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Encore
A blog about living in and planning for retirement

Quiz: How “Financially Capable” Are You?

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Quick question: Do you think you are “financially capable”? In other words, are you able to make ends meet, plan ahead, and choose and manage financial products? In short, do you have the skills and knowledge necessary to make good financial decisions?

Don’t be too quick to say “yes.”

That quality – “financial capability” – is at the heart of a new and disturbing report from the Pension Research Council at the University of Pennsylvania’s Wharton School. The study finds that levels of financial knowledge in the U.S. – including an understanding of retirement planning – are “strikingly low.” What’s more, the study finds that there is “a sharp disconnect between how much people think they know and what they actually know” about personal finances.

The upshot: If many of us are, in fact, ill-equipped to make sound financial decisions, “the cost of [those] decisions can be passed on to all Americans through higher prices for financial products and the diversion of economic resources.”

The report, titled “Americans’ Financial Capability,” was written by Annamaria Lusardi, an economics professor at George Washington University in Washington. The study surveys Americans’ financial prowess (or lack thereof) – and is also a good way to measure your financial skills and knowledge. (There’s even a brief quiz. Sample question: “If interest rates rise, what will typically happen to bond prices?” Only one in five people respondents answered correctly.)

For example, see how you and your household compare with the following:

Rainy-day funds. Only 50% of surveyed individuals ages 45-59 (and about two-thirds of individuals age 60-plus) say they have set aside funds to cover expenses for three months in case of sickness, job loss, economic downturn or other emergency.

Savings needs. Only 51% of surveyed individuals ages 45-59, and only 50% of people age 60-plus, say they have tried to calculate how much money they will need to save for a comfortable retirement.

Credit cards. Only 44% of individuals ages 45-59 say they pay their credit-card balance in full every month. (Here, older adults perform better; 75% of respondents age 60-plus say they pay their credit-card balance in full.)

Indeed, the report states that “while many [people] believe they are pretty good at dealing with day-to-day financial matters, in actuality, they engage in financial behaviors that generate expenses and fees: overdrawing checking accounts, making late credit-card payments, or exceeding limits on credit-card charges.”

Ideally, your “financial capability” is above average. This study can give you a good idea of where you stand – and what you might need to do to improve.

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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