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Lessons in Financial Literacy

What You Don’t Know May Hurt You

Most of us get the basics of financial management. While it may not be our favorite pastime, we generally know the gist of balancing our checkbook, paying credit-card bills, and identifying retirement funds. But for many, that’s the extent of our financial comprehension.

In fact, most Americans fail to make the grade when their financial knowledge is tested beyond the ABCs of financial literacy. According to a 2006 study commissioned by Northwestern Mutual, Americans have little grasp of important — and relevant — financial matters that can affect their financial futures. In response to the study’s questions, which test financial knowledge, the vast majority of the more than 1,000 study participants failed to get 60% correct — that’s an F in school terms.

The study found that Americans score well when they’re presented with a list of answers to questions that ask them to identify terms like asset allocation, diversified portfolio, and IRA. However, when asked questions that delve a little deeper, Americans don’t make the grade with issues such as:

  • Bonds vs. stocks. Most Americans erroneously say bonds provide better long-term protection against inflation and other adverse market conditions as opposed to stocks.
  • Group Insurance. Six in 10 wrongly believe they will be able to take their group life or disability policies with them should they leave their job.
  • Nursing-home costs. Most underestimate such expenses; while the average yearly cost is approximately $75,000, most estimate the cost to be less than $60,000. In addition, few protect themselves against these costs.
  • College savings programs. Fewer than half know 529 plans are savings vehicles for funding education.
  • Yet these results raise another important concern that must be addressed: our children’s knowledge of financial matters. Most parents know the importance of teaching their children how to manage money. In fact, two-thirds of teenagers look to their parents, not teachers or peers, to learn how to make money and manage it. Yet according to a 2004 study by Northwestern Mutual on kids and money, nearly half of the parents surveyed admitted that they did not believe they were good financial role models for their children. So how’s their financial future looking? Not good.

    Kids and Money

    The Jump$start Coalition for Personal Financial Literacy has conducted national research underscoring that the average high-school graduate also lacks basic personal finance skills and, therefore, struggles with everyday earning, spending, saving, and investing.

    The coalition’s most recent biennial survey, released in April 2006, shows that nationally, 12th grade students are in trouble.

    Though they also understood fundamentals like asset allocation, at large, they correctly answered only 52.4% of the questions — or the equivalent of an F — a sure sign that students’ lack of financial literacy remains an issue that affects all Americans.

    The fact is that, in today’s complex world, it’s not enough to know only the basics, and this holds true for both parents and kids. There is so much to understand about retirement, college saving, protecting our families with the right kind of insurance, and more that it’s up to each of us to stop this cycle.

    So, where does the answer lie? If we aren’t grasping financial knowledge beyond the basics, how will our children ever learn it?

    Investing in Education

    The answer lies in education — both at home as well as at school. For Americans who want to take a proactive approach to building financial knowledge and change the cycle, utilize the wide array of financial resources available to get you on track. Look at financial statements on a monthly basis to better understand and track investments.

    Reading reliable financial publications, such as the Wall Street Journal, Barron’s, and Investor’s Daily, can also grow one’s financial knowledge base. And don’t forget to include your kids in the conversation so you can learn together.

    The Web also offers a variety of resources: Northwestern Mutual offers a Learning Center at, which features articles on a range of topics, as well as a glossary of financial terms and calculators to help gauge financial well-being. Moreover, parents and teachers can access information on teaching young kids about earning, saving, investing, and owing at,, and

    Your children’s school can also play a role, though it’s best if they are learning the foundation at home from you. However, encouraging school officials to consider classes and curriculum on the importance of being money-smart shouldn’t be overlooked. There are plenty of free resources available to teachers through organizations like the National Council on Economic Education and the Northwestern Mutual Foundation to help get them started.

    It also may be eye-opening to gauge your own financial knowledge by taking the Money Maladies Test at, a condensed, 14-question version of the 2006 study. See where you are strong, and also identify some areas you may want to address.

    While some may be born into money or great wealth, no one is born knowing how to save and invest. Building a financially secure future depends on learning the basic principles of earning, investing, and saving. As Benjamin Franklin once said: “an investment in knowledge always pays the best interest.”v

    John Joyce is a network representative with Northwestern Mutual Life Insurance Co., based in Milwaukee, Wis., its affiliates and subsidiaries, and is based in Springfield; (413) 748-8744;[email protected].

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