There’s a financial-literacy crisis in the U.S. And it is probably even worse than it seems.
Study after study shows how poorly Americans understand money and investing. Consider this common question posed by surveys: “Suppose you had $100 in a savings account and the interest rate was 2% a year. After five years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?”
This is one of three questions typically used to measure financial literacy. Incredibly, only one-third of Americans older than 50 answer all three questions correctly.
Moreover, questions such as this one, while important, measure only financial literacy. They do little to get at financial comprehension and financial behavior. That is, even if people know financial facts such as the correct answer to this question, they often don’t understand why they may be investing the way they do, and what their behavior means for their current and future well-being. And they don’t understand that not understanding their actions can be even more damaging than not knowing financial facts in the first place.
We do good when we promote financial literacy. We do even better when we promote financial comprehension and the financial behavior that comes out of that comprehension.
So it is important for people to be able to pass a different kind of financial-literacy test—one whose questions and answers will lead the way to smarter spending, saving and investing. We’ve put together just such a test that everybody should take. Those who do—and truly understand the answers—will be smarter investors and consumers because of it.
1. A surgeon perfects her surgeries, and increases her rate of success as she performs surgeries more often. Likewise, an investor perfects his trading and increases his rate of success as he trades more often.
True or false?