Blog Post
Do you understand money? These 3 questions reveal the answer
Have you ever wondered how much you truly understand about money? Two professors Annamaria Lusardi (Stanford University) and Olivia Mitchell (Wharton) developed three...
Have you ever wondered how much you really understand about money? Professors Annamaria Lusardi and Olivia Mitchell developed three simple questions that are widely used to measure financial literacy.
They are simple, but they reveal a lot.
The Big Three
Question 1: Interest and growth
Imagine you have $100 in a savings account earning 2% a year. After 5 years, how much would you have if you left it alone?
- A. More than $102
- B. Exactly $102
- C. Less than $102
Question 2: Inflation and buying power
Suppose your savings account earns 1% a year while inflation is 2% a year. After one year, will your money buy:
- A. More than today
- B. Exactly the same
- C. Less than today
Question 3: Risk and diversification
Buying one single company stock usually provides a safer return than a stock mutual fund.
- A. True
- B. False
The Correct Answers
- A: More than $102
- C: Less than today
- B: False
If you missed one or more, you are not alone. Only about one in three adults worldwide answers all three correctly.
What Each Question Is Really Testing
1. Compound growth
This question asks whether you understand that money can grow on both the original balance and the interest it already earned. That is why investing early matters so much, and why high-interest debt gets dangerous so quickly.
2. Inflation
This question is about purchasing power. If your money grows more slowly than prices rise, you are losing ground even if the balance looks stable.
3. Diversification
This one tests your sense of risk. A single stock leaves you exposed to one company. A mutual fund or index fund spreads your money across many companies, which usually makes the ride more stable.
Money confidence does not require knowing everything. It starts with understanding a few powerful basics.
Takeaway
Once you understand how growth, inflation, and diversification work, you make better decisions with savings, debt, and investing. Three concepts can change a lot.