Most Folks Get 46% On This Simple Financial Literacy Quiz
Will You Do Better?
What do you really know about finance?
How would you rate your financial literacy?
Many of us don't answer those questions honestly.
In fact, most of us think we know A LOT more about finance than we actually do.1
And guess what?
Most folks can't get 4 or more questions correct on a simple 7-question financial literacy quiz.2
Can you?
Will you score better than the average American?
Let's find out!
Take the basic financial literacy quiz below (it'll take you less than 2 minutes or so).3
Test Your Money Smarts With
7 Basic Questions About Finance
After selecting your answers on the following questions below, scroll down to see the correct answers and see how many you got right!
1. Suppose you have $100 in a savings account earning 2% interest per year. After five years, how much would you have?
A) More than $102
B) Exactly $102
C) Less than $102
D) Don't know
2. Imagine that the interest rate on your savings account is 1% per year and inflation is 2% per year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
A) More
B) Same
C) Less
D) Don't know
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
A) Rise
B) Fall
C) Stay the same
D) No relationship
E) Don't know
4. True or False: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
A) True
B) False
5. True or False: Buying a single company's stock usually provides a safer return than a stock mutual fund.
A) True
B) False
6. 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?
A) <2 years
B) 2 to 4 years
C) 5 to 9 years
D) 10+ years
E) Don't know
7. Which of the following indicates the highest probability of getting a particular disease?
A) There is a one-in-twenty chance of getting the disease
B) 2% of the population will get the disease
C) 25 out of every 1,000 people will get the disease
D) Don't know
HERE ARE THE ANSWERS TO THE QUIZ
See how you did!
1. Suppose you have $100 in a savings account earning 2% interest per year. After five years, how much would you have?
Answer: A) More than $102
It's more than $102 due to compounding interest.3
The Math: A savings account with $100 and a 2% annual interest rate would earn $2 the first year (an ending balance of $102). Year 2, the $102 would earn $2.04 (an ending balance of $104.04). By year 5, the savings account would grow to $110.41.3
2. Imagine that the interest rate on your savings account is 1% per year and inflation is 2% per year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
Answer: C) Less
You have less due to inflation, the rate at which the prices rise.3 If the inflation rate is greater than the savings interest rate, your buying power will not keep up with inflation.
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
Answer: B) Fall
When interest rates rise, bond prices fall (and vice versa). This is because rising interest rates bring newer bonds to market. The newer bonds pay higher interest yields than older bonds, making those older bonds worth less.3
4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
Answer: A) True
Assuming the same interest rate for both, you pay less in interest for a 15-year loan because you repay the principal faster.3 That's also why the monthly payment for a 15-year loan is higher.
The Math: With a 30-year mortgage at 6% on a $150,000 home, you pay $899/month in principal and interest charges. Over 30 years, that's $173,757 in interest alone. A 15-year mortgage will cost you nearly $100,000 less — $1,266/month but only $77,841 in total interest.
5. True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.
Answer: B) False
A stock mutual fund lets you diversify*.3 In general, that makes a stock mutual fund less risky than a single stock because you can spread your risk by spreading your investments. With a single stock, all your eggs are in one basket.
6. 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?
Answer: B) 2 to 4 years
Compound interest would double the debt in less than five years.3
The rule of 72: In finance, this rule is a way to estimate an investment's doubling time. Divide the rule number (i.e., 72) by the interest percentage per period (usually years) to obtain the approximate number of periods for doubling. Using the rule, it would be about 3.6 years, which makes the correct answer "2 to 4 years."
7. Which of the following indicates the highest probability of getting a particular disease?
Answer: A) There is a one-in-twenty chance of getting the disease
To compare probabilities, first, convert each option into the same format or a percentage. When you do that, a one-in-twenty chance equals 1/20 or .05, which is 5%. Similarly, a probability of 25 out of every 1,000 equals 25/1000 or .025, which is 2.5%. Now, comparing the percentages — 5%, 2.5%, and 2% — clearly, the largest percentage and greatest probability of contracting the disease is 5% or a one-in-twenty chance.3 If you want improve your financial literacy, having knowledge about probabilities can help you in evaluating risks and potential outcomes more effectively.
Financial Lesson:
Your Quiz Score Doesn't Matter as Much as Your Willingness to Learn
How did you do on the quiz?
Were you surprised by any of the questions — or answers?
It's OK if you couldn't get every question right. You don't have to know everything. Few people do.
In fact, these days, more folks are missing more questions on this quiz than they did roughly 10 years ago.2
And that's not because they're dumb.
Actually, there's at least one good reason why many people don't do so hot on this quiz.
It's because they're choosing “don't know” as an answer more than ever before.2
In fact, the “don't know” responses have sharply increased over the last decade. And that's likely why scores on the quiz are dropping — and why financial knowledge seems to have declined since 2009.2
That could mean more folks are recognizing their knowledge gaps when it comes to finance.2
But not all of those “don't know” answers reflect a lack of knowledge.2
Some are signs that folks could be weighing out current conditions and uncertainties, taking a more nuanced and careful approach to their answers.2
Whether you're in that boat or not — and no matter how you scored on this quiz — here's the best part: It's never too late to learn more and level up your money smarts.
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Sources
1. https://www.cnbc.com/2023/01/19/why-overconfidence-bias-may-cost-investors.html
3. https://www.finra.org/financial_literacy_quiz
*Diversification cannot guarantee a profit or protect against loss in periods of declining values. No investment strategy can guarantee success in all market conditions.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Advisory services offered through Cambridge Investment Research Advisors, Inc ., a Registered Investment Adviser. Strategic Wealth Design and Cambridge are not affiliated.
Material made by Snappy Kraken.