For a new report on financial literacy, Americans were asked three “very fundamental questions” to test financial literacy.
Among millennials, only 16% correctly answered all three.
Dr. Andrea Hasler, one of the authors of the report, appeared on Yahoo Finance’s “On the Move” to discuss the findings. “The problem here is that financial literacy is highly linked to money management behavior and saving and planning for retirement,” she says.
The multiple choice questions covered broad concepts of numeracy, inflation, and diversification:
1) Suppose you had $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? Answers: a) More than $102; b) Exactly $102; c) Less than $102; d) Do not know; e) Refuse to answer.
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? Answers: a) More than today; b) Exactly the same; c) Less than today; d) Do not know; e) Refuse to answer.
3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” Answers: a) True; b) False; c) Do not know; d) Refuse to answer.
Even the millennials who self-identified as financially literate struggled. Only 19% of that group were able to answer the three questions correctly. (The answers were “a”; “c”; and “b.”)
As the report notes, the millennials (defined as individuals 18-37 in 2018) “demonstrate lower basic financial literacy levels while at the same time being more likely to overestimate their own financial knowledge.”
Americans across all age ranges struggled with the questions, but the knowledge holes were most glaring among young people. For example, 49% of respondents aged 70-74 correctly answered the big three questions. No age group scored above 50%.
But financial literacy is arguably more important for the young. “Students have very difficult questions very early in their lifetime,” says Hasler. “For example, right after high school, how to fund their college.”
The study, titled “Millennials and Money: The State of Their Financial Management and How Workplaces Can Help Them,” was from the Global Financial Literacy Excellence Center at the George Washington University, supported by the TIAA Institute.
It was based on analysis of data from the 2018 National Financial Capability Study.
Hasler, a professor of financial literacy, appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans.
[Read more: Retirement planning 101]
Gaps in knowledge alongside $1.6 trillion in student debt
The lack of financial literacy intersects directly with the student loan crisis; statistics show Americans have $1.6 trillion in outstanding debt, working out to $29,200 per borrower.
According to the TIAA report, 43% of millennials have a loan. And of those that are currently working off their loan, 47% of respondents reported that they did not look into what their monthly loan repayment bill would be at the time they decided to accept a loan.
The challenge is getting young people educated and then out of debt and on the path to savings while they still have time for the money to grow. As Hasler says, she often tell her students “compound interest even works when we’re asleep.”
Ben Werschkul is a producer for Yahoo Finance in Washington, DC.