Can You Pass This Basic Financial Literacy Test?

We rail on a lot over here at The Money Manual about the importance of financial literacy, and it turns out a lot of people need help in this department. Standard & Poor’s, Gallup, the World Bank, and George Washington University created a five-question test, which was posed to 150,000 people in more than 140 countries in 2014 to test peoples’ understanding of risk, inflation, interest, and compound interest. People didn’t do so well. Only 33% of respondents were able to demonstrate competency by answering three of the four topics correctly. Here is a modified version of the test (with answers at the bottom). Take it and see how you do! 1. Risk Diversification Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments? a. one business or investment b. multiple businesses or investments 2. Inflation Suppose over the next 10 years the prices of the things you buy 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? a. less b. the same c. more 3. Numeracy Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three percent? a. $105 b. $100 plus three percent 4. Compound interest Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years? a. more b. the same 5. Compound interest II Suppose you had $100 in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? a. more than 150 dollars b. exactly 150 dollars c. less than 150 dollars Answer Key: (1): b. (2): b. (3): b. (4): a. (5): a. Image: Unsplash