The following are three questions used to assess basic financial literacy:
- 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?
- Imagine that the interest rate on your savings account was 1% per year and inflation
was 2% per year. After 1 year, would you be able to buy more than, exactly the same
as, or less than today with the money in this account?
- Do you think that the following statement is true or false? “Buying a single company
stock usually provides a safer return than a stock mutual fund.”
In a recent study published by Annamaria Lusardi and Olivia S. Mitchell (March 2009), and brought to my attention by investor advocate Ken Kivenko of CanadianFundWatch.com, the authors indicated that in a study of 50+ year old Americans who were administered these three questions:
- Only 56% of respondents answered the first two questions correctly
- Only 52% of respondents answered the last question correctly
The paper (which you can access from Dartmouth College’s website here) goes beyond just testing these questions, in fact they developed a more comprehensive set of questions and tested a larger range of ages in a study that found a link between financial literacy and retirement readiness.