How Would You Do on This Simple Financial Literacy Quiz?

The Financial Industry Regulatory Authority, or FINRA, offers a seven-question financial literacy quiz — and the average American only got 3.3 answers right. That’s a bit less than 50%. If a passing grade was 70%, one would need to answer 4.9 questions correctly, or roughly five of the seven. Yikes!

Here’s a look at a few of the questions. See whether you know the answers.

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Imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?

The answer is that your money would buy less. That’s because while the value of your account will grow by that 1% over a year, its purchasing power will shrink by 2%, because of inflation. It’s imperative to understand this concept because over long periods — like, one hopes, your retirement — inflation can be devastating. Indeed, the purchasing power of the dollars you retire with will likely be cut in half (or more!) over 25 years.

Thus, it’s smart to plan for inflation. You might aim for a bigger nest egg to retire with, and you might try to delay claiming Social Security for as long as possible, because your bigger benefits will receive bigger cost-of-living adjustments. Including in your portfolio stocks that pay increasing dividends can also be effective, as can Treasury Inflation-Protected Securities (TIPS).

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?

The answer here is about 3.8 years. This is an important concept to understand, because it shows how dangerous it is to ignore your debts. It’s easy for many of us to rack up credit card bills of several thousand dollars, and if we don’t pay those bills off in full, we can end up owing more… and more. Paying the minimum due is rarely a good idea.

The average credit card interest rate in America was recently around 21%. That’s a big number. If you owe, say, $30,000, and don’t pay it off, you’re looking at forking over $6,300 in interest alone — and even more if your balance grows over time.

True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

The answer is false. Sure, a single stock could skyrocket. But it could also crash. A stock mutual fund will be spreading your money across multiple stocks — potentially hundreds or thousands of them — and that diversification is beneficial. If one or more stocks in the fund fall, the rest can offset the damage. We especially like index funds, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO).

It’s well worth spending some time reading up on personal finance and investing topics. The more you know, the more money you might make and the less money you might lose.

Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.