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Hope to retire someday? See if you can answer these six simple questions

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Then try taking the following financial literacy test containing just three basic questions about interest rates, inflation and diversification. Despite being quite elementary, only 34% of adults aged 38 to 64 are able to answer all three correctly. Among millennials this percentage is just 16%.

Those results are sobering enough. But what’s even more striking is the disconnect between these low scores and investors’ self-perception. More than 71% of older adults rate themselves as having “high financial knowledge.” The comparable percentage among millennials is only slightly lower at 62%.

These results are reported in a just-published study, “Millennials and money: Financial preparedness and money management practices before COVID-19.” Its authors, all affiliated with the Global Financial Literacy Excellence Center at George Washington University, are Annamaria Lusardi (the Center’s founder and director), Andrea Hasler, and Andrea Bolognesi.

Here are these three basic questions for which the researchers report “shockingly low” levels of financial literacy. They were devised a decade ago by Lusardi and Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, and have been so widely used since then that many researchers now refer to them as the “Big Three” of financial literacy. (The correct answers, should you have any doubt, are listed at the end of this column.)

• Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? [More than $102; Exactly $102; Less than $102; Don’t know; Prefer not to say]

• Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? [More than today; Exactly the same; Less than today; Don’t know; Prefer not to say]

• Buying a single company’s stock usually provides a safer return than a stock mutual fund. [True; False; Don’t know; Prefer not to say]

Since you are regular readers of MarketWatch and subscribers to Retirement Weekly, I have no doubt that you correctly answered all three questions. But can you answer the following three bonus questions as well? Only 7% of older adults could answer all six questions correctly, and just 3% of millennials. These three additional questions are:

• If interest rates rise, what will typically happen to bond prices? [They will rise; They will fall; They will stay the same; There is no relationship between bond prices and the interest rate; Don’t know; Prefer not to say]

• Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? [Less than 2 years; At least 2 years but less than 5 years; At least 5 years but less than 10 years; At least 10 years; Don’t know; Prefer not to say]

• A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. [True; False; Don’t know; Prefer not to say]

There are several reasons to focus on how few are able to answer these questions correctly. The most important is that there is a direct causal connection between illiteracy and reduced retirement financial security. This has been shown empirically, such as in this study by Lusardi and Mitchell. The authors of this recent report give a few examples, including the widespread use among millennials of “alternative financial services.”

“Alternative financial services are forms of short-term borrowing that fall outside of the traditional banking sector. It includes borrowing using auto title loans, payday loans, pawnshops, and rent-to-own stores. These are particularly expensive forms of borrowing, with APRs as high as 400% or more and, as such, have been defined as high-cost borrowing methods. In 2018, a staggering 43% of millennials reported using at least one form of alternative financial service in the [prior] five years.”

This surprising reliance on high-cost-borrowing methods becomes less surprising when we focus on millennials’ answer to the second of the bonus questions above—the one that asks about compound interest. Just 32% of them could answer it correctly. The researchers found that higher levels of financial literacy were correlated with less reliance on alternative financial services.

Another reason to focus on financial literacy is to warn you about the dangers of overconfidence. Chances are good that you rate your financial literacy to be higher than it really is. And overconfidence leads to pursue particularly risky behaviors.

The investment moral I draw from this new report is the importance of using the services of a retirement financial expert. Having someone to bounce your ideas off of is an excellent way of making sure you haven’t built your retirement financial security on a shaky foundation. Having this reality check is important for all of us, even if we are in that small minority of investors who can correctly answer all six financial literacy questions.

Most of all, be on guard against overconfidence. Humility is a virtue.

Correct answers to the 6 financial literacy questions

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? More than $102

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? Less than today

3. Buying a single company’s stock usually provides a safer return than a stock mutual fund. False

4. If interest rates rise, what will typically happen to bond prices? They will fall

5. Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? At least 2 years but less than 5 years

6. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. True

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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My friends raised $15,000 on GoFundMe while I was comatose after an accident. But I inherited $1 million, and my insurance covered the costs

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Dear Quentin,

Last month, I was in a terrible accident. Most of the expenses are covered by insurance and a couple months before that, I received almost $1 million from a relative. I had not told anyone about my good fortune nor made any purchases (yet!) that would indicate a change of status. While I was in the ICU and comatose, a friend started a GoFundMe for me.

