Can You Pass This 5-Question Financial Literacy Test?

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can you pass this 5 question financial literacy test

Only 55% of Singaporeans passed Standard & Poor’s financial literacy survey. We try the test ourselves and explain what the correct answers mean.

In an article by the Business Times, Standard & Poor’s financial literacy survey recently found that women and the poor are less financially savvy.

Beyond revealing the obvious (the poor are less financially savvy? Who would have guessed!), we note that some of the financial literacy questions are revealing. People often got them wrong in ways we could predict.

Here are the common failings, dissected via survey answers:

1) 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?

a) one business or investment
b) multiple businesses or investments
c) don’t know
d) refused to answer

The correct answer is B. Generally speaking, over a long period of time, it’s better to spread your money out between different assets. This ensures that one bad downturn will not wipe out your entire fortune at a stroke.

Most Singaporeans would be in the “don’t know” category because investments are thought of as an individual thing. Even if people put money into a diversified fund, they often believe they are investing in a singular product (the fund counts as one thing to them.)

On a side note, the people who answer A may be extremely financially savvy, or not at all. Investors who follow Warren Buffet’s philosophy (Buffet believes diversification is protection from ignorance) may come from a different school of thought. They may believe that it makes more sense to put all their eggs in one basket, which they can then watch very closely. With this answer, it’s hard to tell if you’re dealing with someone clueless, or a very skilled analyst.

2) 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?

a) less
b) the same
c) more
d) don’t know
e) refused to answer

The correct answer is B. This isn’t so much a test of financial savvy as it is a test of maths skills, although the two are related. It might be more appropriate to simply ask: “If you have $100 today, and you keep it for 10 years, how much stuff will that $100 buy in 10 years?”

As long as the answer is “less than $100”, that’s a good sign that the answerer grasps the concept of inflation.

But since most people can’t work out the exact impact of inflation, they should be taught to ask their financial advisor to do it for them. When you buy an insurance plan, for example, you can ask to see inflation adjusted returns, or real returns, which take into account the inflation rate after a given number of years.


Related Article: Why Do Singaporeans Keep Buying the Wrong Financial Products?


3) 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 per cent?

a) 105 US dollars
b) 100 US dollars plus three per cent
c) don’t know
d) refused to answer

Again, this is more of a maths question than a test of financial savvy. For those of you who can’t work it out, 3% of $100 is $103–yes, the correct answer is B. But we get the point–the question implies that most people can be confused by percentages.

So let us show you the most popular way to confuse lay investors with percentages:

Let’s say Fund A saw a 300% increase in returns over the past year. Fund B saw a 10% increase in returns. Which fund is better?

Going by percentages alone, it’s Fund A. But what if Fund A made $10,000 in returns last year, whereas Fund B made $420,000 in returns? That would mean Fund A’s returns increased by $30,000, whereas Fund B’s returns increased by $42,000. In actual dollars, Fund B still came out way ahead.

Remember this if you are ever confronted by an advertisement that only wants to talk about percentages. This is a cheap parlour trick that’s often used in marketing materials or statistics.

4) 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?

a) more
b) the same
c) don’t know
d) refused to answer

We’re pretty sure simple interest and compound interest is taught in Secondary school maths. But then again, we don’t remember how to find the angle of elevation between us and the nearest hotel either. So, a quick clarification:

Compound interest means more money comes in on the second year. For example, say we have (for simplicity’s sake) $100 that compounds at 1% interest per month. It would be:

Month 1: $100 + $1 = $101
Month 2: $101 + $1.01 = $102.01
Month 3: $102.01 + $1.02 = $103.3

And so on. Note that each month, the interest increases because it was based on the previous month, not the very first month. So the correct answer is A.

This is also important for understanding loans because most forms of loans (credit card loans, personal loans, etc.) are compound interest loans. That’s why financial products have an Effective Interest Rate (EIR) next to the given rate. This is what the loan actually costs after you take into consideration compound interest.

5) 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?

a) more than 150 dollars
b) exactly 150 dollars
c) less than 150 dollars
d) don’t know
d) refused to answer

The correct answer is A. This question is similar to question 4. You would have earned over $150 because the amount added is not exactly $10 per year. Each interest payment is 10 percent of the amount from the previous year.

The table below illustrates how the savings account grows with interest over 5 years.

Year

Amount Interest Payment (10%)

Total Amount
with Interest

1

$100 $10 $110

2

S110 $11

$121

3

$121 $12.1

$133.1

4

$133.1 $13.31

$146.41

5 $146.41 $14.64

$161.25

You Might Also Want to Read:

INFOGRAPHIC: Why Your CPF Savings Are Not Enough for Retirement
How to Save Money for a Flat Before Your 35th Birthday


Ryan
By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.


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