About a decade ago a Wharton business school professor and some colleagues put together 3 questions that were designed to do one thing; discover whether consumers had the financial knowledge they needed to make effective decisions.
Three questions were these;
1 Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? (A) More than $102. (B) Exactly $102. (C) Less than $102.
2 Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? (A) More than today. (B) Exactly the same. (C) Less than today.
3 Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
Depending on your age and how long you have been handling your own finances, you might find these questions either extremely difficult or extremely easy. Knowing the answers however is definitely important for your financial future because, if you do, it shows that you know more than the average person about money, finances and money management. It also means that, most likely, you will be in good shape come retirement.
The answers, by the way, are A, C, and False, respectively.
Many people get 1 of the 3 questions correct, which is not a good sign. American consumers who are 50 years of age and older usually get 2 correct. Only about a third of American consumers get all 3 right. If you’re one of them, don’t feel too bad, because in countries like Japan, Switzerland, Germany and the Netherlands, where there are just as many well-to-do citizens, there’s just as much financial illiteracy as well. (Don’t feel bad, but DO start learning more.
In fact the majority of well-educated people only get 2 questions correctly out of the 3. Usually however, very affluent people get 3 correct, which accounts for the difference in financial knowledge between well-to-do citizens and others.
Of course this is only 3 questions but they are 3 basic financial questions that should be relatively easy to answer if you have a good financial knowledge base. They referred to, for example, how inflation affects money, an understanding of basic financial concepts and how diversifying your investments can reduce your risk.
For example, if you don’t realize how much inflation affects your money, you might believe that you’ll be able to live on the $60,000 a year you have set aside for retirement, not realizing that it will only be worth about $28,000, as far as its “buying power” is concerned, in 25 years.
The point of the 3 questions is simply this; the more you learn about finances and investing, the better off you will be financially. If you didn’t get all 3 questions right, it means it’s time to hit thew financial books, do your research and educate yourself.