Subscribe

Sign In

PERSONAL FINANCE

7 Questions To Test Your Financial Literacy

Erik Carter
Contributor
Financial FinesseContributor Group
Apr 4, 2013,09:00am EDT

More From Forbes

Did you know that April is

Financial Literacy Month? With taxes fresh on your mind and spring cleaning in the air, it’s as
good a time as any to brush up on your financial literacy. After all, as we’re required to make
more and more financial decisions, financial literacy is becoming almost as important as being
able to read and write.

So where should you start? While you can literally read entire books about financial planning,
I’ve repeatedly come across several common misunderstandings that can lead to big financial
mistakes. To test your financial literacy, see how well you answer the following questions:
1) Does carrying a balance on your credit card help your credit?
It’s true that responsible use of a credit card can help you build a positive credit history, which is
a big part of your credit score. However, you don’t need to carry a balance to do that. In fact,
building up credit card debt can actually hurt your score. Instead of paying needless interest
charges, try to pay the balance off in full each month and avoid closing credit cards, especially if
you’ve had them open for a long time. For more ways to improve your individual credit score,
check out sites like Credit Karma and Credit Sesame.
2) Should you pay down your largest debts first?
This idea comes from the fact that those larger debt balances are costing you more interest in
absolute terms. In other words, a $200k mortgage at a 3% APR is costing you about $6k a year
while a $10k credit card balance at a 10% APR is costing you only $1k a year. But the relevant
number isn’t the total balance but the amount of money you’re putting towards the debt. The
same $1k towards the credit card debt would save you over $6k over the life of the loan but less
than $2k if put towards the mortgage.
That’s why it makes the best financial sense to pay down the highest interest debt first,
regardless of the size of the balance. As one balance is paid off, you would then put those
payments towards the next highest interest rate debt. You can use this calculator to see
how much interest you can save and how quickly you can pay off your debt with this
strategy. Finally, for debts with interest rates below 6-8%, you’ll actually probably be
better off investing the extra money than paying down the debt early since over the long
haul you can earn more than you would save on interest.
3) Is an IRA a good investment?
I can’t tell you how many people I’ve spoken with have told me that they either want or
don’t want to contribute to an IRA because of how well or poorly one did. Setting aside
the question (but only for a moment) of whether we should be basing these decisions on
past performance, that past performance has nothing to do with whether it’s an IRA
because an IRA isn’t an investment. It’s simply a type of account that comes with certain
tax benefits and penalties. You can invest an IRA in everything from a FDIC-insured
savings account to mutual funds, individual securities, and even gold bullion and real
estate. Just be sure to open the IRA at an institution that offers what you’re looking for.
4) Should you invest in the top performing mutual funds?
This may seem obviously true but as counter-intuitive as it is countless amounts of
research has demonstrated that past performance is a very poor indicator of future
performance. For example, Barron’s magazine consistently does a study in which they
look at top mutual funds over a 5 year period and see how many of them continue to be
top performers over the next 5 years. More often than not, the top funds are actually less
likely than average to remain top performers. In other words, you would have had a
better chance of picking a top fund by literally throwing a dart at a dart board than
picking a past top performer.
So why does the financial industry promote this idea? Simple. Everyone from mutual
fund companies, to investment brokers, to the financial media has a vested interest in
wanting you to believe that if you find out from them what some of the top performing
funds are, you too can earn their skyrocketing returns or at least avoid the losses of
others.
Instead of chasing past performance, first make sure you’re properly diversified with an
asset allocation that fits your goals and risk tolerance. You can use this questionnaire
and worksheet as a guide.  Then fill in the allocation with low cost funds since low cost
has been one of the best indicators of superior future performance.
5) Is your company stock a safe investment?
I’ve heard so many arguments from so many people in so many different companies and
industries about why their particular company is a safe investment that it’s a wonder
that any stocks lose value at all. The fact is that every company is susceptible to the risk
of catastrophic loss. I’m not just talking about a temporary dip in the stock market or
even a significant decline like we saw in 2008. The difference is that an individual stock
can go to zero and never recover. If it’s your employer’s stock, you could also be out of a
job at the same time. If you absolutely want to own company stock, limit it to no more
than 10-15% of your overall portfolio.
4) Should you invest in the top performing mutual funds?
This may seem obviously true but as counter-intuitive as it is countless amounts of
research has demonstrated that past performance is a very poor indicator of future
performance. For example, Barron’s magazine consistently does a study in which they
look at top mutual funds over a 5 year period and see how many of them continue to be
top performers over the next 5 years. More often than not, the top funds are actually less
likely than average to remain top performers. In other words, you would have had a
better chance of picking a top fund by literally throwing a dart at a dart board than
picking a past top performer.
So why does the financial industry promote this idea? Simple. Everyone from mutual
fund companies, to investment brokers, to the financial media has a vested interest in
wanting you to believe that if you find out from them what some of the top performing
funds are, you too can earn their skyrocketing returns or at least avoid the losses of
others.
Instead of chasing past performance, first make sure you’re properly diversified with an
asset allocation that fits your goals and risk tolerance. You can use this questionnaire
and worksheet as a guide.  Then fill in the allocation with low cost funds since low cost
has been one of the best indicators of superior future performance.
5) Is your company stock a safe investment?
I’ve heard so many arguments from so many people in so many different companies and
industries about why their particular company is a safe investment that it’s a wonder
that any stocks lose value at all. The fact is that every company is susceptible to the risk
of catastrophic loss. I’m not just talking about a temporary dip in the stock market or
even a significant decline like we saw in 2008. The difference is that an individual stock
can go to zero and never recover. If it’s your employer’s stock, you could also be out of a
job at the same time. If you absolutely want to own company stock, limit it to no more
than 10-15% of your overall portfolio.

