Every year since 2017, the folks at the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business have quizzed Americans about personal finance topics, and only about half of the questions have been answered correctly each year. In the 2023 report, only 48% of questions were answered correctly overall.
While many personal finance quizzes yield dismal passing rates for the overall population, they serve as a wake-up call for individuals’ financial awareness. One such quiz, conducted by the TIAA Institute and the GFLEC, provides insight into Americans’ financial literacy level.
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Decoding the TIAA Institute and the Global Financial Literacy Excellence Center Quiz
Jose owes $1,000 on a loan that has an interest rate of 20% per year compounded annually. If he makes no payments on the loan, at this interest rate, how many years will it take for the amount he owes to double?
This question often trips people up, but a quick way to tackle it is by using the Rule of 72. This rule estimates how long it takes for an investment to double at a fixed annual rate of return. Dividing 72 by the annual interest rate gives an approximate doubling time for the investment.
For instance, with a 20% interest rate, dividing 72 by 20 gives approximately 3.6. Thus, it will take about 3 1/2 years for Jose’s debt to double, highlighting the potential financial burden of high-interest loans and credit card debts.
The compounding phenomenon also applies to investments, illustrating how they may grow and double over time:
Chart and calculations by author.
Insight from the FINRA Quiz
The FINRA Financial Industry Regulatory Authority quiz, with a national average of 3.2 questions answered correctly, assesses financial literacy. Here are two sample questions:
Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
Understanding inflation’s impact is essential as it steadily erodes the purchasing power of money over time. For example, over 25 to 30 years, typical inflation rates can halve the real value of savings, emphasizing the significance of investing to surpass inflation’s negative effects.
Another question pertains to the safety of investing in a single company’s stock versus a stock mutual fund. The answer is false, with the latter offering diversification, while sole reliance on one company’s stock exposes the investor to higher risk, as historical examples demonstrate.
The Value of Financial Literacy
The TIAA Institute and the Global Financial Literacy Excellence Center identified a group with a low level of financial literacy that exhibited concerning financial behaviors. These individuals were more likely to struggle with making ends meet, face debt constraints, and lack sufficient emergency savings, emphasizing the correlation between financial literacy and positive financial habits.
Enhancing financial literacy empowers individuals to make informed financial decisions, recognizing the implications of debt and asset growth. Accessible resources like Fool.com and TheAscent.com provide valuable financial insights, complemented by a plethora of financial literature.
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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
