If you can’t tell a stock from a bond or make sense of your savings account statement, it could be something in the water.
Based on 25,000 Americans’ scores on a test of financial know-how, people’s grasp of personal finance basics varied significantly depending on which state they lived in.
Residents of California, Massachusetts and New Jersey are the most financially capable, according to the State-by-State Financial Capability Survey by FINRA Investor Education Foundation.
They ranked in the top five among in at least three of five measures of financial capability.
Cellar-dwellers included Mississippi, Arkansas and Kentucky. Mississippi did worst overall, landing in the bottom five in four measures.
Arkansas was in the bottom five in three, and Kentucky landed in the bottom five in two.
The General State of the Nation
Although some states stood out as particularly capable or incapable, the state of the nation’s financial capability was generally poor.
Most Americans — 61 percent to be exact — got three or fewer correct answers on the five-question assessment.
The average score was 2.88 correct answers out of a possible five. Only 58 percent of Californians got that failing mark, however.
More than 68 percent of Mississippians, meanwhile, missed three or more.
Other Measurements of Financial Capability
In addition to the quiz, the study looked at four other measurements of financial capability.
One was how many respondents had enough rainy-day savings to cover three months living expenses. Most (56 percent) didn’t.
Another question asked how many spent less than they earned (41 percent said they did). Unpaid medical bills were reported by 26 percent.
And over a third (34 percent) reported paying only the minimum on a credit card during the past year.
FINRA did a similar survey in 2009, during the last recession, and comparing it to the current study shows some increase in financial capability.
For instance, the people who said they had no trouble paying monthly bills rose from 36 percent to 40 percent.
Also, in 2009 about 40 percent had experienced a large unexpected income drop in the previous year, something 29 percent reported in 2012.
But enough about the results. What are the five questions? Here they are.
You Take the Quiz
Question 1: 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
C) Don’t Know
Question 2: 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?
D) Don’t Know
Question 3: If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
C) Stay the Same
D) No Relationship
E) Don’t Know
Question 4: 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.
C) Don’t Know.
Question 5: True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
C) Don’t Know.
To find out how much you know, take the actual test online. Bear in mind: Only 14 percent got all five right.
The Writer’s Results
One unanswered question about Americans’ financial savvy is: How did the writer of this article do on the test?
The answer: 4 correct questions of 5.
The miss was the first question. Although answer A is obviously correct, failure to read the question carefully before answering led to a wrong answer.
That suggests that, to some extent, this study’s results may indicate poor test-taking skills rather than or along with lack of financial knowledge.
Mark Henricks reports on finance, business, technology and other topics from Austin, Texas. He is the author of Not Just A Living: The Complete Guide to Creating a Business that Gives You A Life and other books. Visit him online or on Twitter @markhenricks.