By the time I found out about it, it was up to $15,000 and over 300 friends, even strangers, had contributed. Several friends gave hundreds of dollars. I asked several more knowledgeable friends about somehow canceling it, and they discouraged that action. Too late! Now not only am I racked with guilt, but I am afraid to make improvements on my house.

I make donations to every GoFundMe that I come across, and I made donations to my favorite causes, but meanwhile there is THAT money. I did one “status update” on Facebook, thanking everyone and mentioning my ego “accepting” help. I am afraid to even look at the total, and have not gone to the site. To make it worse, before this, I was lower-middle-class, and so are many of the friends who gave money.

I am sick at the thought of their sacrifice. I will buy them lunch and drinks when I am on my feet, but what else can I do? I can’t even enjoy the money I received before the accident for fear of upsetting someone.

Ask Before Funding Me

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

Dear Funding,

You are still recovering from your accident, and no doubt traumatized by that ordeal. The last thing you need is this hanging over your head. It may have become a proxy for all of the emotional turmoil you endured during and after your accident.

That said, I suggest you rip off the Band-Aid and take action. Tell your friends that you appreciate what they did for you, but your insurance covered most of the costs, and you have an inheritance and more money than you need to get through this.

GoFundMe can also return the money to your friends. You can post another status update to say the gesture meant more than any monetary value, but the insurance has come through, and you have been very fortunate. GoFundMe makes it easy to refund donors.

And, yes, I take your point. Setting up a GoFundMe without the knowledge or permission of a friend or neighbor or coworker is a risky prospect, and should be avoided in most, if not all, instances. In this case, you were in the ICU and sedated, so they can be forgiven for that.

Godspeed with the rest of your recovery.

The Moneyist: My friend set up a GoFundMe to pay for her sick pet, instead of getting a refund on our vacation. I canceled the trip. Who’s right?

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.





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My friend of 30 years owes me $20,000 after living in my apartment rent-free. She texted on my birthday to say she misses our friendship

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Dear Quentin,

One of my oldest friends of 30 years rented an apartment from me for 8 years. She stopped paying rent during the last year when she started her own business. She kept saying she would pay me back, but by the time she moved out 3 years ago, she owed me more $20,000 in back rent and stopped taking my calls when I tried to collect it.

Out of the blue she texted me on my birthday last week, and said she missed me, and would like to be friends again. However, her texts mentioned nothing about paying me back. I have already made peace with the lost money, and lost friendship, but I’ll bring up the back rent if we do speak again, which will probably be the end of that.

So what should I do? What should I say?

Bad Blood

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

Dear Bad Blood,

“…and I miss my $20,000.”

If your friendship is that important to your friend, she should have led with her amends. The price of that is $20,000. The most interesting, if not surprising, thing about her text message is that it focused on how she feels, and her needs. It does not address the harm she has done to your friendship — possibly irrevocably.

U.S. states have a dollar limit on small-claims court cases. Unless you live in Delaware, Texas or Tennessee, it seems that your dispute with this friend exceeds that amount in other states. But that also speaks to the amount of money she pocketed. It’s a lot of money, and it should not be brushed off so lightly. Think again about taking legal action.

Enough texting. Meet her face to face. Tell her that you had to pay the mortgage while she lived there rent-free, and remind her that she is not the only person with financial responsibilities, and that she abdicated her duty to you as a tenant and as a friend to pursue her needs. She used your friendship as leverage to scam free rent.

She cannot repair the friendship until she has repaid the debt.

The Moneyist: My boyfriend talked me into depositing my paychecks into his bank account, and paying for a car in his name. What can I do?

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.





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Americans are opening their wallets, and ready to splurge (mostly on one thing)

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Have vaccine. Will travel.’ Schwab’s 2021 Modern Wealth Survey concluded that Americans are dreaming most about traveling (40%) and socializing (30%) and taking a vacation (24%).


PATRICK T. FALLON/AFP via Getty Images

American spending habits are about to get real.

