Financial Literacy Quiz – Episode 619

This transcript was auto-generated and may contain errors.

[00:00] Welcome to the Prosperity Podcast. Prosperity thinkers, in this episode, we’re going to be taking a financial literacy quiz. Kim, you found this gym. So again, you see a lot of different quizzes, and we’re going to see how well our audience takes this information, and then we’re going to discuss different pieces of it. You ready? Yes. Okay, excellent. So one, it’s a FINRA quiz. Will you explain what FINRA is? Because that’s like one of those annoying little acronyms out there. Yes, I would call it the financial industry’s watchdog. So I don’t even remember what it stands for, but it’s the space that all financial people pay attention to because it looks out for bad actors, right? People that are not doing things correctly.

[00:56] And we have to remember that’s an opinion. Like, attorneys could decide that this situation is bad, but a different group of attorneys could decide that this situation is good. Nevertheless, this organization comes with credibility and some interesting questions because the financial literacy landscape right now is heavy, right? There’s all kinds of people and places and organizations focusing on it, and it always interests me. What does an organization define as financial literacy? And you can tell it from the questions that they ask. Yes, absolutely. And we’ll say sometimes they ask really bad questions. Yes, they do. Some of them are horrible. They are. And it’s like you walk away more confused.

[01:48] So I see this quiz here, and there are some that I’m like, holy cow, like awful questions. So let’s go through a few of those. Okay, so and this is the FINRA investor education. So it’s all related to that. So here it goes. It’s regarding inflation. It says, imagine that the interest rate on your savings account was 1% per year and inflation was 2% a year. After one year, how much would you be able to buy with the money in this account? And it says more than today, exactly the same, less than today, or I don’t know. Well, I think the answer is less than today. And yet, I mean, even I’m a very conceptual person, as most people know, but I do have calculators and I do know how to use them. So even with all that, I still have to kind of think through the question.

[02:43] But nevertheless, I believe that’s the answer. It’s less. It is. Yes. And the thing is with that, they’re not calculating one thing that is in the truth concepts calculator, which is a present value of money and the opportunity cost. Can you explain that just for a moment? Because that’s the one thing that so many of these people, they just like pull out the basic calculator and they’re like, look at this. And they’re so off. Can you explain opportunity cost and like the snapshot? Holy cow. So opportunity cost is an economic term that all of us learned in either econ or accounting, but was never brought down to our own personal level. And so we do not know how to integrate it into personal financial decisions.

[03:29] And here is an example. If I choose to put a hundred dollars a month into my mortgage, for example, I’ve got my regular principal and interest payment, but I’m going to add an extra hundred bucks per month of principal. Yes, I do a whole bunch of things with the mortgage and I lose the opportunity to do anything with that money. Well, let’s say that my mortgage has a five percent cost, but I have an investment that I’m very confident in that is seven percent. Well, by trying to pay down, forget taxes for a minute, by trying to pay down my five percent mortgage, I’ve lost the opportunity to invest at seven percent. Well, let’s say that I have an investment that I’m very confident about that earns nine percent.

[04:16] Well, then I’ve lost the opportunity to earn nine percent. So opportunity cost is defined by Kim, at least at a very simple level is what are you giving up when you’re making a decision to do one thing with your dollars? What are the other things that you could be doing in the way to measure that? It’s technically called opportunity cost because we have opportunity gain too. But the way to measure the opportunity cost is what is the interest rate that I gave up because I did the first thing with the money instead of the second thing with the money. Oh, I love it. That’s so good. As you’re explaining that there was one thing that I haven’t I don’t think we have defined this, but there’s almost like a new definition that we could come up with, which is like the liquidity.

[05:08] I don’t know. Yeah, which is like this. Like there’s so many people that dump that money into a mortgage and they realize, wait, the only way I’m going to get it out of here is if I get permission from someone. And so you’ve got opportunity cost. You’ve got liquidity tied up. You’ve got all of these other pieces. The only way you’re going to get it is if you know the true numbers and if you think in a specific way. OK, so here we go. Question two in this little quiz. Suppose you owe a thousand dollars on a loan and the interest rate you are charged is 20 percent 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?

