Can You Ace This 3-Question Financial Literacy Quiz? – Only 1/3 of Americans Surveyed Did

There is a lot of policy talk about increasing financial literacy in order to improve people’s decision-making. The Conversable Economist blog discusses a paper that digs into this subject, called “The Economic Importance of Financial Literacy” (found via Counterparties). In order to measure current levels of financial knowledge, a very short survey was conducted on a nationally representative group of Americans age 50+ to. Only 34% of respondents answered all three questions below correctly:

Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow:

View Results

Loading ... Loading ...

Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy:

View Results

Loading ... Loading ...

Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

View Results

Loading ... Loading ...

The first question measures numeracy or the capacity to do a simple calculation related to compounding of interest rates. The second question measures understanding of inflation, again in the context of a simple financial decision. The third question is a joint test of knowledge about ‘stocks’ and ‘stock mutual funds’ and of risk diversification, since the answer to this question depends on knowing what a stock is and that a mutual fund is composed of many stocks.

If you’ve been following this subject, sadly this isn’t be a surprise. Many similar tests confirm that the level of financial literacy in the U.S. is low. There is a lot of debate about the best way to solve this problem, from high school classes to adult education programs. Nothing has been found to be all that great (so far).

My take is that we should continue working on financial education as there is a lot of room for improvement, but also consider that many poor financial decisions can’t be solved by learning some definitions. The root cause is often a lack of non-academic skills like self-control, ability to delay gratification, and persistence. Most people know that they should spend less and save for the future. They just don’t necessarily do it.

Comments

  1. Mitchell says:

    You didn’t post the answers!

  2. Ha, I would have thought that 100% readers of this blog would have answered questions correctly.

  3. It is pretty close to 100%. MMB readers are definitely not in the dark about basic financial knowledge!

  4. Alexandria says:

    Just wanted to say that my 8 year old and 10 year old kids would know the answer to #1. Why? Because they have savings accounts and I explain it to them, how it works. We calculate the interest when it hits – banks can make mistakes.

    I have been on financial forums where people don’t know the basics of how interest works. For example, 2% interest per year is $2 per year on $100. 2% interest is not $20! & it’s not $2 per month. This really should be part of any basic high school education. (Though I’d think this stuff should be taught in elementary school). Sure, parents should be teaching their kids stuff, but they can’t if they don’t even understand how it works.

    • Alexandria,

      I think I learned basic interest rate calculation in 6th grade, and I’m sure I learned more complex interest calculations later on. But, for many kids, it’s not applied — they don’t have bank accounts. So, this type of math isn’t presented in a context they’ll remember.

      What I really think is that kids need basic household financial planning education.

    • I had a grandfather that offered me some prize when I was five or six for telling him what the interest would be on a bank account deposit of 100$ for a year. It compounded daily, and I remember working it all out, and being very proud of my answer. The rate was 5.25%. He insisted the answer was 5.25, and I never was able to convince him otherwise. Funny how I remember this still decades later, it was so frustrating being told I was wrong when I knew I was right.

  5. Sadly these people vote. If they cannot understand BASIC financial concepts how can they possibly grasp the issues of the federal debt, monetary policies, minimum wage increases, trade deficits, ect.

  6. Very depressing that only 1/3 of Americans understood these basic financial concepts. But, when you consider the average American savings rate is less than 5% and only 38% of 401k eligible workers contribute to their 401k…it makes sense.

    I wish that along side with civics class in 8th grade their had been a basic personal finance class offered. Even getting the American financial literacy rate to 50% would be a great boon!

  7. You should ask: is it safer to use a debit card with a pin vs signature. It amazes me how many people don’t get that . They keep using their pin just asking for some hidden reader steal it when using your debit card as “credit” gives you much greater protection not only from keeping pin safe but from Visa/MasterCard etc…

    • Does it even make sense to use a debit card at all? At least with a credit card you get more protection by law, and you get to review the bill before you pay it.

  8. Bernardo says:

    I believe it is much worse than financial illiteracy for at least the first two questions. Computing percentages is a basic math skill not a financial one! I wonder how these people leave tips… :-) (probably using their smartphones…)

  9. Hard to see why so many people would get the questions wrong.

    There was another study on NBER from 2009:
    http://nber.org/2009rrc/Full/2.....tchell.pdf

    The 1st question called the Numeracy question, they show 92% of people getting correct.
    The 2nd question called Inflation they have 91% correct.
    For the 3rd question on stock, 71% got that right.

  10. I don’t like the last question. Here is where I am a victiom of too much knowledge. What kind of mutual fund is it? Is the mutual fund an actively managed front end loaded with 3% plus an expense ratio of 1.5% annually? These are not so uncommon. Is the mutual fund indexed? Sure it may be diversified but there is too little information here. There are plenty of VERY risky mutual funds. There are also different kinds of risk, market risk, interest rate risk etc. Sometimes individual company stocks eliminate that risk. Don’t get me wrong I am a hard core low cost indexer. I don’t invest in individual stocks. But trying to extrapolate something meaningful from such a question is difficult at best. This is not directed at Jonathan, but rather the quiz writers.

    • I agree with your logic Sam, you’re right. This question reminds me of most financial questions. While there are many answers that could be correct; choose the ‘best’ answer. The ‘best’ answer forces one to generalize and not consider the many factors involved with financial decisions.
      Financial exams that our worlds financial advisors must pass to give advice are filled with these choose the ‘best’ general answer questions…
      That’s why I trust my own opinion over any financial advisors opinion.

Speak Your Mind

*