Many Americans are sorely lacking in knowledge when it comes to basic financial terms, according to new research.
A recent study of 1,000 Americans over the age of 30 found less than half of participants could confidently explain what a 401(k) is.
The research examining people’s grasp of financial terminology found many struggled to define common terms such as understanding what interest is (48 percent), the concept of bankruptcy (48 percent) or how inflation works (34 percent).
It's not just an American thing. Many Canadians don't know about finance as well.
Here, in Canada, if you've never studied finance and you're looking to save money for the future, then these are the basic terms to learn and understand:
- Chequing account
- Savings account
- Guaranteed Investment Certificate (GIC)
- Registered Retirement Savings Plan (RRSP)
- Tax Free Savings Account (TFSA)
- Mutual Fund
- Exchange-traded Fund (ETF)
- Management Expense Ratio (MER)
That's it. I've met more than one married adult with children who is spooked by the stock markets. So, these people keep significant amounts of cash locked in GICs but since they don't really understand how TFSAs work, their meager interest is taxed.
For example, a woman goes to a bank and locks $20,000 for a 5-year GIC. The interest rate is 3%. Five years later, she gets $3,000. This income is taxed at her marginal rate which is, let's say, 25%. So, the government gets $750.
Had she simply spent thirty minutes to open a TFSA and then locked her GIC within it, she would have kept that $750. Note, there is zero additional risk in this scenario.
Canadians who don't bother learning those eight things lose out on hundreds of thousands of dollars in their lifetime. Ignorance is very expensive.