April 12, 2017 by Lisa Brammer
Since April is financial literacy month, I thought it would be a good time to discuss the sobering results of the Standard and Poor’s Ratings Services Global Financial Literacy Survey. The S&P survey is the world’s largest, most comprehensive global measurement of financial literacy. The results are based on interviews with more than 150,000 people from over 140 different countries, aged 15 and older. Unfortunately, the outcome revealed that worldwide only 1-in-3 (~33%) adults (15 and older) are financially literate. Sadly, this leaves about 3.5 billion people ignorant of basic financial concepts.
To determine financial literacy, questions were asked that measured knowledge in four basic financial concepts: risk diversification, inflation, numeracy (interest), and compounding interest. A person was considered financially literate if they understood (at least) three of the four concepts.
Here are the questions. Multiple choice answers are in brackets.
Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments? [one business or investment; multiple businesses or investments; don’t know; refused to answer]
Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today? [less; the same; more; don’t know; refused to answer]
Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three percent? [105 US dollars; 100 US dollars plus three percent; don’t know; refused to answer]
Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years? [more; the same; don’t know; refused to answer]
Suppose you had 100 US dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? [more than 150 dollars; exactly 150 dollars; less than 150 dollars; don’t know; refused to answer].
Here are the answers:
Risk Diversification: Multiple businesses or investments
Inflation: The same
Numeracy (interest): 100 US dollars plus three percent
Compound Interest: More, More than 150 dollars
How did you do?
Worldwide, risk diversification was the least understood concept. I was surprised by this. I guess a lot of people have never heard of the old adage, “Don’t put all of your eggs in one basket.” Kind of spells it out for you, doesn’t it?
Overall, men fared better than women. Worldwide, 35% of men and 30% of women were financially literate. People from Northern European countries had the highest scores: 71% of adults in Denmark, Norway, and Sweden understood the concepts. People from South Asian countries had some of the lowest scores, where, at best, 25% are financially literate. Here in the United States 57% of the people passed and in Canada 68% did well. The Republic of Yemen had the lowest score with a financial literacy rate of only 13%.
One of the things I found interesting about the results was that worldwide financial literacy was lowest among adults 65 and older. But as poorly as scores generally were, I found it encouraging that globally and in countries with emerging economies people in the 15-35 age group did the best. This tells me that perhaps there’s been an increase in education for people in these younger age groups. Hopefully this will translate into higher scores for everyone in the future.
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