Financial success is 10% knowledge and 90% behaviours! So, with only a basic understanding of money, banking and debt, you should be well equipped to build a bright future as long as you have the right behaviours. Today we learn the 10% of the knowledge we need to Financial Literacy: the knowledge you need to know.

Knowledge

Remember that knowledge is only 10% of the puzzle. To achieve financial success please forget about Wall Street’s latest product and focus on developing your financial literacy. The lack of our financial literacy was discussed in Live Debt Free As Much and As Long As Possible which profiled a study done by S&P Global. This study starts off with  a short quiz  and touches on concepts as follows:

Developing financial literacy:

1. Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?

  1. One
  2. Multiple
  3. Don’t know

It is generally safer to put your money into multiple businesses or investments. Having multiple investments reduces the risk of you losing all your money. If diversified properly your money will be spread out among many industries and business. While one industry or business is not performing well, the others most likely would be.

2. Suppose over the next 10 years the prices of the things you buy double. If your income ALSO doubles, will you be able to buy less than you can buy today, the same as you can buy today, OR more than you can buy today?

  1. Less
  2. The same
  3. More
  4. Don’t know

Price of all goods you can buy is $100 while your income is $100, you can buy everything. In 10 years the price of all goods for $200 (same quantity) while your income is $200, you can buy everything but the exact same amount as 10 years ago as the quantity has not changed.

3. Suppose you need to borrow 100 dollars. Which is the lower amount to pay back: 105 dollars or 100 dollars plus three percent?

  1. 105
  2. 100 + 3%
  3. Don’t know

3% of $100 is $3, therefore the second pay back amount is $103 which is lower than $105.

4. Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add MORE money to your account the second year than it did the first year, or will it add the SAME amount of money both years?

  1. More
  2. The same
  3. Don’t know

The principle is called compound interest, which lets follow the example.

Year Interest Balance
0 Initial deposit of $100
1 $15 (15% of $100) $115
2 $17.25 (15% of $115) $132.25

We received more money in the second year the answer is.

5. Suppose you had 100 dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account: more than 150 dollars, exactly 150 dollars, or less than 150 dollars?

  1. More than 150
  2. Exactly 150
  3. Less than 150
  4. Don’t know
Year Interest Balance
0 Initial deposit of $100
1 $10 (10% of $100) $110
2 $11 (10% of $110) $121
3 $12.1 (10% of $121) $133.1
4 $13.31 (10% of $133.1) $146.41
5 $14.64 (10% of $146.41) $161.05

The power of compound interest grows the $100, invested for 5 years at 10%, into over $150.

A simple interest example, $100 invested for three years at 10% interest:

Year Interest Balance
0 Initial deposit of $100
1 $10 (10% of $100) $110
2 $10 (10% of $100) $120
3 $10 (10% of $100) $130

Under the simple interest example the interest rate of 10% is only multiplied the original invested amount of $100.

Spend less than you make

In order to reach your financial goals you must be able to spend less than you make. Through utilizing your budget and completing your monthly review you can be on the road to spending less than you make to achieve great financial success.

Wrap up

You are now equipped with the necessary knowledge of financial literacy to achieve your financial success. Well done! Next we will be exploring the behavioural side to achieving your financial success.