Being financially literate involves acquiring more knowledge than you might think.
To test where people stand, Standard & Poor's, Gallup, and The World Bank have teamed up to create a financial literacy test. Join Fool contributors John Maxfield and Gaby Lapera as they run through the test and, if you're bold, see where you fall on the financial literacy spectrum.
Listen to the full podcast by clicking here. A full transcript follows the video.
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This podcast was recorded on 11/23/2015.
Gaby Lapera: Which kind of leads me actually into my next topic which is a survey that was conducted by Standard & Poor's/Gallup/The World Bank. This is a lot of big names, you can probably trust this study. On financial ...
John Maxfield: The Onion.
Lapera: The Onion yeah. So it's actually about financial literacy and the survey asked five questions which I am actually going to ask to you, John Maxfield and let's see how you do.
Maxfield: Oh no, no you're not. Oh no. OK. Alright, is this the real deal, so you're going to ask me these questions? And just for listeners I have not prepared the answer to these questions.
Lapera: No, this is a shock to him. Get excited. So are you ready?
Maxfield: Yeah I hope I don't fall into that other category. OK.
Lapera: Suppose over the next 10 years the prices of the things you buy double. 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?
Maxfield: So your income increases by the same percentage the price increases?
Lapera: Right, and we're not talking about savings or anything. Just literally your income.
Maxfield: Just your income. I would say that you can buy the same.
Lapera: Exactly. Good job.
Maxfield: OK. Oh my God. I'm very nervous, I want you to know that.
Lapera: Good. Suppose you need to borrow $100. Which is the lower amount to pay back? $105 or $100 plus 3% interest?
Maxfield: $100 plus 3% interest.
Lapera: Correct, excellent! Two for two. You are two for two. Get excited. Alright, we're almost there. Compound interest. Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Will the bank add more money to your account second year than it did the first year, or will it add the same amount of money both years?
Maxfield: It will add more and I want that bank account.
Lapera: Yes, I know. Who doesn't want 15% interest?
Maxfield: Because I feel like one basis point on mine.
Lapera: I know, me too. OK, last question. I guess they're, oh no there is one more question after this, I'm sorry. So suppose you had $100 in a savings account and the bank adds 10% 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? And I'm going to give this to you with multiple-choice answers because I don't want you to have to do math right now.
Maxfield: OK so let me just make sure, so $100 and they're giving you 10% every year?
Lapera: Right. And how much would you have after five years. Can you do the math in your head?
Maxfield: OK go for it. Give me some multiple choice options and I have a rough idea about what it is. But go on.
Lapera: Less than $150, exactly $150, or more than $150.
Maxfield: You'd have more than $150.
Maxfield: OK thank you.
Lapera: No problem. Yeah when I did this the first time, I like sat down and did all the math and I got the correct answer. And then it was multiple choice like that, and I was like oh this is a word I can't say on the air.
Anyway so risk diversification. 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?
Maxfield: It's definitely safer just to put your money into multiple investments.
Lapera: Correct. Congratulations you are super financially literate.
Maxfield: Wow, wow.
Lapera: That was it. That was the difficulty level of the questions we're talking about for this survey.