A recent Freakonomics podcast listed three questions to determine financial literacy developed by an economist who teaches at George Washington University.
Question 1: Suppose you have $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? A) More than $102. B) Exactly $102. C) Less than $102. Or, if you really want to play along, D) I don’t know.
Question 2: Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account? A) More than today. B) Exactly the same as today. C) Less than today. Or, D) I don’t know.
Question 3: Do you think the following statement is true or false: buying a single company stock usually provides a safer return than a stock mutual fund.
And the answers:
Answer 1: A), more than $102. Because 2 percent interest on $100 in a year is $2, so after year 1 you have $102 — and then over the remaining four years, the interest grows on that $102, and so on. And that’s why compound interest has been called “the eighth wonder of the world.”
Answer 2: The answer is “less than today” because if inflation is 2 percent, prices go up 2 percent. But if you only earned 1 percent in your saving account, you basically can buy less.
Answer 3: False. Because a single company is a lot riskier than a basket of stocks. Don’t put all of your eggs in one basket.
Want to guess how financially literate Americans are (those who got all three questions correct)?
Around 30 percent of the respondents got all three questions right.
Ok, I'm not sure these questions should be the test to determine financial literacy, but supposedly they are predictive of it even when more questions are asked. So what do I know?
And is anyone really surprised anyway to learn that Americans aren't 90% financially literate?
So, how did you do on the test?