When Is It a Good Time to Start Learning About

Personal Finance?
Learning about personal finance isn’t something that should be put off until
you’re much older. It’s a good idea to start early and learn the basics in high
school so that you can develop healthy financial habits from an early age, and set
yourself up for success down the road.

Many teenagers do not realize how money affects their daily lives and decisions.
High school students often begin to work part-time and are able to earn a
paycheck for the first time in their lives. Having a job introduces students to the
world of financial independence, which can be applied now and later on in life.
Paychecks come with taxes, bills, and responsibilities that young people will have
to take into account when learning about personal finance.

It’s important to have the basic skills of money management under your belt
before you finish high school, because knowledge is power! Being able to
manage your finances well means that you’ll be able to navigate adult life with
confidence and know-how.

Many high school students have parents who pay for all or most of their
expenses such as food, shelter, transportation, etc., but they will soon be
considered independent adults once they graduate from college or university.
The more preparation one has prior to becoming financially independent the
better off he/she will be in creating a financially secure future.

What Are Some Common Questions High School

Students Should Know?
High school students need answers to common financial questions involving
everything from planning for college, saving money, and finding a job. As
highschoolers begin to take a more active role in managing their finances, it’s
important for them to be prepared for the questions that are bound to arise. The
following questions are common ones that every high school student should
know by the time they graduate.

 What is the difference between a credit card and a debit card?

 What are some reasons for having a savings account?
 What are some reasons for having a checking account?
 Why does it matter how much of your income you save?
 Why does it matter how much of your income you spend?
 How do you determine your net worth?
 What is a budget?
 What are some simple tips to help you save money?
 What are some simple tips to help you spend less money?
 What is the difference between needs and wants?
  What are some reasons for having an emergency fund?
 What are some reasons for having a retirement account?
 Why is it important to invest early in life?
 What are some reasons for having life insurance?
 What are some reasons for having car insurance?
 How can you get out of debt faster?
 What is the difference between good debt and bad debt?

Why Isn’t Financial Literacy Taught in High School?

You might wonder why financial literacy isn’t taught in school – isn’t it important

Financial literacy is not a core subject (like English or math), not a mandated
subject (like health or physical education), and not tested on. Teachers are also
not trained to teach those subjects.

Furthermore, it’s simply not a priority for schools or society as a whole when the
economy is struggling. It’s sad but true: when times are good, we’re all allowed to
forget about our finances until things get bad again and we start worrying about
money again. But by that point, it’s too late for most people who didn’t learn how
to manage their money well.

What Personal Finance Courses Should High Schools

Be Teaching?
Personal finance might seem like a challenging topic to tackle in high school, but
it doesn’t have to be that way. In fact, the basics of personal finance are not
difficult at all. Some schools even teach the subject and find it to be a hit.

If you’re looking for a simple course outline for your students, use these helpful
questions and relevant tips as your guide:

 What do you know about credit? How can credit be good or bad?
Credit can improve your life by offering you things that you may not initially be
able to afford—such as education, a home and car—but also can ruin your life if
misused or abused. Educate students on how credit works (for example: why do
credit reports exist?) and what can happen if they don’t use it wisely (credit score
consequences).

