The Discerning Investor by Julie Jason

Test Your Financial Acumen With Five Questions

Known as the “Big Five,” five questions can predict your ability to make good financial decisions. This is the conclusion drawn by researchers who conducted a study between 2012 and 2018 of 1,500 Americans to test basic financial knowledge.

The study “represents one of the nation’s first efforts to collect and analyze longitudinal data linking financial literacy to the financial outcomes of individual Americans over a multi-year period,” said FINRA (Financial Industry Regulatory Authority) Foundation President Gerri Walsh. Longitudinal studies follow the same people over a period of time to see what changes occur.

The FINRA Investor Education Foundation (FINRA Foundation) conducted the study together with the University of Southern California’s Center for Economic and Social Research, and The George Washington University’s Global Financial Literacy Excellence Center (GFLEC).

The research brief, “The Stability and Predictive Power of Financial Literacy: Evidence From Longitudinal Data,” was released Thursday.

Researchers concluded that “financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline financial characteristics and a wide set of demographic and individual characteristics that influence financial decision making.”

The Big Five cover topics related to everyday economic and financial issues like risk diversification, how interest affects savings accounts and mortgages, and how inflation works. The questions were developed by the FINRA Foundation National Financial Capability Study (NFCS).

Researchers found that answering one additional question correctly (for example, answering two questions correctly instead of one) in 2012 “increased the likelihood that a respondent could meet a $2,000 unexpected expense in 2018 by 8%. Answering two questions correctly increased the likelihood by 16%, and three by 24%.”

The study focused on six different financial outcomes, three positive and three negative, and found that financial literacy in 2012 was “not statistically related to any of the negative financial outcomes documented in 2018, such as costly credit card behaviors or the use of alternative financial services, including auto title or payday loans, rapid refunds, pawn shops or rent-to-own shops.” The positive outcomes included being financially satisfied, planning for retirement and handling the $2,000 unexpected expense.

From my perspective as an advocate of financial literacy education, these are momentous outcomes. They underline the interplay between financial literacy and the ability to make good financial decisions.

From my perspective as a money manager who focuses on retirement portfolios, I am encouraged by Annamaria Lusardi’s comment: "We found that people with greater financial knowledge were more likely to plan for retirement and be able to cope with a $2,000 unexpected shock. Financial education and workplace financial wellness programs need to be fundamental pieces of rebuilding the financial well-being of Americans." Lusardi is the academic director of GFLEC and a professor at George Washington University.

I’d like to see more engagement with young people just starting their working careers to teach the value of saving early and the benefit of compounding over a long horizon. I’d also like to see financial basics taught at the grade school level. Everyone needs to learn how to save and invest for good reason: Someday they will need to create retirement income.

Share this link of the Big Five questions (surveymonkey.com/r/Big5FinLitQuiz) with your family and friends. Three of the five questions made up the “Big Three” survey, which I wrote about in February. Everyone should know the answers to these five questions.

On another note, I invite you to join me at a free virtual presentation, “Why a Portfolio Review is Important and How to Do It,” on Thursday, Nov. 12, at 10:00 a.m., sponsored by the Greenwich (Connecticut) Library. To register, go to tinyurl.com/yy3fu4qp or contact Yang Wang, 203-622-7924, ywang@greenwichlibrary.org. This is part of the library’s financial and investment programs.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION