A new data reveals that people all over the globe don’t understand the basic concepts of investment and inflation.
A three-question test, given as part of the Aegon Retirement Readiness Survey 2018, measured how well people understand basic financial concepts. The online test was given to 16,000 people in 15 countries this year. It revealed just how unprepared a good chunk of the world is for retirement as many of the participants failed the quiz, with big potential consequences for their future security.
The “Big Three” financial literacy questions were created by Dr Annamaria Lusardi of the George Washington School of Business and Olivia Mitchell, of the Wharton School of the University of Pennsylvania. These three questions, measure the understanding of compounding interest, inflation and risk diversification – the ABCs of finance.
Here’s the “Big Three” quiz. Let’s see how you do:
How did you score? The correct answer is: Q1. More than $102 (compound interest). Q2. Less than today (inflation). Q3. False (diversification)
The survey corroborates Lusardi and Mitchell’s research findings that financial literacy is low around the world. Globally, the survey finds only 30% of respondents correctly answered all three questions. Financial literacy is highest in Germany with 45% answering all three correctly– and lowest in Turkey (17%), for the countries considered. A concerning 11% of people globally did not answer any of the three questions correctly.
The survey concludes that without the requisite level of financial knowledge, it is impossible for people to formulate good retirement plans, or even know what questions to ask of advisors and retirement plan providers when seeking advice. Low financial literacy may also translate into failure to engage in any kind of retirement planning.
The need for global financial literacy
In a world in which workers are expected to exercise more choice over how much they put aside for retirement, and how their retirement savings are invested, it is imperative to increase financial literacy among adults and to provide more education starting at an early age so that children can gain these vital skills that will serve them throughout their lives. Whether taking a do-it-yourself approach or relying on expert advice, a solid understanding of financial concepts will help people make better-informed decisions.