Financial literacy means having a basic knowledge and understanding of financial matters to manage your resources effectively for a lifetime of economic well-being. What percentage of the U.S. do you think is financially literate? The answer may surprise you.
According to research by TIAA, only 16 percent of Americans have a high level of financial literacy. Economic illiteracy is rampant throughout the country. And, the adverse effects of this financial illiteracy are more relevant to your business than you likely realize.
A 2016 article from The Atlantic details the many ways financial illiteracy can negatively impact your staff. According to the article, individuals with lower levels of debt literacy are more likely to do things that result in higher fees and costs. In fact, up to one-third of the charges paid on credit cards are a result of a lack of knowledge.
Similarly, a new survey by The Knowledge Academy found many Americans can’t define simple financial terms. In this article, we’ll detail the top 11 financial terms that Americans are least confident about the meaning of, then detail why financial education matters.
What Your Employees Don’t Know…
Here are the top eleven financial terms Americans struggle with understanding, in descending order. All percentages equate to the number of respondents who claimed they weren’t confident in the meaning of the word, according to The Knowledge Academy’s survey.
11. Amortization – 36%
Amortization is the process of paying off debt with a fixed repayment schedule in regular installments, over time. People typically use amortization for loans such as your mortgage or a car loan. Applying amortization to a loan means, each payment includes the interest amount plus a chunk of the loan’s principal total.
So, through amortization, you pay proportionally less in interest each month, until the entire loan is paid off. But amortization also refers to the spreading of the costs of an intangible asset over a specific period of time. Amortization for intangible assets occurs over the asset’s useful life.
10. Liquidity – 37%
Liquidity is the degree to which an asset or security can be bought or sold. Because cash can be converted into other assets the most easily, it’s used as the standard for liquidity. Treasury bills, notes, stocks, and bonds are all other examples of highly liquid assets. Assets that have low liquidity include real estate, art, and collectibles.
9. Mutual Fund – 39%
A mutual fund is an investment vehicle that allows you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities in an account called a portfolio. Professional money managers typically operate mutual funds. These managers pick what investments make up the fund.
The main benefit of a mutual fund is they grant investors access to assets they otherwise wouldn’t have the resources to invest in. It’s important to note that mutual fund investors don’t own the securities in which they invest; instead, they only own shares in the fund itself.
8. Roth IRA – 39%
An IRA, or individual retirement account, is an investment vehicle for individuals looking to save for retirement. Individual retirement accounts allow investors to save with tax-free growth or on a tax-deferred basis, dependent on the type of IRA you use.
A Roth IRA differs from a traditional IRA in the way it’s taxed, and how you make contributions. Under a Roth IRA, you make contributions with post-tax money. Then, your money grows tax-free and qualified distributions are tax-free.
You contribute to a traditional IRA, on the other hand, with pre-taxed dollars. But, money in a traditional IRA grows on a tax-deferred basis rather than tax-free as with a Roth IRA.
7. Capital Gains and Losses – 40%
A capital gain is any profit gained when you sell a capital asset, which includes assets such as stocks, bonds, mutual fund shares, or property. A capital loss, on the other hand, is a loss on the sale of such a capital asset.
There are two types of capital gains and losses. Both a loss and gain can be considered either short or long-term. Short-term gains come from the sale of property owned one year or less. Whereas long-term gains come from the sale of property held more than one year. These same rules apply for capital loses.
6. Annuity – 41%
An annuity is an investment vehicle that pays out a fixed stream of payments to an individual. Financial institutions create and sell annuities, primarily for retirees. Individuals invest in an annuity, which the financial institution consequently invests for the annuity owner.
Then at a specific point in the future, upon annuitization, the annuity issues payments. These payments can be made monthly, quarterly, annually, or in a lump sum.
There are two main types of annuities, a fixed annuity and a variable annuity. How much you receive from each payment depends on which annuity type you select. A fixed annuity provides regular, periodic payments to the annuitant.
Variable annuities allow the owner to, potentially, receive greater future cash flows. If the investments of the annuity fund do well the account holder receives more substantial payments. Consequently, they give the owner smaller payments if the annuity’s investments do poorly.
5. Endowment – 42%
An endowment is a donation of money or property to a non-profit organization such as a hospital, university, church, or scholarship fund. This organization then uses the donation for a specific purpose.
Endowment funds are typically organized as a trust, a private foundation, or a public charity. They usually come with specific rules and obligations. These rules help establish the long-term growth of the financial asset.
4. Stock Options – 43%
Stock options give the holder the right, but not the obligation, to purchase or sell a stock at an agreed-upon price within a specific period of time. A stock option usually represents 100 shares of an underlying stock.
Stock options typically give holders one of two types of options. A call is when the holder has the right to purchase the stock at a specified price before the option expires. A put option means the holder has the right to sell the stock at the stated price before expiration.
3. Asset Allocation – 44%
Asset allocation refers to the investment strategy of mitigating risk by dividing your investments among different asset classes. There is no formula for the right asset allocation. Rather, every person’s asset allocation will differ, according to the individual’s financial goals, risk tolerance, and investment horizon.
The goal of asset allocation is to control risk through diversification of your investment portfolio. Through asset allocation, you can attempt to maximize returns while minimizing risk.
2. Index Fund – 48%
An index fund is a type of a mutual fund. The securities in the portfolio of an index fund are set up to match the components of a whole market index such as the S&P 500 or Russell 2000. So, when prices of commodities in the index decrease, the value of your index fund also decreases and vice versa.
1. Bitcoin – 52%
Bitcoin is a form of digital currency that exists on a blockchain. A blockchain is a public ledger on the Internet. These public ledgers use cryptography to secure their transactions, hence the name cryptocurrency. It’s also important to know that no one central authority that updates this ledger.
Instead, computers run the respective cryptocurrency’s software in a peer-to-peer network. As a result, the currency is managed by a consensus of the computers in the network. “Mining,” is the process of finding this consensus on the shared public ledger.
The first cryptocurrency created was Bitcoin. But since its conception, hundreds of other cryptocurrencies have been built. Now over 150,000 merchants worldwide accept bitcoin as payment for goods and services. In total, the cryptocurrency industry has grown to around $38 billion in market capitalization.
Read more about purchasing Bitcoin as a part of your retirement portfolio.
These 11 terms are just a handful of the financial vocabulary your employees need to know. Learning necessary financial words such as the above terms, helps employees improve their financial literacy. The more financially literate your employees are, the less their work suffers from the genuine, adverse effects of financial stress.