Can You Pass the Global Financial Literacy Test?

Can You Pass the Global Financial Literacy Test

We use various forms of assessment to measure knowledge and skills. The “IQ test,” for instance, is widely used to measure intelligence of an individual and predict their performance, which can be beneficial for personal and professional success.

In addition, we employ Daniel Goleman’s “emotional intelligence test” to evaluate several aspects of one’s emotions, creating self-awareness and the ability to respond effectively in stressful situations.

Further, a physician is makes a diagnosis through the results of an examination taken from a laboratory to assess a patient’s overall health.

Purpose of financial literacy assessment

What about financial literacy? How do we assess whether an individual can understand financial concepts and is efficient or capable of managing their personal finances?

Why financial knowledge is an essential skill?

People with low levels of financial literacy tend to incur more debt, are unable to compare and make decisions about investment programs and fail to plan for retirement. They may also be susceptible to missing  the importance of  emergency fund, and pay  extra fees related to financial products, and are often unsuccessful in investment efforts.

In order to make sound financial decisions, it is essential to have basic understanding about financial concepts.

Because the cost of financial ignorance is quite high, financial education is important to improve the quality of one’s life.

Standard & Poor (S&P) on financial literacy

Much research has been conducted about financial literacy but the Standard & Poor (S&P) is the most popular measure. S&P is an American financial services company that publishes financial research and analysis. They provide a credible source of information about the subject and have conducted surveys about financial literacy in many countries. The S&P’s Ratings Services Global Financial Literacy Survey is the world’s largest, most comprehensive global measurement of financial literacy.

Four financial concepts

Dr. Annamaria Lusardi,  Academic Director of Global Financial Literacy Excellence Centre at George Washington University highlighted the findings and made the information available in public. It is the first ever conducted global survey covering more than 140 countries in the world.

The survey was conducted in 2014 and the results come from interviews of more than 150,000 adults age 15 and above. They were tested on their knowledge of four basic financial concepts: risk diversification, inflation, numeracy (capacity to do calculation in the context of interest rate), and interest compounding (saving and debt).

The questions were designed at the basis of financial decision making. These are universal and can be asked regardless of any nationality to ensure the tool is valid and objective.

What were the highlights of the study?

The survey indicates the following results:

  • there is a low levels of financial literacy around the world
  • numeracy and inflation are the most understood concept
  • risk diversification is the least understood concept
  • women’s financial literacy levels are lower than men’s
  • the young are a vulnerable group and an important target for financial education programs.

 

Which countries have the highest number of people who are financially literate?  Scandinavian countries such as Denmark, Norway, and Sweden topped the survey with 71 percent of adults being financially literate. This was  followed by Canada, Israel, and the UK.

The United States was quite lower than other developed countries, having 57 percent of adults who are financially literate.

What about the Philippines?  Alarmingly, the survey found the Philippines was one of the 30 least financially literate countries in the world, with only 25 percent of adults aware of the basics of managing their money.

Thailand’s financial literacy is at 27 percent, or two percent comparatively higher than the Philippines. In comparison with other Asian countries, Singapore has the highest number of financially literate adults with 59 percent.

You may check the S&P Global Financial Literacy Survey summary report here.

Now, it’s your turn to answer the survey

These are the sample questions being asked to respondents with four or five options to choose. To test your financial literacy, see how well you answer the following questions about financial concepts or money.

Risk Diversification

  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?
    • multiple businesses or investments
    • one business or investment
    • don’t know
    • refused to answer

Inflation

  1. 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?
    • the same
    • more
    • don’t know
    • refused to answer
    • less 

Numeracy (Interest)

  1. 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 percent?
    • 100 US dollars plus three percent
    • 105 US dollars
    • don’t know
    • refused to answer

Compound Interest

  1. 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?
    • the same
    • more
    • don’t know
    • refused to answer
  1. 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?
    • exactly 150 dollars
    • less than 150 dollars
    • more than 150 dollars
    • don’t know
    • refused to answer

So how did you do? If your score is low, now might be the time to find a credible financial mentor and start improving your finances. Increasing financial literacy alone is not enough as financial success is a result of a strong commitment and sound financial habits.

“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate.”Robert Kiyosaki

 

Richly blessed,

P.S. 1. I’ve been very blessed to have come upon the Truly Rich Club as my  financial mentor.  Join TRC Today!  

P.S. 2.  Please don’t forget to share this article. 

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Answer Key: a.) multiple businesses or investments, b.) the same, c.)100 US dollars plus three percent, d.) More, e.) more than 150 dollars