Less than Half of the US Can Pass This 3-Question Test. Can You?

The Trinity Study is the most discussed academic research paper in financial circles, as it’s the best one that measures how much money is enough to have. Before you know how much money is “enough,” however, you need to be able to amass it first. And for 70% of America, this ability is quantifiably out of their reach; not because of income inequality, but because of their lack of education. All it takes is three questions to realize it.

In 2015, an economics professor at George Washington University published an article on financial literacy in America. Her name is Annamaria Lusardi, and I for one need to see her name more often in blog posts and discussion boards because her work is phenomenal. This lady is a badass when it comes to helping the masses achieve financial literacy. When she’s not at her day job teaching at one of the most prestigious universities in the nation, she’s doing things like, oh, advising the goddamn US Treasury or testifying to the motherfucking US Senate on how crucial financial literacy is. She is my freaking hero. I need to pop down to DC once it’s safe to travel just so I can sit in on a lecture of hers. Her work demands respect and I sit here in awe of it.

The Article in Question

Which brings me to the realization that Dr. Lusardi is likely a very frustrated person. Think about it. This is a powerhouse of a human that’s a formidable international authority in financial know-how. She earned her PhD in economics before I was even born. People all over the globe respect the hell out of her and ask her for her input. And yet, when she researched how well those testimonies and advising sessions and life’s work penetrated the thick skulls of the general populace, the results were abysmal. To say the least.

You can read her article about it here, titled “Financial literacy: Do people know the ABCs of finance?”

It’s 12 pages. 10 pages if you don’t look at the notes or references at the bottom. It won’t take you long at all to read through; Dr. Lusardi writes so concisely that any high schooler could grasp this.

The Questions

The meat of the paper is in the three questions she and Dr. Olivia Mitchell – another woman after my own heart – had designed in the 2000s. These questions were created to assess basic financial literacy. BASIC, not advanced (because there’s a whole other set of questions for assessing that, also in the paper).

Here are those three questions:

1. Suppose you had US$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 US$102, exactly US$102, less than US$102? Do not know (DK). Refuse to answer.)
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1year, would you be able to buy: (more than, exactly the same as, or less than today with the money in this account? DK. Refuse to answer.)
3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” (DK. Refuse to answer.)

Y’all see these are multiple choice questions too, right? Dr. Lusardi gave respondents every chance to at least not make fools of themselves. She even gives them a dignified way of saying they don’t know! She lets them use hostile answers in the “refuse” option!! I need to buy her several drinks. And some for Dr. Mitchell too.

The Answers

Because when I look at these three questions, they’re easy to answer. I’ll be the first to admit I don’t quite have the brain for advanced numbers – which, by the by, you don’t need to become outrageously rich. I’m proof of that because I know the answers to these three questions already. #1’s correct answer is “more than $102,” because an interest rate of 2% per year on $100 means you get $102 the first year and will have a little more at the end of five. She’s not even asking the specific amount of money I’d have after Year 5; just if I knew how compound interest worked!

#2 is also easy for me, as it is for most financially-educated folks. Inflation means the value of a dollar goes down throughout the years; if your savings account gives you 1% interest when inflation is 2%, you’re essentially losing 1% of your account’s spending power. It’s “less than today”. Notice this question doesn’t require you to bust out a calculator or solve some head-scratching equation. All it’s asking is “Do you know what inflation does with the money you choose not to spend or invest?”

And the answer to #3, of course, is “false”. Buying only one company’s stock is the same as gambling, in my eyes. You can’t possibly know if this company will actually hit stratospheric heights or, more likely, crash and burn. Stocks are risky because of that, and the safest option is to invest in a fund of them to best spread out that risk, or diversify your investment.

The Problems

Yay. I passed.

But most – to both my utter horror and mild unsurprise – do not.

Drs. Lusardi and Mitchell posed these three questions to people in 2004 and 2009, the ’04 respondents being Boomers and the ’09 respondents being a “representative sample of the US population”. In the 2009 study, roughly 2 out of 3 people could answer the first and second questions correctly. Which is bad. But it gets worse: that third question, which asks you “hey, you know putting all your eggs in one basket is really fucking bad, right?” had HALF of the answers come out WRONG.

And as you can see from the title of my post, less than half actually nailed all three questions. Specifically, only thirty percent answered all three correctly. That is less than a third. That means that, if I took any ten people in America and asked them to help me with my money, seven of them would immediately have their heads explode in front of me.

That is worse than bad. People, the systems we built around money is literally what funds government and society. For the purposes of living a safe and happy life, it is just as fundamental as knowing not to eat poison or approach a grizzly bear.

Okay, you’ll still find humans who will eat the poison or touch the grizzly. But not seventy percent of the population.

This perfectly illustrates just how hard we collectively fail at life. There is more access to understanding this shit than ever before, simplified to the point that any non-STEM major can grasp it easily. But we don’t.

We Can Do Better

Dr. Lusardi, bless her, talks about why we don’t grasp this financial stuff in ways that even the most pigheaded fool can’t refute. She discusses what role governments can play in increasing literacy rates via school, the workplace, and improved domestic policy. She also looks at the racial and gender aspects of literacy, and how the families you’re born into can overwhelmingly determine your success later in life.

The financially literate students are overwhelmingly White, male, and the children of college graduates. Thus, the correlation between financial literacy and gender, race, and education is present at early stages of the life cycle.

She calls the results of these studies “sobering”. Please don’t disappoint the light of my life Dr. Lusardi ever again. If the system has already failed you, it’s time to team up with me so we can fix at least some of the damage done. Get your budget together, improve your behavior around money, and stick to the freaking plan. This is much easier than you think it is. I know for a fact you’ve got this.

Did any of those three questions puzzle you or confuse you? What do you think tripped up the respondents most about them?