Happy Financial Literacy Month!

It’s that time of year where economists around the country try—and inevitably fail—to get more people financially literate. Since it’s a special occasion, I thought I’d surprise my readers with a pop quiz! All groans aside, it’s only three questions, and they’re really easy (right?). Let’s see how you do.

Question 1: You have $100 in savings with a two percent interest rate. After five years, do you have:

A.)More than $100

B.)Exactly $100

C.)Less than $100

Question 2: Imagine that the interest rate on your savings account was one percent per year and inflation was two percent per year. After one year, would you be able to buy more than, exactly the same as or less than today with the money in this account?

A.)More than today

B.)Exactly the same as today

C.)Less than today

Question 3: Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

A.)True

B.)False

C.)I don’t know

I’ll post the answers at the end so you can see how you did. While these questions may seem like common sense to most people, the reality is that, for most older Americans, they aren’t. Two economists surveyed people across the country who are 50 and older with these same three questions. Less than half answered the first two questions correctly. Less than a third answered all three correctly. While extensive research hasn’t been done on younger generations, I fear our grades wouldn’t be much better.

So with it being Financial Literacy Month, I must impart a few tips to get you started on your path to financial enlightenment. These are three things you can do this month to get you started. They’re so simple, yet so many people don’t do them.

First, just make a budget! In the same survey I mentioned earlier, 61 percent of Americans admitted to not having a budget. That’s 61 percent of the country that spends money each month with no clue as to where their dollars go. Budgets can be complex or simple. For most college students, the basic expenses are food, gas and fun. That’s three basic categories to budget for, and I pick those three specifically because they are the most variable expenses (meaning they can change month to month) we as college students have. To budget, simply pick a dollar amount for each category and do everything you can to either “meet it or beat it.” Beating it means you spent less than your budget was, which is great! With a food budget of $200, if you spend your month eating PB&J; sandwiches and tuna and only spend $75 on food, then you’re $125 under budget. That $125 can go straight to savings! This is the basic idea of how a budget works.

Second, build a rainy-day fund. Here’s what I think: there’s a 99.99 percent chance something bad will happen to you that requires money to fix. There’s a law, Murphy’s Law, that states that anything that can go wrong will go wrong. So it is in your best interest to have some money saved away specifically for these financial hiccups you will encounter. For college students, $500 would be more than enough to cover most things that come up. As you grow older, you can bump up your emergency fund to $1,000 or $2,000. Things will come up, and it is always much easier to simply tap into your rainy day fund than struggle for months to come up with money.

Third, find a way to track your spending. This ties in with the first point, but I can’t stress it enough. Whether you use an iPhone app, an Excel spreadsheet, Mint.com or another web-based app such as PowerWallet (my personal favorite). By doing this, you can see exactly how much you have to budget in the first place, how much of your money is going to specific categories, and you can track your progress with simple line graphs. If you do not know where your money is going each month, there’s no way to save it.

 

**Answers: A,C,B