet than those with lower financial literacy. They spent less than their income (53% vs. 35%) and set aside three months’ worth of emergency funds at higher levels (65% vs. 42%). They were also more likely to know their retirement needs (52%, compared to 29%).³

We have a potential recession. The stock market has jitters. Inflation, at least compared to the last 15 years, is uncomfortably high. According to a new survey, 97% of American full-time workers say that they are experiencing financial stress right now. More than half (54%) of respondents were “unable or barely able to cover monthly living expenses over the past year. It’s not the lower-paid workers either; a quarter of households earning six figures are living paycheck-to-paycheck.

I agree with all the arguments for paying American workers more. It creates a more equitable and healthy society. It keeps us all invested in moving the country forward. And yet, paying you more is not a permanent solution for your financial anxiety. Getting paid more without gaining financial literacy won’t take out the poisoned arrow. The simplest, most effective, and most empowering way for you to feel more financial secure is to become financially literate.

Financially illiteracy: copying others and hoping

Someone was talking to me about illiteracy this week. Someone could be illiterate (not able to read or spell at the most basic level) or ‘functionally illiterate’ (reading at the 5th grade level or below). 21% of adults can be categorized as functionally illiterate. They are often experts at hiding it. They order what other people order at restaurants, follow what other people are doing in groups. They get by and hope. People who struggle with literacy feel some degree of shame, embarrassment, and/or anxiety about their difficulties. Most of them think that they are lacking, inept, dumb, disabled, or broken.

Most Americans are functionally illiterate about their finances. They feel shame, embarrassment, and/or anxiety about their money. Most of them think that they are lacking, inept, dumb, disabled, or broken. They try to game the system: they pretend that they are able to handle their money. They watch what other people do.⁴ They get by and hope.

It’s easy to place blame elsewhere, especially if everyone else is doing it. Life circumstances. The “system.” But you can empower yourself. If there’s one thing I’ve learned spiritually: the external world is only a manifestation of your inner world. And once you take responsibility for your inner world, the outer world changes too.

“Self-pity blocks effective action. The more I indulge in it, the more I feel that the answer to my problems is a change in others and in society, not in myself. Thus, I become a hopeless case.”

Financial Freedom this fall

I’m teaching another round of Financial Freedom 1 and Financial Freedom 2 from October 1-November 30. If you’ve taken FF1 (the vast majority of my newsletter readers have), you understand who taking control of your finances allows you to live the life you want. If you haven’t, you should consider it. Money is an issue for everyone.  One of my heroes, Lynne Twist, writes:

“We all have an identifiable, though largely unconscious and unexamined, relationship with money that shapes our experience of life and our deepest feelings of ourselves and others. Whether you count your change in dollars, yen, rupees, or drachmas, money is one of the central, linchpin issues in all of our lives. It is in mine, and it is a central issue for everyone I’ve ever met, no matter how much or how little money they have.” - Lynne Twist, The Soul of Money

Your relationship to money is really your relationship to yourself and how you consciously and unconsciously manifest in the world. Financial literacy combines the practical concrete math of earning and budgeting with the hard inner work of healing your relationship with money. In the course, you’ll free yourself from what’s holding you back, identify your core values and align your spending, giving, and savings habits with what you really care about. You’ll understand the practical financial steps you need to design a life you want. You’ll begin to feel abundant, confident, and free. Personal finance is a pathway to personal empowerment and spiritual development. This is an invitation to get clear on what you want, face old wounds, and face the discipline of committing what's important to you.

People don’t really get that until about halfway through the course and then’s there’s an aha! moment, when they really get it: a sense of control and competence with your personal finances means a sense of control and competence in your life.

There is no good or bad, only consequences

The easiest, more personally empowering thing to do is to stop pretending you know about money and learn about personal finance. As I say in the course, there is no good or bad, only consequences. There is no good or bad in learning or not learning personal finances. But there are consequences. Just take out the poisoned arrow.

So many people ignore the poisoned arrow. Let it fester. But lack of attention doesn’t lessen its importance. Anne Lamott said, “There is ecstasy in paying attention.” There is ecstasy in paying attention to your finances.⁵ Simone Weil said, "Attention is the rarest and purest form of generosity." It’s worth it to give that level of generosity to your financial life.

The work of Financial Freedom is uncomfortable. But the prize is the time. Time for your health, your family, and everything you care about. In other words, the prize is your life.

I know a lot of people who want to take FF1 but “don’t have the time,” so they push it off. But desire is not the same as action. If not now, when? When is the “right time?”

"There are two kinds of magic. One comes from the heroic leap, the upward surge of energy, the explosive arc that burns bright across the sky. The other kind is the slow accretion of effort: the water-on-stone method, the soft root of the plant that splits the sidewalk, the constant wind that scours the mountain clean." - Scott Williams

Personal finance is the second kind of magic. Now is the time.

1. Professor Annamaria Lusardi and Professor Olivia Mitchell of the Wharton School developed this five question U.S. National Financial Capability Study. It’s used to see the financial literacy of Americans.

2. If you chose “Prefer not to say” on any of these, you’re didn’t get it haha

3. Results from the 5 question quiz.

4. Hint: most people don’t know what they’re doing, so copying them isn’t that great.

5. You’re reading this blog!