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Here's a simple test to assess your financial literacy

This video is part of: Centre for Financial and Monetary Systems

To assess individuals' understanding of financial concepts, economists Annamaria Lusardi and Olivia Mitchell have designed a simple test consisting of three questions. So far, it has been found, fewer than 1 in 3 US adults can answer all these questions correctly.

The test

The three questions devised by the economists are related to the concepts of interest, inflation and risk and diversification. The questions are as follows:

  • You put $100 in a savings account with an annual interest rate of 2%. After 5 years, how much would you have in the account if you left the money to grow
  • The interest rate on your savings account is 1% per year and inflation is 2% per year. After 1 year, how much would you be able to buy with the money in this account?
  • True or false? Buying a single company's stock usually provides a safer return than a stock mutual fund.

Why financial literacy matters

Financial literacy means feeling equipped to make financial decisions that impact your future comfort. People with a low understanding of risk are twice as likely to be strapped with debt, lack emergency savings, and worry about retirement income compared to those who understand risk.

Improving financial literacy

Experts recommend incorporating risk literacy into financial education programs taught in high schools and colleges. Teachers can use tools and stories to simplify the topic for students.

So, how many questions did you answer correctly?

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Topics:
Financial and Monetary SystemsEducation and Skills
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