Two-thirds of adults throughout the world are financially illiterate, according to Standard & Poor’s Global Financial Literacy Survey.
The survey of 150,000 adults in 148 countries revealed that 70% of women and 65% of men can’t correctly answer questions about investment risk, inflation, numeracy and compound interest.
You might say that’s no surprise, given that billions of people around the globe don’t even have access to clean water or electricity. Financial literacy might be the least of their problems, and I’d agree.
But what about people who do have all the basics — and a great state-sponsored education system to boot? It’s harder to rationalize financial ignorance in such cases.
And that’s exactly what we have here in the United States.
Indeed, the U.S. ranks 14th in the world, with just 57% of our adults scoring well enough on the quiz to be considered financially literate. (Norway, Denmark and Sweden topped the list at 71% each.)
Even a third of Americans who have a credit card or a mortgage weren’t able to answer questions about compound interest — the very core of their loans.
Five questions were asked, and respondents were deemed financially literate if they could answer three of them correctly. (There are two questions about compound interest; you need to get one of them correct.) Let’s see how you do.
1. Is it safer to put your money into one business or investment or to put it into multiple businesses or investments?
2. Assume that over the next 10 years the prices of the things you buy will 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?
3. Suppose you need to borrow 100 (dollars or any other unit of currency). Which is the lower amount to pay back — 105 or 100 plus 3%?
4. First compound-interest question: Suppose you put money in the bank for two years, and the bank agrees to add 15% 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 both years?
5. Second compound-interest question: Suppose you had 100 (dollars or other currency) in a savings account and the bank adds 10% per year. How much money would you have after five years if you didn’t remove any money: more than 150, exactly 150 or less than 150?
Answers to Financial Literacy Quiz
1. Multiple businesses or investments. Think of putting 12 eggs into 12 baskets vs. all 12 eggs in one basket. Isn’t it obvious which is less risky?
2. The same as you can buy today.
3. 100 plus 3%.
4. It will add more the second year because of compound growth.
5. More than 150, again because of compound growth.
To be considered financially literate, you need to have answered three of the five questions correctly, including at least one of the last two.
If you struggled with this quiz, tell your Financial Planner. It’s easy and fun to become financially literate, and we can help you!