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National Financial Literacy Month: Do You Know How to Calculate Compound Interest?

Man improving his financial literacy

Suppose you owe $1,000 on a loan and the interest rate 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?*

If you don’t know the answer to that question, you’re not alone. Nearly two-thirds of Americans can’t pass a basic financial literacy test with questions about interest rates, mortgages and economic trends, according to the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation.

This matters because, as Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

This matters because, as Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

National Financial Literacy Month

What better time to brush up on your knowledge about compound interest than April, which is National Financial Literacy Month. Financial Literacy Month highlights the importance of financial literacy and establishing and maintaining healthy financial habits. Even though this official push for financial education has been in the works for more than 15 years, much work remains for Americans.

Financial Literacy Statistics

Despite a general post-recession economic recovery in the U.S., according to a recent National Financial Capability Study (NFCS) by FINRA Investor Education Foundation, wealth and income inequality in the United States is at an extreme not seen since before World War II. Large segments of society continue to face financial difficulties, particularly minority populations and those without a college education.

In order to make sound financial decisions, people need to be equipped with at least a rudimentary knowledge of personal finances and economics. That’s where financial literacy comes in.

In the past 2 decades, an increasing number of schools, workplaces, non-profits and government agencies are providing financial education to Americans. While K-12 schools offer financial literacy, economics and personal finance coursework, there is a wide variation across states in terms of what is offered and required. Some require standards be implemented starting in primary school. Others merely suggest that high school classes in economics or personal finance be offered, while others require students to pass those courses to graduate. In 2016, the Council for Economic Education reported only 17 states require high school students to take a course in personal finance. Wisconsin is not one of them.

FINRA, which seeks to promote financial literacy, found that high school students who are required to take personal finance courses have better average credit scores and lower debt delinquency rates as young adults.

Why Financial Literacy Matters

But financial literacy isn’t just about credit scores, bank accounts and bottom lines.

“Being in financial trouble has health implications and happiness implications,” said Richard Entenmann, executive director of Asset Builders of America, a Wisconsin-based non-profit organization that promotes financial literacy. Asset Builders provides programming for youth, young adults, seniors, teachers, athletes and lower-income populations around Wisconsin, including their popular Finance & Investment Challenge Bowl, a gameshow-style trivia contest for high school students.

Entenmann believes financial literacy is important because being in control of your finances gives you more choices in life. For example, credit scores aren’t just being used for buying houses anymore, he said. Other things that might be negatively affected by having a bad credit score include job applications, interest rates for car loans, insurance premiums and apartment rentals.

In addition to content about credit and debt, Asset Builders teaches people about budgeting, investing, wealth building, entrepreneurship and more.

“In some ways, conceptually this stuff is not all that hard,” Entenmann said. “But it’s not intuitive. You’re not just going to roll out of bed one day and say ‘OK I’m going to fix my credit.’ A little education goes a long way.”

*If you want to know the answer, check out this financial literacy quiz.

8 Ways to Participate in National Financial Literacy Month

  1. Talk to your kids about saving some of their allowance for a college fund.
  2. Learn about inflation by researching what a gallon of milk cost the year you were born.
  3. Ask a co-worker “What do you know about interest rates?”
  4. Teach a teenager how to balance a checkbook.
  5. Do some online research about the difference between a Roth IRA and a Traditional IRA.
  6. Sign up for an educational class about money at your church, bank, school or other local organization.
  7. Use a Zillow estimate and an online mortgage calculator to figure out how much your dream home would cost per month.
  8. Test your own financial literacy with this quiz.