Financial Literacy: Get to Know the Basics


The current financial crisis is putting pressure on many Americans to learn the ABCs of personal finance.

To commemorate the start of Financial Literacy Month on April 1, the Center for Economic and Entrepreneurial Literacy released a survey illustrating that an overwhelming number of Americans are unable to answer even the most basic questions about borrowing, interest rates and economic terms.

At a time when credit is squeezed and obtaining a mortgage is often a difficult proposition, 43% could not identify a FICO score as the most important factor in receiving a loan. Less than a third were able to judge the amount of time it would take to pay off $5,000 worth of credit card debt with an 18% annual interest rate, assuming they made only the minimum required payment each month. The answer: 46 years.

Other questions that stumped more than half of respondents:

  • What is an advantage of a traditional IRA? Answer: It allows you to use pre-tax dollars to invest for retirement.
  • What is a the Dow Jones Industrial Average? Answer:An index based on the stock prices of 30 large American corporations.

Luckily, there is no shortage of tools available to help financial illiterates become financially savvy.

“Consumers who are interested in improving their financial situation and learning more about personal finance have a lot of options,” observes Certified Financial Planner John Comer, principal at Comer Consulting, LLC, a Plymouth, Minn.-based firm that works with financial advisors. Steps you can take right now include the following:

1. Consult a financial planner. “The first step you should take is to create a comprehensive or broad-view financial plan,” Comer says. However, one need not commit to hiring an adviser right away. An advisor will often devote 45 minutes or more of his or her time for free, during the initial consult, so this is your opportunity to ask questions. Don’t be afraid to admit how much you don’t know. After all, educating you is part of the planner’s job.

To find a few planners to interview, Comer advises using PlannerSearch, powered by the Financial Planning Association. Assuming you decide to go further, doing the work required to devise a full-fledged financial plan will provide direction for your efforts and the financial planner will provide personalized coaching to help you overcome obstacles along the way, Comer says.

2. Bone up on the basics. Still all Greek to you? Check out the Financial Industry Regulatory Authority’s explanation of investment alternatives including mutual funds, stocks and bonds. Also check out the American Institute of Certified Public Accountants.

3. Understand your 401(k). Certified Financial Planner Karen Altfest of Altfest Personal Wealth Management in New York recalls how a woman rushed up to her with her 401(k) statement after Altfest completed a speaking engagement recently.

“She thought she was a very conservative woman, but was 98% [invested] in equities," says Altfest. “I told her how to go about finding out what was in each of her investments.” If you have that concern, start with your human resources department. See whether they have brief summaries about your 401(k) fund holdings. See if your employer has written material about the company managing your funds. For an unbiased take on 401(k) funds and performance, check with Morningstar. A useful guide to 401(k) terminology can also be found here.

4. Learn your credit score. “Your credit score is what defines you these days financially and you really have to know what it is, since anyway maybe one day you’ll want buy that house or that car,” says Altfest. CreditKarma is the only site we know of that offers credit scores for free. You can get your free credit report from

5. Pass it along to the kids. If your focus is passing personal finance knowledge to the next generation, you may want to read a couple of good books, says Comer. One is Silver Spoon Kids, by Jon and Eileen Gallo. “It will spark your creativity and provide examples of ways to reinforce personal finance messages with children," Comer says. Another is Raising Financially Fit Kids, by Jolene Godfrey. “This book provides specific, age-based activities to enhance knowledge of personal finance,” says Comer.



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