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I found this financial literacy quiz this morning. It comes from the Stanford Center on Longevity. According to the site, only 29% of American adults can correctly answer the three questions in the quiz.
I’m guessing most HumbleDollar readers will Score 100%. I did.
The answer to the first question may be affected by taxes. The answer to the second question might be affected by productivity or other efficiencies for some products. But the answer to the third one is solid, IMHO.
Thank you for posting this quiz. It is very useful.
But I wonder how much the quiz relates directly to our behaviors. As math problems, at age 16 I would have answered all these questions correctly as they are precisely the type covered in the SAT prep class, but it wasn’t until 5 or more years later that I understood in a visceral way how inflation was degrading the money I had. And it wasn’t for another 5 years that I read Jonathan’s column regularly and began to become an index fund convert.
Whenever there’s a test or question that’s supposedly easy, I always worry that I’m going to accidentally click the wrong button or rush and interpret the question opposite of what’s intended.
An article flowed across my screen. “Gen Z is signing up for ‘Adulting 101’ classes – because they can’t handle basic life skills: ‘A lot of stuff involves money’.”
Well, perhaps there is some hope. The oldest in that group will be 28 this year.
Nice work and great idea. I want to try it out on my children and grandchildren. It will be very interesting. Thanks. I did take the test, and happy to report, 3 for 3! But I am 78.
The author of this question is right, for the simple reason that the average reader of this newsletter is likely not an average investor. In my experience in helping others with their investments, they understand very little and are often afraid to even try for fear of losing their hard earned money. In too many cases, they either hire someone to manage their assets and have no idea how much they are paying in fees, or leave everything in low rate deposit accounts without understanding the effects (cost!) of inflation over time.
I just had a very brief conversation with my son’s swimming instructor about her finances, and she mentioned that she doesn’t really understand them, so she hired Edward Jones. I was honestly speechless for a moment. I wanted to encourage her to try managing her own finances, but in that brief pause, I realized how much time and learning it actually takes to feel confident doing that, something many of us on this forum might forget.
And while I couldn’t help but wonder how many different high fee funds she’s now invested in (probably more than a few!), I also get why people turn to firms like Edward Jones. For someone who feels overwhelmed, having a familiar, friendly face to guide them, even at a higher cost, can feel reassuring. Still, I hope over time she gains the confidence to take more ownership of her financial decisions.
Question 3 speaks to how one thinks about risk. If you bought Apple, or Nvidia, or Amazon and just held it, would that be less risky than owning an equity mutual fund? If one equates volatility with risk, which this Stanford test does, then surely it’s more risky to own a single stock. But is that really the case? I’ve never found volatility to be a good proxy for risk, rather I equate risk with permanent loss of capital. There are many reasons for a stock to go to zero, and volatility is not one of them.
“IF” you bought Apple or Nvidia. This is the sort of question that we only ask ourselves after the fact as we never know in advance what the next Apple or Nvidia will be. Absent a crystal ball, most investors will be better off with a well diversified, low cost fund.
Here’s a quiz that’s a little more extensive and challenging: Retirement Income Literacy Quiz | The American College of Financial Services
Thanks for sharing this quiz. I took it, and while I appreciate its depth, I feel there are likely better options out there for assessing personal finance knowledge. Several questions (at least 10) didn’t really apply to me, for example, ones on annuities and life insurance, or didn’t accurately reflect my understanding of personal finance. I say that because I know enough to recognize that annuities and life insurance aren’t a good fit for me, but not enough to answer detailed questions about them correctly. For instance, here’s one question: “True or false: The death benefit from a life insurance policy owned by an individual is income tax free for the beneficiary.”
Additionally, I felt a few questions focused more on financial trivia than practical knowledge. For example, “A PE ratio means…”. Yes, I answered it correctly, but I’m not sure knowing that is essential for someone who manages their finances well, especially if they invest primarily in index funds.
That said, there were many strong questions, particularly those related to Social Security, and I do agree the quiz is more extensive and challenging than the 3 question one linked above. Still, I think someone could score poorly on it and still be doing an excellent job managing their finances.
I got through it with ease, was worried, but it ended up being easier than I expected. Humble Dollar folks get it, but I am concerned about those 71%, and maybe it is time to check this out with the kids!
100%, it really wasn’t that hard, pretty basic stuff. To figure the compound interest just keep multiplying by 1.02 five separate times.