As vaccination rates increase in the U.S., so will people’s willingness to open their wallets. Nearly half (47%) of people polled by Charles Schwab
SCHW,
-2.14%

 are keen to live large, and get back to their spending levels before the COVID-19 pandemic. What’s more, almost a quarter (24%) say they want to splurge and make up for lost time, the survey, released Wednesday, found.

The No. 1 on people’s spending lists? Getting the hell out of dodge, and hanging out with family and friends. The Schwab 2021 Modern Wealth Survey concluded that Americans are dreaming most about traveling (40%), socializing (30%), taking an extended vacation (24%), dining out at upmarket restaurant (21%) or throwing a party for family and friends (15%).

“Many are starting to see the light at the end of the tunnel,” said Jonathan Craig, head of Investor Services, Charles Schwab. Indeed, a majority of Americans (54%) reported having gone out to eat over the past week, according to the latest Axios-Ipsos Coronavirus Index, marking the first time in more than a year that more than half of respondents have reported doing so.


Exhaling after a year of being at home, people just want to get away.

Like the Charles Schwab survey, the index also said people just want to get away. Nearly six in 10 said they’ve visited relatives or friends over the past week, another record high for the survey. Majorities of both vaccinated and unvaccinated Americans are engaging in these activities, according to the poll, which surveyed 1,078 U.S. adults between May 7 and May 10.

After more than a year of quarantine and illness, people are ready to exhale. “We’re also seeing a healthy balance — even as many people are eager to get out to spend, they also want to nurture newfound, healthy savings and investing habits developed over the last year, and it seems that will be an ongoing marker of this next chapter,” he said.

There has been a substantial decline in credit-card balances in the first quarter of 2021. “However, surging retail sales volumes suggest that a combination of stimulus checks, increased consumer confidence, and pent-up demand are both supporting consumption and also helping borrowers reduce revolving debt balances,” said Andrew Haughwout, senior vice president at the New York Fed.

But they also face rising student-loan, auto-loan and mortgage debt, which could put a dent in people’s willingness or ability to finally see some sights beyond their zip code. Student debt rose by $29 billion to $1.58 trillion in the first quarter. The Dow Jones Industrial Average
DJIA,
-1.99%
,
the S&P 500
SPX,
-2.14%

 and the Nasdaq
COMP,
-2.67%

 were all lower Wednesday.


People face significant headwinds as they finally break out of isolation.

Indeed, millions of people face significant headwinds as they finally break out of isolation, and start feeling more confident about the economy. The economic environment during the coronavirus pandemic strained their finances (31%), while 26% faced a salary cut or reduced hours, and 20% said they were laid off or furloughed, the Charles Schwab survey said.

Many Americans will likely be hit by higher prices if/when their spending gains momentum. Consumer prices rose sharply in April, with the rate of inflation hitting 4.2%, up from 2.6% in the prior month — the highest level in nearly 13 years, signaling greater stress on the economy as businesses grapple with supply shortages. Exhibit A: used-car prices.

One wrench in Americans’ desire to travel by plane or car: Retail gas prices just topped $3 a gallon for the first time in more than six years, according to GasBuddy. The national average price for regular unleaded gas was at $3.02 a gallon. Gas prices have been ticking up after the Colonial Pipeline ransomware attack, although that has affected some parts of the country more than others.

What’s more, the economic recovery reveals two very different Americas. The latest jobs figures showed a stark divide among workers, both in their ability to get jobs and hang onto them during the pandemic. While critics have said Americans are staying home because of enhanced unemployment benefits, the official U.S. unemployment rate rose again in April to 6.1% from 6% the previous month.

Still, there are signs of normality, or a new normal, returning. On Wednesday, Broadway star Patti LuPone said Steven Sondheim’s “Company” was 10 days from opening on Broadway last year when the show was suspended. It will begin previews on Dec. 20. In a video on Twitter
TWTR,
-4.12%
,
she said, “Welcome back to Broadway, and when we’re together again it will be one hell of a show.”

The Moneyist: Is it ethical for cruise lines, venues, schools or Broadway to restrict entry to people not vaccinated against COVID-19?



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