Most millennials believe that they’re financially savvy, but there is often a significant gap between the financial responsibilities they’ve taken on, such as student loans, mortgages, and investments, and their knowledge of some fundamental concepts in personal finance.
A recent study of how millennials (Americans aged 23-35) handle their debts and assets by researchers at the George Washington University School of Business’ Global Financial Literacy Excellence Center found that only 8 percent of millennials were able to answer five fairly simple questions designed to assess their financial literacy.
Here are the questions — see how you do (answers at end of this post).
1. Suppose you had $100 in a savings account and the interest rate was 2 percent 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. Do not know
E. Refuse to answer
2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent 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. Do not know
E. Refuse to answer
3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
4. Please tell me whether this statement is true or false: 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.
C. Do not know
D. Refuse to answer
5. 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 interest rates
E. Do not know
F. Refuse to answer
Millennials are also typically juggling long-term debt like student loans (39 percent), a car loan (36 percent) or home mortgage (29 percent) with short-term debt like credit cards. About two-thirds of millennials (68 percent) have at least one credit card, and among that group, 52 percent sometimes carry over a balance and are charged interest.
The authors of this study, funded by the Filene Research Institute, a think tank funded by the credit union industry, found it alarming that 42 percent of millennials say they’ve relied on “alternative financial services” like auto title loans, payday loans, pawnshops, rent-to-own loans, and tax refund advance loans.
“These services carry steep fees and, as such, they have also been defined in related research as high-cost borrowing methods,” the authors note.
“The gap between the amount of financial responsibility young Americans have and their demonstrated ability to manage financial decisions and take advantage of financial opportunities is rapidly widening,” concluded the authors. “Unless there is significant action taken to alter this, financial illiteracy will remain a significant obstacle to both financial market efficiency and Gen Y’s use of traditional financial services.”
The obvious takeaway for student loan borrowers is not to let higher-cost short-term borrowing interfere with your ability to pay down long-term loans. Another is to look at whether you’ve got opportunities to refinance long-term debt like student loans or a mortgage to get a better rate.
To explore options for student loan refinancing, receive offers from vetted lenders, and take care of your financial future, visit Credible.
Answers to financial literacy quiz: 1 (A); 2 (C); 3 (B); 4 (A); 5 (B).
Kristen Caron is a member of the DailyWorth Connect program. Read more about the program here.