Try this financial literacy test

We throw the term “financial literacy” around pretty frequently, and you probably have a good idea of what it means. But how does one actually test financial literacy? And how well would you do on a test of your financial literacy?

Let’s find out.

A little background

Researchers at George Washington University recently released a report, based on data from the 2012 National Financial Capability Study, which concluded that millennials think they’re more financially literate than they really are. In that 2012 study, financial literacy was determined through a series of five questions. Correctly answering the first three questions would indicate a “basic understanding” of personal finance. Answering all five questions correctly would demonstrate a “high level” of understanding.

Of the millennials surveyed, only 24 percent were able to answer the first three questions correctly and only 8 percent answered all five questions correctly. Could you do better? Here are the actual questions used in the survey:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent 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
• Do not know
• Refuse to answer

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent 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 
• Do not know
• Refuse to answer

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 
• Do not know
• Refuse to answer

4. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.

• True 
• False
• Do not know
• Prefer not to say

5. If interest rates rise, what will typically happen to bond prices?

• They will rise
• They will fall 
• They will stay the same
• There is no relationship between bond prices and the interest rates
• Do not know
• Prefer not to say

Ready for the answers? 1 – More than $102, 2 – Less than today, 3 – False, 4 – True, 5 – They will fall

How did you do? Did you meet your expectations? Remember that only 8 percent of the millennials surveyed were able to answer every question correctly, despite 69 percent giving themselves high grades for financial literacy. In general, it’s pretty common for many of us to think we know all that we need to know about money because we handle our money every day. In reality, however, being financially literate means having a solid grasp on a wide range of financial concepts.

If you struggled with some of the questions, don’t worry. In the weeks to come, we’ll be going in depth with each of the questions and the core concepts being tested. Besides, one of the true values of a test like this is learning what you don’t know. Once you see where the gaps are, you can work to increase your knowledge and fills those gaps.