Number of the Day Shows Value of Financial Literacy

Our take on the most relevant or interesting figure in personal finance today

33% - That's how much less vulnerable you are to unexpected expenses than the average older adult if you know the answers to three questions, a new study suggests.

The Balance

That's how much less vulnerable you are to unexpected expenses than the average older adult if you know the answers to three basic financial literacy questions, a new study suggests.

The study, released Monday by the National Bureau of Economic Research, assessed “financial fragility,” finding that the likelihood of not being able to cover an unexpected $2,000 expense was greater for people who incorrectly answered the three most important questions on a 12-question financial literacy test. Researchers at three universities quizzed 2,889 survey respondents aged 45 to 75 in April and May—the early months of the COVID-19 pandemic.

The three questions, which researchers dubbed the “Big Three,” tested whether subjects understood the concepts of interest, inflation, and diversifying risk

“People who were more financially literate were better protected against such shocks,” wrote the study’s authors, who were from North Carolina State University, the University of Pennsylvania’s Wharton School, and George Washington University. “This is probably because the more financially literate made better saving and spending decisions in the past, so they could more easily withstand economic shocks and make better decisions in times of crisis.”

Want to see how you would have done? Here are the Big Three questions, with answers at the bottom.

The Big Three 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? 

  • More than $102
  • Exactly $102
  • Less than $102
  • Don’t know

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? 

  • More than today 
  • Exactly the same
  • Less than today
  • Don’t know 

3. Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” 

  • True
  • False
  • Don't know

Answers to the Three Big Questions

  1. More than $102
  2. Less than today
  3. False