Assess Your Own Financial Literacy With Three Questions

Are you prepared to make smart saving and investing decisions? A simple, three-question quiz may be all you need to know whether that answer is yes or no.

Despite its simplicity, the questions, which were developed over a decade ago by economists Annamaria Lusardi and Olivia S. Mitchell, have stumped many Americans. Test your own knowledge by answering the questions yourself. After you find out how you score, you can take a look at how that compares to others.

Question 1: Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

  1. More than $102
  2. Exactly $102
  3. Less than $102

Question 2: Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, with the money in this account, would you be able to buy:

  1. More than today.
  2. Exactly the same as today.
  3. Less than today.

Question 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.”

  1. True
  2. False

Scroll to the bottom of this for the quiz answers

The Results

How did you do? Did you find it challenging? If so, you’re not alone. In a 2004, when the questions were first posed to U.S. residents age 50 or older, about a third failed to answer correctly the interest rate question, a quarter flubbed the inflation question and nearly half failed to determine that investing in a single stock is usually more risky than investing in a mutual fund. Just 34 percent of respondents answered all three questions correctly.

More recently, some age-diverse surveys incorporating Lusardi and Mitchell’s questions produced similar results, including a study by the Financial Industry Regulatory Authority’s Investor Education Foundation. FINRA’s 2012 Financial Capability Study, which surveyed people age 18 and older, found that a quarter got the interest rate question wrong, 39 percent erred on the inflation question, and more than half bungled the stock question.

“(F)or all groups, the level of financial literacy in the U.S. was found to be quite low,” Lusardi and Mitchell concluded in a report published by the Journal of Economic Literature.

But why do Lusardi and Mitchell believe a three-question survey is enough to gauge an individual’s level of financial literacy? The answer is because those questions cover essential ground when it comes to saving and investing. As you make saving and investing decisions, understanding basic concepts like how interest works, what inflation is, and the differences in risk between investing in stocks and mutual funds can go a long way in helping you make smart investment and saving decisions.

If you missed a question (or two, or three) above, you are in luck. A growing number of resources exist to help Americans improve their financial literacy, including several programs offered by FINRA.

Your local library is a good starting place. Smart [email protected] library®, a joint project of the FINRA Investor Education Foundation and the American Library Association, funds financial literacy programs at local libraries targeted at low-income families. Government institutions including the Federal Reserve and FDIC have helpful resources on core savings topics, and FINRA offers information about key investment concepts and types of investments.

Quiz Answers: 1. A, 2. C, 3. B