Imagine you’re on a TV quiz show. The host turns to you and offers a list of topics, one of which is “Your Personal Finances.” Based on your knowledge, is this a category you would choose?
If you answered no, you’re not alone. Four out of five Americans admit they know more about a variety of topics other than their own finances. That’s about the same share that would choose to answer questions about subjects far less personal, such as current events, entertainment or science and technology.
These results were gathered as part of a research study, sponsored by Northwestern Mutual, to help gauge the American public’s overall financial knowledge — as measured by a financial IQ index — and its understanding of insurance products.
“For me, the results were a powerful reminder of the reason why financial advisers need to make it a point to help clients — even those in the business world — fully understand their personal finances, so they can make the informed choices that are right for them,” says Michael Byrne, a managing partner at Northwestern Mutual.
It’s also helpful for employers to help ensure their employees are educated on personal finances because it can affect their ability to retire.
Smart Business spoke with Byrne about the online survey, which was conducted by an independent research firm, of 1,664 Americans, ages 25 to 65, in 2010.
What financial concepts did Americans understand, according to the study?
The survey found that some basic financial concepts are well understood, including the best way to minimize losses in investments (88 percent answered correctly), asset allocation (79 percent) and dollar-cost averaging (57 percent).
Likely because of their self-explanatory names, high numbers of Americans also recognize what disability income insurance and long-term care insurance are designed to do.
Where did the survey respondents’ knowledge fall short?
More often than not, Americans fail to understand many key financial concepts like the average inflation rate over the past decade, which was known by about 1 in 3. Also, less than one-third knew the product that has traditionally mitigated inflation risk the best.
This lack of financial knowledge appears to be particularly acute when it comes to permanent life insurance. Only a small percentage of Americans seem to know even the basics of this type of risk protection.
What else did the survey results reveal?
Knowledge is power — and Americans recognize it. Nearly eight out of 10 consumers feel the need to learn as much as possible about their personal financial situation.
As to where they find that information and whom they trust, it was good to hear that when asked to rate the reliability of several sources of financial information, Americans rate financial advisers as the most reliable source.
A successful long-term investment strategy is a process that evolves as your needs and goals change at different points in your life. An experienced financial professional can be invaluable in helping you continually educate yourself on your personal finances — taking an objective, unemotional approach to investing and keeping your overall performance and goals in sight, even during market ups and downs.
In addition to talking to a financial adviser, be sure to check out this retirement savings calculator that can be used to show how contributions affect your ability to fund your retirement, as well as a lifespan calculator to estimate how many years you may live past retirement.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Byrne is an insurance agent of NM and Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC.
Insights Wealth Management is brought to you by Northwestern Mutual
