Can you explain what risk diversification is? Identify the effects of inflation? Know how to calculate interest? If you answered yes to these three questions, you are better off than 43% of Americans and a whopping two-thirds of the world's population.
According to the first-ever S&P Global FinLit Survey, a detailed and comprehensive analysis of worldwide financial literacy by the World Bank, Gallup, and George Washington University, just one-third of the world's population is financially literate. On a country-by-country basis, Norway, Denmark and Sweden tied for first place, with 71% of their populations ranking as financially literate. At the bottom of the spectrum was Yemen -- just 13% of the Yemeni population was deemed financially literate by the S&P survey.
The U.S., meanwhile, ranked a less-than-impressive 14th in the world, with 57% of Americans passing the test set before them.
These rankings were calculated by interviewing more than 150,000 randomly selected adults in more than 140 countries over the course of 2014. Adults surveyed had to answer just five multiple-choice questions. In order to appeal to the broadest number of people as possibles, the questions are not specific to financial products like credit cards or mortgages; rather, they test on concepts that are involved in financial decision making. Here's what survey respondents were tested on -- along with the choices provided (answers are at the bottom of the post):
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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?
a. one business or investment
b. multiple businesses or investments
c. don’t know
d. refuse to answer
2. 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?
a. less
b. the same
c. more
d. don’t know
e. refuse to answer
3. 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?
a. 105 US dollars
b. 100 US dollars plus three percent
c. don’t know
d. refuse to answer
4. 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?
a. more
b. the same
c. don’t know
d. refuse to answer
5. 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?
a. more than 150 dollars
b. exactly 150 dollars
c. less than 150 dollars
d. don’t know
e. refuse to answer
Survey respondents were deemed financially literate if they could correctly answer three out of the five questions. And with only 33% of adults worldwide achieving that passing grade, the survey's authors estimate that a whopping 3.5 billion adults around the world -- many of them in developing countries -- lack an understanding of basic financial concepts.
"Financial ignorance carries significant costs. Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less money," authors Leora Klapper, Annamaria Lusardi and Peter von Oudheusden write. "Financial knowledge is especially important in times where increasingly complex financial products are easily available to a wide range of the population. For example, with governments in many countries pushing to boost access to financial services, the number of people with bank accounts and access to credit products is rising rapidly."
This rapid rise in access to bank accounts and credit products could eventually have an effect on global financial literacy: Klapper, Lusardi and von Oudheusden found that adults who use formal financial services generally have higher financial knowledge -- regardless of income. "Even poor people who have a bank account are more likely to be financially literate than poor people who do not have a bank account, and rich adults who use credit also generally have better financial skills than rich adults who do not," they write. "This suggests the relationship between financial knowledge and financial services may work in two directions: While higher financial literacy might lead to broader financial inclusion, operating an account or using credit may also deepen consumers’ financial skills."
The study, which is rife with factoids and insights into different parts of the world (like: "About 47% of adults in India – 415 million adults – lack a bank account, [and] roughly 80% of those without bank accounts have weak financial literacy") also found -- perhaps unsurprisingly -- a wide variation in results between genders and between developed and developing countries. Here's a look at how developed countries like France and the U.K. scored compared to developing economies like Brazil and India:
On a global basis, 35% of men are financially literate, compared to just 30% of women. Interestingly, Klapper, Lusardi and von Oudheusden found that "while women were less likely to provide correct answers to the financial literacy questions, they were also more likely to indicate that they 'don’t know' the answer":
Ultimately, the survey authors hope that their findings will help inspire efforts to improve financial know-how around the world, and maybe even inspire a little bit more consumer protection efforts.
“With technology spreading the design of innovative banking services and payment methods, it’s critical that we understand who knows what around the world,” Klapper says. “My hope is that this data will help policymakers in finding ways to boost financial literacy and consumer protection and help open the door to greater financial inclusion and economic empowerment.”
(Answers to quiz: 1: b. 2: b. 3: b. 4: a. 5: a.)
