College graduates are supposed to emerge from school armed with the knowledge to take on the world, and with the prospect of a lifetime of great money-making potential ahead of them.
But according to a new study, fewer than 25% of college grads can answer money questions of the most basic type.
4 money questions to test your smarts
Sallie Mae is out with a new Majoring in Money study of hundreds of current and recently graduated college students up to age 29.
In this study, the student loan giant asked questions about some basic concepts around interest and credit card payments. And much to everyone’s surprise, only about a quarter of young people could answer all four questions correctly.
Can you ace the same test they took? Good luck! (Answers below)
1. Interest accumulation:
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
- A. More than $102
- B. Exactly $102
- C. Less than $102
- D. Not sure
2. Effects of payment behavior on credit cost:
Assuming the following individuals have the same credit card with the same interest rate and balance, which will pay the most in interest on their credit card purchases over time?
- A. Joe, who makes the minimum payment on his credit card bill every month
- B. Jane, who pays the balance on her credit card in full every month
- C. Joyce, who sometimes pays the minimum, sometimes pays less than the minimum, and missed one payment on her credit card bill
- D. All of them will pay the same amount in interest over time
- E. Not sure
3. Impact of repayment term on cost of credit:
Imagine that there are two options when it comes to paying back a loan and both come with the same interest rate. Provided you have the needed funds, which option would you select to minimize your total costs over the life of the loan (i.e., all of your payments combined until the loan is completely paid off)?
- A. Option 1 allows you to take 10 years to pay back the loan
- B. Option 2 allows you to take 20 years to pay back the loan
- C. Both options have the same out-of-pocket cost over the life of the loan
- D. Not sure
4. Interest terminology:
Which of the following best defines the term “interest capitalization”?
- A. The type of interest charged on high-balance loans
- B. The addition of unpaid interest to the principal balance of a loan
- C. Interest that is charged when you postpone payments on your loan
Those with higher financial literacy are more likely to do the things we talk a lot about here on Clark.com: planning for retirement, building an emergency fund and using credit cards responsibly.
If you want to learn more about your money, here are some resources to get you started:
- Why compound interest is a saver’s best friend
- Traditional vs online banks: This chart shows how $5,000 can grow over 10 years
- Clark’s investment guide
- How much to save each month to retire a millionaire
Ready to find out how you did on those money questions? Check your answers here:
- More than $102
- Joyce, who sometimes pays the minimum, sometimes pays less than the minimum, and missed one payment on her credit card bill
- Option 1 allows you to take 10 years to pay back the loan
- The addition of unpaid interest to the principal balance of a loan
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- How much money do I need to retire?
- 10 best investment companies for small investors
- Target date funds: The easiest way to start saving for retirement
- This is the age when Clark Howard plans to start collecting Social Security