First Person: Improving My Financial Literacy

Yahoo Contributor Network

I never took a personal finance class in high school or college, yet I was able to turn my financial situation around on my own. I paid off more than $20,000 in student loan debt as well as $30,000 in credit card debt. I recently read an article by Bloomberg about how the majority of people surveyed flopped a personal finance quiz. Only 14 percent of the 25,000 adults surveyed correctly answered the five personal finance questions. Although I knew all the correct answers, I know I would have failed 10 years ago. In the past 10 years, I have read personal finance books and talked to financial experts about topics I didn't understand. According to the article, people who are financially literate also tend to be financially capable. In the past decade, I have started an emergency fund, saved $100,000 for retirement and paid off all my credit-card debt.

Learning about interest rates

As soon as I learned about interest rates, I knew I had to get rid of my high-interest rate credit cards first. I had heard about Dave Ramsey's debt snowball plan, which keeps a lot of people motivated. The idea is to pay the smallest balance first so a person feels a sense of satisfaction before moving onto the next largest balance. I decided to just focus on the interest rate.

Investing in stocks and bonds

One of the questions on the personal finance quiz had to do with what happens to bond prices if interest rates rise. The answer is that bond prices will fall, but only 28 percent of those surveyed knew the correct answer. Instead of worrying whether stocks are going up or down, I just make sure to have a balanced portfolio. Is I get closer to retirement, I put more money into bonds and less money into stocks. By using target-date funds, I don't even have to think about anything. An important financial lesson I've learned over the years is that I can't outsmart the financial worlds by timing the markets.

Getting a safer return

I was somewhat shocked to see the results of another quiz question. When asked if buying a single company's stock usually provides a safer return than a stock mutual fund, 48 percent incorrectly guessed "false." Only 9 percent knew it was true. When I received company stock in my 401(k) plan, I made every effort to sell it whenever possible and divert the money into mutual funds. I found out during the Great Recession that stock in individual companies can become worthless when a company declares bankruptcy. However, all of my mutual funds recovered because they were made up of a variety of different stocks.

I think that people who fail the personal finance quiz have nothing to be embarrassed about. I used to pay the minimum balance on my credit card and take cash advances even though it cost a fortune. I still have a long way to go before I can say I have enough money to be comfortable in retirement. Although some people prefer formal courses, I liked learning about personal finances on my own. I enjoy trading stocks using a discount brokerage firm's online trading site. If I don't do well financially, I know I can only blame myself for not applying what I've learned.

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More from this contributor:

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