[05:58] And here are the answers you get to choose less than two years, two to four years, five to nine years, ten years or more. So, again, thousand bucks, 20 percent per year. How long would it take for that to double? I’m dying to open a TC calculator. I won’t do it because it’s hard to show on a verbal podcast. And I’m sure there’s some like rule of 72 or some archaic thing that I should probably be using that I don’t know because I never that never ever resonated with me. I’m going to say ten years, but it seems kind of long. Ten years is long. You’re right. And it’s the one that’s the shocking. What’s the shocking one? Well, the short one, two years, two years. I saw that and it’s right in between where you’re saying that the two years I think is the scary one where you’re like, no way.

[06:51] And it’s the it’s not the ten. It’s the two to four. Now, here it is with a podcast that we’re doing talking about math in our heads, not using a calculator and even using a calculator. You’re not getting the real numbers. It’s two to four, which is insane. And how is it? You know, you’re having conversations. You’re teaching people over video, teaching people over audio. How do you help educate so that we get the young learners? Because you teach a lot of young families. So sometimes kids get involved to adults. How is it that you’re able to balance those two, Kim? Well, it is imperative when you are dealing with personal finance to use what’s called a financial calculator. And they’re very simple to use.

[07:42] They can be very simple, but unfortunately, the default financial calculator is this thing called HP 12 C, which nobody in their right mind is going to easily learn how to use. Now, I did learn how to use it. I was trained on it right out of college. I’m super thankful, but I don’t know that I could use one today. However, we have truth concepts. And so with a discussion like this, you cannot use a simple handheld calculator. You must have a calculator that has present value, future value, time, interest rate. And those are the elements of financial calculations and hence financial calculators. So thankfully, Todd, with his truth concepts app, which you can also get financial calculator apps on both Android and iPhone.

[08:35] So whether you use the truth concepts app or you get another financial calculator app, please do that. Do that for yourself, for your children. If you are a young adult, please learn how to do things because you can make calculations based on, for example, that fact pattern or a very important one is payments. And that’s the fifth element. So we have present value, future value, time, interest rate and payment. And so many people make financial mistakes because they don’t understand how payments are calculated, particularly around one’s first major buying experience, which is usually a car. And I am just disgusted right now with a couple advertisements and I do not watch TV. But unfortunately, to watch a movie today, you get ads there.

[09:33] There is a car buying company right now that talks about you get to define your payment, but they don’t tell you the rest of the terms of the loan. No interest rates, no time frames. It’s so sad. It is absolutely sad. And I think the one thing that I’m seeing in this quiz, which is from FINRA. So meaning the quiz that they’re asking is that they’re not explaining all of the pieces to the puzzle. And that is a disservice to not only the quote unquote financial experts, but it’s a disservice to the public as they aren’t intaking the correct information. And so they can’t get the correct answers. Now they can get like napkin math kind of stuff, but not the real deal. So for you as an expert in, we’re not going to call it, and it’s so broad to just call it like family finance or something like that.

[10:36] You’re an expert at educating people how to think. So how is it that you help people to think beyond the basic math, beyond the basic finance? Excellent question. And it is why you and I do this podcast, because so many people learn by listening. It is why every single one of my books has an Audible’s version, because people learn by listening. And of course, we have the YouTube channel and all of the written material for those that learn best by reading. And back to the books, every single personal financial element that makes an impact on people is covered in one of the 11 books. The super simple thinking orientation, which is so important, is in our Prosperity Pets book, as well as our newest Busting Scarcity Mindset book.

[11:35] And then there’s a book on mortgages, there’s a book on retirement plans, there’s a book on life insurance, et cetera, et cetera, et cetera, 401Ks, et cetera. So this arena of financial literacy, which really needs to upgrade to financial competency, is so important. And you know what, Spencer, I’m putting it public today. We have a couple of quizzes on our websites that drive behavior, but we’re going to come up with our own financial competency quiz that actually talks about things that matter that people really should focus on knowing. And I will probably say it’s not just going to be five or six questions, right? There’s maybe a 10 to 20 question space of things that people will want to know, and they’ll want their children to know, and their children’s children.

[12:30] And how nice it will be because it’s not coming from a governmental organization or a bank or a brokerage house that clearly has an ulterior motive in putting out the questions that they’re putting out. Yeah, I love it. This line in the sand of saying we’re focused on the truth. The truth and the information gold. Kim, awesome episode. For everyone that’s wanting to see the questions here that Finner is asking, we’ll put a link in there. But the real important thing is understanding how to think and ask the right questions with the right truth and information. So we can put a link to the special email address as well, which is hello at ProsperityThinkers.com. Thank you for listening to the Prosperity Podcast.

[13:30] To take control of your money and have it work for you, visit ProsperityThinkers.com.