 What is a budget? Why is budgeting important?

Budgeting is important because it allows you to plan ahead financially so that
you have enough money for everyone of your financial needs as well as
unexpected expenses. Explain simple budgeting concepts (like delayed
gratification) and show them how making a plan will help them reach their goals.

What Are Good Resources for Learning Personal

Finance Basics?
Some good resources for learning personal finance basics include:

 High school teachers. For many high school students, the most obvious
resource would be their teachers. If they do not know the answer to a
personal finance question, they may have friends or other contacts that
can provide an answer, or if all else fails, they can help you look up the
answer on the internet or in a book.
 Parents. Most parents are willing to help their children learn new ideas and
concepts, including those related to personal finance. In fact, this is one of
the main reasons why it is so important for teenagers to talk with their
parents about money issues!
 Friends and relatives. Friends and relatives are more likely than strangers
to be able to give you trustworthy advice about what does and does not
work in real life situations. They also have more experience dealing with
money problems firsthand than someone who has never had any financial
difficulties before (more on this later).
 Financial planners. If your family has a financial planner or coach in their
network, you can ask for advice from them as well. If you don’t have those
resources available now, there may be opportunities for you to attend
classes or seminars hosted by local banks and credit unions.
 Personal finance websites. Examples
include Investopedia, NerdWallet, FINRA Personal Finance, and our site
here at Banks.org
What Are the Best Personal Finance Books for High
School Students?
Along these lines, here are the best books for high school students to start
learning about personal finance:

 Personal Finance For Dummies, Eric Tyson – This is more of an

introductory book that covers everything you need to know about personal
finance in one place. There’s no particular order or way you have to follow
—just pick up this book and start reading!
 The Richest Man in Babylon, George S. Clason – This book is a staple of
any personal finance library and should be read by all. It uses parables to
explain ways to save money, build wealth, and become a wise investor.
 Rich Dad Poor Dad, Robert Kiyosaki – What sets this book apart from
others like it is its use of story as an alternative method of teaching high
schoolers about money. As opposed to approaching the topic from a
theoretical standpoint alone, Kiyosaki offers advice in a relatable way
through narrative.
 The Millionaire Next Door, Thomas J. Stanley – If you want your high
school student to become the next millionaire next door (as the title
suggests), this is the book for them! It uses real-life stories from
Americans who have built their net worth up with hard work over many
years rather than winning big on lottery tickets or getting lucky in Vegas
casinos.
 Random Walk Down Wall Street, Burton Gordon Malkiel – A guide for the
stock market with practical advice on investing and achieving financial
freedom. Malkiel’s main point is very clear: start a savings plan early in life
and invest in a variety of companies via low-fee index funds.
 

Should I Set Up a Budget as a High School Student?

It’s never a bad idea to develop money management skills, and high school is the
perfect time to start. It’s also the perfect time for your parents to get you started
on a budget. Your parents might not be thrilled about giving you money, but if you
have your own account, it will be easier for them because they won’t have to pay
for everything.

A budget is a written plan of how much money you make and how much you
spend it on things like food and clothes. You can use a spreadsheet or an app to
keep track of it all. For example, Xcel has budgeting templates that are easy to
customize or use with any other program that uses spreadsheets (like Google
Sheets).

There are different ways to set up a budget:

 Add up all the expenses in your life (everything from rent and food to
entertainment) then subtract that amount from what you earn each month.
If there’s money left over, save it! If there’s no money left over after paying
expenses, reduce spending until there is some left over (this is called zero-
based budgeting).
 Use the 50/30/20 rule: spend 50% of your income on essentials like
housing and groceries, 30% on wants like entertainment or travel, and 20%
on savings or debt repayment (this method is called envelope budgeting).
 

How Do I Save Money as a High School Student?

As a high school student, you might be wondering how to save money. After all, it
can seem like you’ve got more on your plate than ever before. It can be hard to
prioritize saving, as well as deciding what types of things are worth saving for.
Here are some tips for saving:

First and foremost is that you should save at least a small percentage of your
income every month. Whether it’s 10% or 20%, the goal is to try and set aside at
least some of your money each payday. If you’re not sure where to begin, divide
your pay into three separate piles: discretionary spending (stuff like coffee shops
or clothing), needs (like food and rent), and wants (anything fun). Next, look
through those piles and decide which ones are important enough to put aside
money for. Then make a plan with yourself about how much you should put into
each category each month so that by the time you turn 18 officially (but even
before then) you’ll have enough in the bank to buy a few nice things with the rest
of your allowance or birthday money—maybe an iPod Touch or other electronic
device!