It’s sad that the average is only 29%. Those questions are something everyone should know the correct answers to by the time they graduate from high school
Everyone should be required to take a course in basic finical concepts. They should know how to by a car with a loan, a house with a mortgage, setting up a budget (the less you make the more important it is to have a budget), the difference between a collage loan and a grant, etc….
Assuming you meant multiplying the growing balance each time by 1.02, which is the correct method for compound interest, which is what I assume you mean 🙂
I graduated from high school 40(!) years ago. In order to graduate, we had to pass a series of ‘competency’ exams that included counting change back, writing a personal check and other basic money-related tasks. I am truly frightened by the number of people who can’t do simple percentage calculations.
It is a little shocking when people are clearly just throwing out guesses rather than doing even crude calculations. Percentages and fractions really get people, I’ve noticed.
Years ago I went to an outlet store to go clothes shopping. Every rack of clothing had a sign on top of it indicating the markdown percentage of the particular items on the rack. As I was browsing through some items on the “50% off” rack, I overheard two young women struggling to figure out the final price of one of the items.
“The tag says $70, so 50% off means….uhm….it will be less than that….it should be about…maybe….$20?….no, maybe $15? Something like that.”
Every inch of me wanted to scream “it’s not ‘maybe’ anything. It’s an actual value and it’s neither of the values you have mentioned!”
But I’ve always taken my math very seriously…
Also word problems.
People see all those words and don’t even try to figure out what’s being asked. They just get a feel for it and toss out an answer, especially on multiple choice.
I got 100%, and it wasn’t just lucky guessing, I actually knew the answers, which I’m really glad about. It’s reassuring to see that I have an understanding of compound interest (Question 1), inflation (Question 2), and risk diversification (Question 3). If you check the Q&A section from the creators of these questions (Stanford’s IFDM Center), they explain the intent clearly:
“The Big Three are questions that assess individuals’ knowledge of financial concepts that are the universal building blocks for financial decision-making: compound interest, inflation, and risk diversification. These concepts apply over the life cycle, over time, and across countries. Understanding them is critical for managing debt, deciphering loan terms, investing, growing wealth, and generally managing day-to-day finances.”
These three concepts aren’t just trivia. I feel they are important for making informed choices about borrowing, saving, and investing. While they may seem basic to many of us with a background in finance, they’re often unfamiliar or misunderstood by the general public. That said, if we were to refine or expand the assessment, what would you add or replace from these three questions to make it a better measure of someone’s knowledge and ability to manage their finances?
It seems to me that the first question does not specifically test compound interest, only simple interest. But compounding is an important concept for saving for retirement, especially for young people because it confers the greatest benefits over long periods of time. So I would change the first question to:
Suppose you had $100 in a savings account and the annual interest rate was 2% paid yearly. After 5 years, how much do you think you would have in the account if you left the money to grow?
And I would change the answers to: more than, exactly equal to, or less than $110. (not $102)
You make a great point, compound interest is key to understanding long-term saving and investing. While the original question doesn’t explicitly say “compound,” the phrase “left the money to grow” typically implies compound interest. Using simple interest, you’d have exactly $110 after 5 years. But with compound interest, it’s about $110.41, a small difference now, but huge over decades. I like your suggested edit to make the intent clearer!
By the way, $110.41 is the correct answer if you’re compounding annually. However, since most savings accounts compound monthly, the actual amount would be closer to $110.51. The question doesn’t specify the compounding frequency, so while annual compounding is typically assumed in these types of questions, either answer could be reasonable depending on interpretation.
thanks Fred, accordingly I would amend my version of the question to:
Suppose you had $100 in a savings account, and the annual interest rate was 2% on the balance, paid yearly into the account. After 5 years, how much do you think you would have in the account if you left the money to grow?
First 2 questions are basic math, forget about financial literacy. It makes sense in a way, I’ve never heard a school take the position if you can’t do a simple math word problem that you’re illiterate and can’t function.
Very hard to convince people to participate in equities if they don’t really understand percents.
I respectfully disagree. Simple math is something like 1 + 1 = 2. But compound interest, as asked in Question 1, goes beyond that—it’s a foundational financial concept that requires some understanding of exponential growth, not just arithmetic. Question 2 deals with inflation and how it erodes purchasing power over time, which again isn’t basic math, it’s a key economic principle.
These questions may seem simple to many of us here because we have a solid grasp of personal finance. But that’s exactly the problem, the “Curse of Knowledge” makes it easy to forget that most Americans don’t have this background. For them, these are not basic questions at all. Without understanding concepts like compounding and inflation, it’s hard to make informed financial decisions, let alone feel confident about investing in equities.
