Two-thirds of the world can’t pass this financial literacy test. Can you? You don’t need a calculator, just 3-5 minutes of time.
Risk Diversification: Suppose you have some money to invest. Is it safer to put your money into one business, piece of real estate or investment or to put your money into multiple businesses or investments?
a)One business, piece of real estate or investment
b)Multiple businesses, pieces of real estate or investments
Inflation: Suppose over the next 10 years, the cost of things you buy including housing, food, taxes and health care and all others double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
Mathematics: Suppose you need to borrow $100 for one year. Which is the lower amount to pay back: $105 or $100 plus 3% interest?
b)$100 plus 3% interest
Compound Interest: Suppose you put money into a bank and the bank agreed to pay 3% interest per year to your account. Will the bank add more money to your account in the second year than the first year, or will it add the same amount of money for both years?
Compound Interest II: Now suppose you have $100 to invest in a (very aggressive) bank who will pay you 5% interest per year. How much money will you have in your account in 5 years if you do not remove any of the principal or earned interest from the account?
b)More than $125
c)Less than $125
Pretty simple, right. The answer is b for all. We’re sure our regular DWM blog readers got them all right.
Across the world, however, the 150,000 people who took the test didn’t do so well. Two-thirds of them answered at least 2 of the 5 questions incorrectly. The survey pointed out some key findings. Norway has the greatest share of financially literate people worldwide. Canada, the UK, the Netherlands and Germany also finished in the top 10. The U.S. didn’t.
In the Emerging Market countries, like China, India, Brazil and Russia, the young people, ages 15 to 35 were the most financially literate. Apparently the kids in Shanghai “knocked the cover off the ball” (just like George Springer of the Astros).
So, what’s the takeaway? Financial literacy for Americans could use improvement. In addition, as we pointed out in our blog two weeks ago highlighting Nobel Prize winner Richard Thaler, people, even if they are financially literate, can make systematically irrational decisions. This means you may need a financial coach and advocate. That’s what we are for our DWM clients. Whether it’s professional investment management, financial decisions and planning, income tax planning, insurance and estate planning matters, we provide our financial literacy, rational analysis and proactive solutions and suggestions. It’s our expertise and our passion. At DWM, this is how we hit home runs!