From determining when and how to claim Social Security benefits, managing retirement accounts, taking out loans and mortgages, navigating taxes, and saving for college expenses, it's more important than ever that people are financially savvy. Thing is, many aren't.
A recent study, Financial Literacy Around the World, by Standard & Poor's Ratings Services and McGraw Hill Financial Inc., reveals that worldwide only one in three adults could be considered financially literate.
And in the United States? Slightly more than half (57 percent) of adults would be considered as such. In fact, the United States did not make the cut for countries with the highest financial literacy rates. Those honors went to Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, and the United Kingdom, where 65 percent of their adults are financially literate.
So how did researchers determine this literacy? More than 150,000 adults in more than 140 âeconomiesâ were asked the following questions about risk diversification, inflation, interest, and compound interest. Three out of four correct answers is considered financially literate.
- Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
- 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?
- Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus 3 percent?
- 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?
- 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?
Right about now, you're probably wondering how your clients would do on this test. Here are eight takeaways from what researchers found.
- Inflation and interest are the most understood concepts. Worldwide, half of the people surveyed knew these issues.
- Knowledge of risk diversification is lowest, with 35 percent of respondents answering correctly. Among major advanced economies, 64 percent understood risk diversification, compared to 28 percent in emerging economies.
- Worldwide, 35 percent of men are financially literate, compared to 30 percent of women.
- Financial smarts increase with age to a point and then decline. About half (56 percent) of adults younger than 35 are financially literate, compared to 63 percent of those age 35 to 50, and lowest for adults older than 65.
- Schooling helps. In major advanced economies, 52 percent of adults with nine to 15 years of schooling are financially literate and 31 percent for adults with up to eight years of school. Seventy-three percent of adults with at least 15 years of school are financially literate.
- Owning financial accounts doesn't necessarily help. Worldwide, 38 percent of account owners are financially literate, and 57 percent of those in major advanced economies are.
- In major economies, 51 percent of adults use credit cards, compared to 11 percent in emerging economies.
- In major economies, 26 percent of adults have outstanding loans at a financial institution for home purchases. In the United States, almost a third have a mortgage, and 70 percent answered the compound interest question correctly.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.