In my September 2024 “Money Smart Women” column, in Kiplinger Personal Finance, I referred to the “Big Three,” a trio of multiple-choice questions designed more than 20 years ago to measure respondents’ knowledge of the ABCs of personal finance: compound interest, inflation and risk diversification. Since then, that quiz has become the gold standard in measuring financial literacy in the United States and in countries around the world.
A number of readers have asked whether we could publish the quiz, so we have printed the questions below. Spoiler alert: The answers appear at the end, so don’t peek.
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five 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
D. Do not know
E. Refuse to answer
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2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% 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
C. Less than today
D. Do not know
E. Refuse to answer
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.”
A. True
B. False
C. Do not know
D. Refuse to answer
How do your results compare?
If you are a regular Kiplinger reader, it’s likely you would know that the correct answers are A, C and B. The questions appear simple, but they are designed to test for “fundamental knowledge at the basis of most economic decisions,” says Annamaria Lusardi, of Stanford University, one of the study’s chief authors. If people are unfamiliar with these topics, says Lusardi, “they are much less likely to know about more complex concepts, such as the relationship between risk and return, the term structure of interest rates and how interest compounds over long periods.”
In fact, only 43% of Americans surveyed answered all three questions correctly. Particularly troublesome are the results for question 3, which 61% of respondents answered correctly — meaning that a significant number of people do not know that a single stock is riskier than a stock mutual fund. More than 20% of those surveyed responded to that question with “do not know” answers, indicating that “knowledge is particularly low about the fundamental concept of risk diversification,” says Lusardi.
The research also shows a sizable gender gap. Overall, only 29% of women answered all three questions correctly, compared with 48% of men. And women are much more likely than men to respond that they do not know the answer to at least one of the questions, particularly the one about risk diversification. Says Lusardi, “Such gender differences are likely to be the result of a lack of self-confidence, in addition to lack of knowledge.”
Education levels are a factor, too. Among respondents with a college degree or higher, 65% earned a perfect score on all three questions, compared with 38% of those with some college education and 29% of those with a high school diploma. Even within the group of respondents who had a college degree or higher, more than one-third did not answer one or more of the three questions correctly. Concludes Lusardi: “Acquiring financial know-how requires additional investment not currently part of a general education.”
Among age groups, the youngest respondents scored the lowest. Only one-third of 18- to 29-year-olds answered all three questions correctly, at a time of life when they are called upon to make decisions with long-term consequences about such things as student loans, credit management and retirement saving. Financial literacy peaks among 50- to 59-year-olds, with about half getting all three answers right, and then falls to 44% among those aged 70-plus. Notably, older generations who lived through the inflationary 1970s were particularly knowledgeable about inflation.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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