How financially literate are you?

In each case, we may evaluate the decision more or less based on the size of its impact to us (the cost of a latte, the return on an investment) and then try to choose wisely.

That process — using economic information to decide how to spend, save, and grow your money — is part of your financial literacy.

So how would you rate your level of financial literacy? Well here’s a simple quiz from two leading economist-educators, Annamaria Lusardi and Olivia S. Mitchell, that will help give you an idea.¹

1. Suppose you had $100 in a savings account and the interest rate was two percent per year. After five years, how much would you 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 one percent per year and inflation was two percent per year. After one year, with the money in this account, would you be able to buy:

a) More than today

b) Exactly the same as today

c) Less than today

3. Is the following statement true or false? Buying a single company stock usually provides a safer return than a mutual fund.

a) True

b) False

How did you do? In a survey of people age 18 and over, one-quarter gave a wrong answer on interest rates and compounding (the first question), more than one-third didn’t know the effect of inflation on buying power (the second question), and over half couldn’t answer the investment question (the third question).²

These questions are valuable because they cover the basics of saving and investing — concepts you want to understand in order to take advantage of financial opportunities and avoid costly pitfalls. And there is a lot to learn. For example, even if you answered the question on compounding interest correctly, you may not be aware about how compounding interest affects your income tax — and the answer is that it could be significant.

Committing to being more financially literate is more than a feel-good endeavor. Experts say financial literacy correlates strongly to success in retirement, managing debt, financial planning, investing, and accumulating wealth.³ That’s why some high schools and colleges are adding courses to teach students the basics of budgeting, managing debt, and investing.

You can boost your financial literacy at any age, using self-help books and online tutorials and articles.

Talking with a financial advisor can be another wise move. Even if you aced the quiz today, our financial advisors have access to a comprehensive suite of objective wealth management solutions to help meet your short- and long-term growth and protection goals. Learn more.