Money Listens

Don’t know much about history

Don’t know much biology

Don’t know much about a science book

Don’t know much about the French I took

Sam Cooke wrote the song “Wonderful World” in 1960.  Go ahead, take a minute and hum along.  I’ll wait.

How much do you remember about your history or biology classes?  Maybe it doesn’t make much difference.  Did you even have a class in finance or money management?  I never did.  Does it really matter if we know much about finance?

Last week I wrote that we’re basically on our own when it comes to managing our money. How do we know if we’re OK on our own?  How much do we really need to know?  A Dartmouth economics professor, Annamaria Lusardi,  has developed a simple test to determine if you’re financially literate.  Don’t worry, it’s only 3 questions and nobody has to know your score.

Here are the questions:

1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
a) More than today
b) Exactly the same as today
c) Less than today
d) Do not know

3) Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
a) True
b) False
c) Do not know

If you answered all 3 questions correctly, congratulations, you are financially literate.  If you missed 1 or more, or didn’t know, you need some more financial education.  Even if you answered all 3 correctly, you need to keep learning to stay one step ahead of all the traps the banks and credit card companies are setting up for you.  Just keep reading this blog.

The answers?  A) More than $102,   C) Less than today, and   B)False

Read more about financial illiteracy at the Freakonomics blog from the New York Times.

This entry (Permalink) was posted on Monday, July 21st, 2008 at 4:14 pm and is filed under Educate Yourself. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response , or trackback from your own site.