Question 1 requires you to know that 1 year of interest is $2, and that per year means it accumulates every year. So that over 5 years it’s bigger than $102, no exponential math needed.
Question 2, which is a little harder, requires one to think, if I had $100 and got paid 1% interest I’d have $101. If inflation is 2% (well let’s forget the extra dollar) I lose $2 of buying power. That would leave me at $99. Not complicated, no exponents, a little vocab.
The issue that I perceive is that they’re word problems, that people who don’t like math (so maybe 80%) will treat them like a version of the bubonic plague, to be avoided at all costs. I used to get paid too much to help students decipher them and often they just wanted me to do their HW (BLECH)
Don’t reduce basic math to the first grade, that’s far too infantilizing. Schools already put emphasis (or at least they claim to) on these ideas. Perhaps it’s a schooling failure, that they are perfectly ok with students that won’t decipher a word problem if they can achieve some level of basic competence on the statewide test. THAT is very possible.
Just to clarify, I’m not trying to reduce basic math to something like first-grade arithmetic, as you put it. You originally said, “First 2 questions are basic math, forget about financial literacy,” and I was simply pointing out that what you’re calling “basic math” actually involves understanding financial concepts like interest and inflation. Sure, basic math includes more than addition, there’s subtraction, multiplication, division, etc., but the key issue here is that the questions aren’t just about solving math problems. They require conceptual understanding. You’re assuming people already understand what inflation or compound interest is before they can even apply the math. Interestingly, you later said, “The issue that I perceive is that they’re word problems…” which seems to shift away from your original take. So which is it: are these just basic math problems or are they more complex word problems that require financial understanding? I’d argue it’s a combination. Without grasping the underlying concepts, even simple calculations can be out of reach.
Let me give an example from my field to illustrate why conceptual understanding matters. Suppose I ask: If Sally eats 60 grams of protein per day, is relatively sedentary, and weighs 65 kg, is she consuming:
A) too much protein
B) too little protein
C) just the right amount
D) I have no clue?
You’d need to know the basic recommendation, 0.8 g/kg/day for sedentary individuals, to solve it. Then you’d multiply: 0.8 × 65 = 52 grams. Since she’s eating 60 grams, the answer is A) too much protein. That’s simple math, yes, but only if you understand the context behind the numbers. Same goes for these finance questions: without understanding the concepts behind them, they’re not truly “basic.”
And yet, many on HD think average Americans can do the investment planning analysis and withdrawal strategies often talked about here as if they were routine activities.
When it comes to financial matters, HD is in a bubble of knowledge— that’s a compliment by the way.
Thank you, Dick, I agree with this. We are who you are talking about in your comment: average Americans. Some of the posts here in the forum that are more technical are definitely over my head, but I just scroll on by. Some don’t apply to us, and that is ok too. I am grateful for the bubble of knowledge on HD. Chris
Like you, Chris, I scan or scroll past the articles above my head, but I’m always grateful for the good ideas about charitable giving and basic household financial management, as well as ways to help younger generations. I especially like the personal anecdotes about life lessons learned, which are usually about much more than money.
When I saw the first question, I reached for my calculator. I thought I was gonna need an exact answer. But then I saw it was a “more than” type of answer.
I’ve worked with many very intelligent people through the years that just ignored finances and related knowledge.
I did the same thing. I started to compound the 2%.
100%. Yay for me! I could not have said this when I was younger, especially for question 3. I didn’t know what a mutual fund was for a long time, our parents had pensions. Chris
I thought #3 was a bit tricky because there are some really poor high fee mutual funds out there. I’d have preferred if the question asked about index funds. Apparently some bias over at Stanford.
Interesting that 69% got the interest question correct. Also, scores improved with age, presumably from experience.
Sad results indeed.
Hmm I hope most HDers would have said “it depends” at Q3. Real financial literacy involves knowing all assets with the same category name aren’t equivalent.
This is a common mistake that smart people make on standardized tests.
You neutralized a word in the question (usually) and brought in outside knowledge. Neither will help you on this kind of evaluation.
I suspect they were just trying to get at if people knew what a mutual fund is and what it’s supposed to be attempting to do. (simple vocabulary, not potl returns or the ability to pick better investments)
Oh I know. I did actually wind it back and make an educated guess at the answer they were looking for given the level of the test. Which was right. But the wording does imply some bias as there can be multiple interpretations of the word “safer”.
