Posted on 16 February 2012
By Mark Miller
Okay, folks — it’s time for a Personal Finance 101 quiz. Please answer the following three questions:
1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow (more, less or the same)?
2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account (more, or less)?
3. Is this statement true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
Most of you probably think you can provide the correct answers — 70 percent of Americans think they have above the median level of financial knowledge, according to a recent national survey on financial literacy.
But if that’s true, why is it that just 65 percent of the survey respondents were able to give a correct answer to the first interest rate question — which doesn’t even ask for an actual calculation of return? (You would have more money, of course — $110.51, assuming compound interest paid monthly and a constant interest rate.)
Just 64 percent had the right answer on inflation (you’d be able to buy less); 20 percent got it wrong; and 14 percent couldn’t provide any answer.
Only 50 percent got the answer right on diversification (the mutual fund is safer), while one-third couldn’t answer at all.
The questions and responses are among the highlights of new research by two of the nation’s top experts on financial literacy. Learn more in today’s column at Reuters Money.