What goes first? Your Hair, Seeing, Hearing, or Memory?

Can you rmember three words for the Medicare annual physical?

Now that I am receiving Medicare, I am accustomed to being asked to remember three words during my annual physical. The words are given to me by the nurse or physician’s assistant. After having me do an exercise drawing a clock with hands pointing to a specific time, I am asked to recite back those three words. I know the words, but the key is remembering them. The words are often things like “banana”, “chair”, and “bus.” So far, I have scored 100% for the clock test and the short-term memory test. But how would most adults do with a simple financial literacy test? According to a recent study mentioned in the May 2022 AAII Journal, the answer is “less than 40%” can pass a three-question test.

Basic financial literacy is more uncommon than you might think.

Financial Literacy Test Question 1

The first test question is, “can you calculate interest rates?” This implies that you would understand interest on savings, the cost of credit card debt, dividend yield information, and expense ratios. If you cannot do this, then be prepared to struggle when you retire.

AAII Journal May 2022 Page 2

Financial Literacy Test Question 2

The second question is, “do you understand inflation?” This implies that you understand your dollar in your savings accounts or investment accounts is worth more today than it will be ten, twenty, or thirty years from now. To be a “millionaire” thirty years ago was a pretty big deal. In 2022, if you have a million saved up for retirement, it really isn’t that grand. In reality, if you are unwilling to invest the million with some outstanding stocks, ETFs or low-cost mutual funds, your dollars will shrink and the costs for just about everything will rise.

Financial Literacy Test Question 3

Do you know what it means to be a diversified investor? If your answer is, “My financial advisor takes care of this,” then I ask you to step back into the classroom. The reason I say this is that Cindie’s mom had a financial advisor who was a Vice President at a major Milwaukee investment banking firm. He had moved all of Cindie’s mother’s wealth under his care into energy-related stocks because “Charlotte was retired and needed the income.” She was retired, but she did not need this type of mismanagment of her investments. Thankfully, Charlotte asked me to review her investments and then took my advice. Needless to say, we ended the investment relationship with the above-mentioned broker.

Financial literacy is like wearing a helmet when riding a bicycle. It protects what is important while you are living.

Why These Questions Matter

If you don’t understand interest and percentages, you are probably saving too little and spending unwisely. If you don’t understand inflation, you will probably be thinking that it is best to play it safe in the stock market and follow allocation strategies that will cause you to fight a losing battle with inflation. If you don’t understand true diversification (different asset types and classes and different business sectors), then you are inviting unnecessary risk into your financial future.

The good news is that you don’t have to work terribly hard to be financially literate. That is one of the reasons I offer free advice in this blog. In addition, I am willing to teach you if you are willing to learn. If you understand percentages, then let me tell you up front that I will charge you 0% on your total assets for the training. With some basic training, you can know what questions to ask your financial advisor. Better yet, you will be able to invest without an expert’s help and save some money you can put to work towards your financial future.

Final Word

If you are really serious about learning, then you would do well to explore an AAII membership. The monthly AAII Journal is packed with good ideas, training, and advice. Here is a link: AAII