Are you financially illiterate?

Do you know the difference between a defined-contribution plan and a defined-benefit plan? Can you explain the time value of money? Do you know why you should have a living will? What common type of investment has the best track record for the past 60 years? Which kind of insurance are you most likely to need before age 65-life or disability? Do you know what the alternative minimum tax is and whether you are likely to pay it?

If you can not answer these basic questions about personal finance, you may be among the millions of Americans who are financially illiterate. "Financial illiteracy is an insidious disease most Americans don't even know exists," indicates Terry J. Siman, president of the Institute of Certified Financial Planners. "It cuts across all strata of society. Millions of Americans in almost every income category live on the brink of financial disaster."

Financial illiteracy is the inability of individuals to manage their personal finances. In a survey, financial planners cited three principal areas of concern they saw among their clients: poor knowledge of investment fundamentals, planning indecision and fear, and poor spending and saving habits. Because the financial world is becoming increasingly complex, individuals who are unable to manage their own personal affairs are more vulnerable to impoverishment, spartan retirement years, broken marriages, high debt or personal bankruptcy, and investment scams.

Financial experts cite several causes for financial illiteracy, including little or no education in the schools about personal finance; distrust of personal finance experts; government regulations and tax laws that discourage savings and investing and create confusion; and the failure of people to realize that they are living longer and that Social Security and their employers no longer can provide for all of their retirement needs.

Siman suggests six steps to becoming...