Test Your Financial Literacy in 3 Questions?

The following are three questions used to assess basic financial literacy:

  1. 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?
  2. 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?
  3. 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.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 16 comments
  • Riscario Insider

    Simple questions.
    Eye-opening replies.

    It would be nice to have three questions to measure the understanding of
    – risk tolerance
    – market timing

  • Connie Walsh

    Okay, show me a bank where you put 100 and you get 2% and you actually have more than 102 after 5 years…not one of the big banks, you would have lost $3 a month in fees (at least). I think they are silly questions.

    Connie

  • Patrick

    @Connie: PC Financial? ING? I don’t have accounts in either of them, but I believe they claim to have no fees.

  • Traciatim

    Connie, Patrick is correct. I have an ING account and have earned a lot and never paid a fee. If you are being charged for your saving account you need to find a better bank.

  • Steve

    It would be nice to have the answers. I believe they are:
    a) more than $102
    b) less
    c) false

    Can anyone confirm?

  • Howie

    wow…. that is scary.

  • Mr. Cheap

    Steve: I think these are the sort of questions that if you need to ask whether your answers are correct or not it indicates a problem.

    Which of your answers are you uncertain about and why?

  • Steve

    Mr.Cheap: I’m just looking for confirmation. I believe the answers I’ve posted are correct and would be very surprised if I’m wrong – but if I am – I’d like to know and more importantly – I’d like to know why. These questions seem so basic that I begin to question myself if there’s a trick in there somewhere.

  • Preet

    Thanks for the answers to Connie’s questions guys! I echo their sentiments – there are a number of non-account-fee savings accounts out there.

    @Steve – your answers are correct. To you they seem simple and that’s good, but given that the responses from the studies were so poor it is indicative that there is a big problem out there. Not everyone reads this blog… YET!!!!! :)

  • Connie Walsh

    Umm, yes I bank at PC but I don’t thing PC or ING are considered one of the big banks. TD, RBC, CIBC, BMO or scotia would cause you to have less than 100 after 5 years.

    Do you think people actually didn’t know that their is such a thing as interest that compounds or were they, like me confused because in reality a 2% interest means you will come out behind because of the usual bank fees.

  • DAvid

    Connie,
    I pay no monthly service fees on the savings account I have at a major bank. There might be transaction fees on some of the accounts at my bank, but you would end up with more than $110 at the end of five years (not including taxation)if you ran this scenario.

    Possibly a bit of research might quell your cynicism?

    DAvid

  • Connie Walsh

    Yep, my cynicism is showing. Yes if you do nothing with your account (don’t get a passbook or a monthly paper statement). If you don’t withdraw more than twice a month. But it cannot be inactive for 2 years…you must deposit or withdraw at least once every 2 years. You would end up with more than 102

    From Daily Interest Savings at Scotia

    inactive account $20
    monthly paper statement $1.50 – $2
    update your passbook $2
    Interact fee $1.50 + .85
    Withdrawal .85
    Transfer .85
    Bill Payment .85
    Direct Payment Purchase .85
    Cheque .85

    Are you saying that I am cynical because I think banks charge more in fees than they give in interest? Think about it. Of course they do.

  • Traciatim

    Connie, I repeat “If you are being charged for your saving account you need to find a better bank.”.

    Only when peoples money start moving will the situation change. Do something about it.

  • Connie Walsh

    And I repeat, I am not being charged for my savings account, but my hypothesis is that most people are (and this is borne out by the numbers) so this survey would not get to the basics of whether they knew about compounding interest, or even simple interest 5 years in a row.

    I’m just saying it’s not that they don’t understand financial basics, it’s that their reality does not let the question make sense.

    Thank you for trying to educate me. I do appreciate it. I am alright at money, I really love debates. So don’t think I am criticizing you. Although I am criticizing the guy/gal who wrote the survey.

  • Justin

    I have chosen to have a CIBC, PC Financial and ING account (TFSA and savings).

    I have no fees, only make interest, and only the CIBC account requires a $1000 in chequing to wave fees.

  • Alex Fernandes

    Good way of testing our own financial literacy. According to me answer of 1. more than $102, 2.less, 3.false. Please let me know it’s right or not.