Once this is done and your bank account looks healthy, take another look at all
the stuff in those first two piles—especially if they’re items that cost more than
$20 now. Take another look at if they will still matter tomorrow when you’ve got
$200 in savings and no other need for spending any more money on them except
maybe buying pizza once in a while. You probably don’t want to spend too much
on these kinds of things anyway since it would only be one purchase out of
hundreds over time; plus if something does happen later where you absolutely
need it now, there’s always eBay!

Once again take another look at what kind of balance sheet this creates: if there
are still some items left that seem worthwhile but these funds aren’t enough yet
because they still require one-time purchases like filling up gas tank or paying an
electric bill.

What Is Interest?
Interest is the cost of borrowing money. If you have a savings account, this
means that your bank will pay interest to you on the balance in your account (in
other words, they are borrowing money from you). If you want to borrow money
from a bank and get a loan, they will charge you interest as it costs them to lend
out their money.

Interest rates vary depending on the type of loan (credit card loans usually carry
higher interest than student loans) and other factors like the strength of your
credit score or the reputation of your lender. The more money you borrow, the
more interest you’ll pay back over time.

What Are Credit Cards and How Do They Work?

You use a credit card to make a purchase, and then you repay the credit card
company for that purchase over time. When you apply for a credit card, the credit
card company will give you a spending limit — in other words, the most money
they will let you charge on your account. You can’t spend more than your
spending limit.

There are two types of credit cards: unsecured and secured. Unsecured cards
don’t require collateral, while secured cards do require collateral (usually cash).
Secured cards are typically easier to get than unsecured cards. The downside is
that if you don’t pay back what you owe with a secured card, you may lose
whatever money or assets were used as collateral on your account.

Credit cards have something called an APR—an annual percentage rate—which is

essentially the interest rate for the money charged on your account for the year.
If you pay off the balance every month before it’s due, there’s no APR because
there’s no interest owed to the credit card company (and there’s usually a grace
period in which this can be done). But if you don’t repay what was borrowed by at
least a minimum amount before it’s due, interest gets added onto your balance.

What Kinds of Loans Are Out There, and How Can I

Get One?
There are four main types of loans: student, home, car and personal.

To apply for a loan, you need to fill out an application, and then wait to see if
you’re approved. A good credit score can improve your chances of being
approved

How much you get in a loan, and what the interest rate is depends on how much
money they think you can pay back each month (known as your debt-to-income
ratio), your credit score and other things like that. It’s important to know whether
it makes sense to borrow money for something like a new television or an
expensive vacation—if it will take years to pay off the loan, maybe you should
save up instead.

As far as how you actually go about getting a loan from a bank or other financial
institution (and certain kinds of student loans), that’s more complicated than I
have time or space for here

 
What Are Some Cool Financial Hacks for High School
Students?
You have three main options when it comes to saving money in high school:
open a savings account, start investing or do both. As soon as you earn your first
paycheck, make sure that you deposit at least some of the funds into your
savings account, because this will help build good habits for the future. When it
comes to investing, there are numerous apps available that cater especially
toward younger users who want an easy way to get involved in trading stocks
with minimum capital. Good budgeting is essential when trying to save money in
high school and this will allow you more flexibility later on down the road if any
unexpected expenses arise.

It’s never too early to start saving, and you don’t have to be some sort of financial
wizard to get started. In fact, most of the best tips are super-easy methods that
anyone can use, even if they’re in high school.

One simple way to save money is by cutting down on gas consumption. Save gas
by combining errands into one car trip instead of taking multiple trips in one day.
Also try cutting down on how far you travel each week (and conversely, make
sure that you take less expensive public transit when possible).

Another great way for students to save money is by buying used textbooks or
renting them online—new textbooks are much more expensive! Also, keep your
eyes peeled for special deals from book retailers like Amazon and eCampus
Textbook Rental. Sometimes they’ll offer special discounts if you purchase
multiple books at once or if you buy early in the semester.

Get a part-time job after school is over; this will help relieve some stress and give
you some extra cash for spending money

Finally, there are plenty of ways for students to make a little extra cash during
their summer break. Whether it’s doing odd jobs around your neighborhood or
setting up a babysitting business with friends (or maybe even both), taking
advantage of the long summer days gives you ample opportunity to earn some
money while still having time off from school—just be sure not to spend it all in
one place!