https://www.marketwatch.com/story/can-you-answer-all-six-of-these-simple-questions-2020-09-21Here are these three basic questions for which the researchers report “shockingly low” levels of financial literacy. They were devised a decade ago by Lusardi and Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, and have been so widely used since then that many researchers now refer to them as the “Big Three” of financial literacy. (The correct answers, should you have any doubt, are listed at the end of this column.)
• 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? [More than $102; Exactly $102; Less than $102; Don’t know; Prefer not to say]
• Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? [More than today; Exactly the same; Less than today; Don’t know; Prefer not to say]
• Buying a single company’s stock usually provides a safer return than a stock mutual fund. [True; False; Don’t know; Prefer not to say]
But can you answer the following three bonus questions as well? Only 7% of older adults could answer all six questions correctly, and just 3% of millennials. These three additional questions are:
• If interest rates rise, what will typically happen to bond prices? [They will rise; They will fall; They will stay the same; There is no relationship between bond prices and the interest rate; Don’t know; Prefer not to say]
• Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? [Less than 2 years; At least 2 years but less than 5 years; At least 5 years but less than 10 years; At least 10 years; Don’t know; Prefer not to say]
• A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. [True; False; Don’t know; Prefer not to say]