Some of this then goes to the multitude of abuses that occur in the personal finance industry from non-fiduciary sales folk and under informed/sceptical customers. You can well imagine a pitch that goes “well this is a mutual fund so it’s obviously safer” without any discussion of what “safer” means nor adequate consideration of costs.
If you know how to predict, in advance, which individual stocks will outperform the average, please share!
I was rather thinking of would you rather buy Berkshire Hathaway or Wizzbang Alpha Robo Small Cap Flavour of the Month fund that only invests in opaque PE rounds for a reasonable 3% annual fee?
But I do acknowledge the question was probably designed to be generalist without putting people off answering by getting too specific. I wonder how people would answer though if the assertion was Apple or Vanguard World Equity fund?
I think they would choose Apple, based on name recognition. Will be interesting to see how people vote in the NYC mayoral election where two of the current candidates have the same last name but are not related.
Ah yes, “it depends” was practically the answer to every income tax question I was ever asked. It would have been a good option here as well.
Would be interesting to see what the percentages are on each question.
Here’s the detailed breakdown by various demographics: https://ifdm.stanford.edu/dataviz
Thanks. The summary is amazing. While the older did better, it seems all of the wisdom of a lifetime falls short. “Only 14% of those under age 35 answered all three questions correctly. Young people’s financial literacy knowledge lags that of older adults. Nevertheless, less than half of those 66 and older were able to correctly answer the Big Three.”
Thanks for the breakdown link.
Question #3 really is an “it depends” answer. The other 2 were basic so I decided to answer 3 the same way.
It’s the postgrad edu level failure rate of 40% that most surprises me – unless they’ve just been asking recent grads who have no money and/or smartarses who challenge the integrity of the question (like me).
Don’t even get me started on how poorly most women do…
I found all the results a bit shocking, very scary and sad.
Perhaps an interesting challenge to take on, Kristine?
I dug around (with a little AI help) and found these five non-profits focused on financial literacy among women:
Savvy Ladies. Founded in 2003, Savvy Ladies is a 501(c)(3) nonprofit that provides free financial education to women. They offer a Free Financial Helpline, connecting women with volunteer financial professionals for personalized guidance. Their mission focuses on empowering women, especially those from underserved communities, to make informed financial decisions. Women’s Money Matters. This organization builds financial wellness, confidence, and security for low-income women and girls through a unique program combining instructional workshops and one-on-one coaching. They have implemented over 229 programs, serving more than 2,100 women and girls. AAUW Money Smart. The American Association of University Women (AAUW) offers the Money Smart program, which provides women with personal finance information to ensure their financial security. The program includes workshops on budgeting, managing credit and debt, and planning for investments and retirement. Invest in Girls. Invest in Girls partners with high schools to deliver financial education and career exploration to students who identify as girls. Their programs aim to build financial competency and confidence among high school girls across the nation. Women’s Institute for Financial Education (WIFE). WIFE is the oldest nonprofit organization dedicated to providing financial education to women. They offer “Second Saturday” divorce workshops across the country, providing seminars with attorneys, counselors, and financial advisors to help women navigate financial aspects of divorce.
Good information.
I was surprised to find out that one woman I know had no idea how to access her (joint) banking accounts. Not only did she have no knowledge of account numbers/routing numbers, she wasn’t even sure of the name of the banking institution.
One of my coworkers has been putting money money into a retirement account for the last few years, but has no idea how to access her account 🤦 I’ve tried to help a few times, but you can only do so much…
That reminds me of the first time I went to one of my employer’s “Retirement Ready” seminars. They were designed to help people who were five years or less away from retirement. About half of the people who were in attendance weren’t even aware they had employer-funded retirement accounts available to them.
I know many of my female married friends are in this situation. I’ve suggested they ask their husbands to make a cheat sheet guide to their finances as my husband did. It was an invaluable reassurance to me when he passed. I continue to update it and share with my children.
To be fair it’s quite easy to fall in early to the inertia trap of “it’s all too far in the future to think about” and as long as you’re autopaying from payroll not worry too much. I’d have failed at the true FIRE movement because I didn’t really focus on retirement accounts until I went to a scheme provided seminar in my late 30s.
Absolutely! My employer contributed an amount equal to 10% of my salary into my retirement account and I assumed (for many years) that was all I would ever need in order to retire comfortably. It wasn’t until I was in my 40’s that I realized I needed to play ‘catch-up’ with my own contributions to my accounts.
Congrats to you for realizing you needed to make the change.
Of course, you’re right. Scary about the 29%. Maybe we should call ourselves the 29 Percenters?
Sadly, for women, I would be a 20 Percenter.