Here's a simple test to assess your financial literacy
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Fewer than 1 in 3 US adults gets all the questions right. They were designed by economists Annamaria Lusardi and Olivia Mitchell. Financial literacy means feeling equipped to make financial decisions. It's linked to how comfortable you are in later life. People with a low understanding of risk are twice as likely to be constrained by debt, lack 1 month’s worth of emergency savings and to worry about their level of retirement income, than people with a good understanding.
To assess individuals' understanding of financial concepts, economists Annamaria Lusardi and Olivia Mitchell have designed a simple test consisting of three questions. So far, it has been found, fewer than 1 in 3 US adults can answer all these questions correctly.
The test
The three questions devised by the economists are related to the concepts of interest, inflation and risk and diversification. The questions are as follows:
- You put $100 in a savings account with an annual interest rate of 2%. After 5 years, how much would you have in the account if you left the money to grow
- The interest rate on your savings account is 1% per year and inflation is 2% per year. After 1 year, how much would you be able to buy with the money in this account?
- True or false? Buying a single company's stock usually provides a safer return than a stock mutual fund.
Why financial literacy matters
Financial literacy means feeling equipped to make financial decisions that impact your future comfort. People with a low understanding of risk are twice as likely to be strapped with debt, lack emergency savings, and worry about retirement income compared to those who understand risk.
Improving financial literacy
Experts recommend incorporating risk literacy into financial education programs taught in high schools and colleges. Teachers can use tools and stories to simplify the topic for students.
So, how many questions did you answer correctly?
