Got a little pop quiz for you, courtesy of The Atlantic:
1. If you had $100 in a savings account with an interest rate of 2 percent annually, after five years, how much would you have in the account if you left it there? A) more than $102; B) exactly $102; C) less than $102; D) don’t know
2. Your savings account has an interest rate of 1 percent each year and inflation is 2 percent annually. One year later, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) don’t know
3. Is this statement true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) don´t know
Here are the correct answers: 1-A; 2-C; and 3-B.
Most people didn’t know the answers to these questions. Folks were polled in Russia and 96 percent could not answer the three questions correctly and only 30 percent of Americans could. Germans (53 percent answered all three) and the Swiss (50 percent) were the top performers–even though they just made it over half.
The list of underperformers continues: 79 percent of Swedes, 75 percent of Italians, 73 percent of Japanese, and 69 percent of French did not respond correctly to all three questions. Meaning most people across the globe are financially illiterate.
These findings, which were recently published by economists Annamaria Lusardi and Olivia Mitchell, indicate how smart people are about managing their money. According to the research, women, the poor, and the elderly have the lowest levels of financial literacy. But while men better grasp the subject than women, independent of age and education, women know their shortcomings.
“For a large and fast-growing number of people, personal bankruptcy is just one bad decision away. This threat will become more critical as the global middle class continues to expand. The newfound prosperity of millions of families in the developing world could be shattered if they mismanage expenses, acquire large and expensive debts, fail to adequately protect their savings, or don’t know how to identify a tempting but catastrophically risky investment,” reports The Atlantic.
This is an important issue to address because as financial products become more diverse and more people reach middle-class status, people will need to be financially literate to handle this new responsibility.
How many of the questions did you get right?