Financial literacy plays a huge role in one’s life when managing personal finances. If you are not financially literate, then you cannot effectively plan or achieve the financial future you want. Financial literacy means you possess the understanding in various financial areas such as investing, debt, and budgeting.
Financial Literacy – The Study
A few weeks ago, I was listening to a podcast from Freakonomics called Everything You Always Wanted to Know About Money. One of the core concepts being discussed was financial literacy. The podcast’s host was interviewing Annamaria Lusardi, an economist from George Washington University and founder of Global Financial Literacy Excellence Center. Professor Lusardi created the “Big Three” financial literacy questions as a way to measure one’s financial literacy both domestic and abroad.
These questions revealed that among developed and developing countries, financial literacy is very low. The interview also uncovered a troubling statistic:
“Roughly 70% of Americans are financially illiterate.”
This means that nearly 2 in 3 American do not know how to manage their personal finances, and as a result, are most likely in debt and without much saved for retirement.
Are you Financially Literate?
Test your financial literacy – see how you do with answering the “Big Three” questions below:
- Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5
years, how much do you think you would have in the account if you left the money to grow?- More than $102
- Exactly $102
- Less than $102
- Do not know
- Imagine that the interest rate on your savings account was 1% per year and inflation was 2%
per year. After 1 year, how much would you be able to buy with the money in this account?- More than today
- Exactly the same
- Less than today
- Do not know
- Please tell me whether this statement is true or false: “Buying a single company’s stock
usually provides a safer return than a stock mutual fund.”- True
- False
- Do not know
| Question #1 | Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? |
| Answer: A More than $102 | |
| Question #2 | Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? |
| Answer: C Less than today | |
| Question #3 | Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund. |
| Answer: B False |
So how did you do? Are you financially literate?
See the “Big Three” original source here.
