You Can’t Make This Stuff Up

84% of Americans could not score over 75% on a simple financial literacy test. This stuff is not music theory. Mostly simple arithmetic and modest thinking skills. What has gone wrong?

What is financial literacy?

When you can’t define the problem or opportunity, the rest of the outcomes become random. For the purpose of discussion let’s say financial literacy answers questions:

  1. What is money for? It allows trades to happen without urgency. I can buy (trade my money for your goods) even when I have nothing you want that I could trade. If I am trading fresh fish for gasoline, I am out of luck if you don’t want fish today. You could see why I would like to have traded my fish to someone else for money and then trade my money for your gasoline.
  2. How do you get it? By trading some value you have to someone who wants that particular value and will trade their money to get it. At one time, the trades were mostly physical. Fish for meat or a fur coat. Now it is mostly skill and time.
  3. How can you move it around in time? There are two movements possible. I can move it to the future by saving and investing or I can move it from the future by borrowing. With money, all of the past, the future and present time frames are important to know about.
  4. What happens when you get money? Once you have earned money, your friendly government wants some of it. You might ask what have they traded to me to get my money? There are many things. Roads, schools, police and fire protection, and hundreds more. We probably don’t use everything they provide, but that is okay. We could deal with that in other ways.
    The rest of the money is sent ahead for future consumption, pay debt, (sent to the past) or consumed in the present. It is as simple as that.
  5. What is risk? Risk is a big subject, but most of us see it as the probability that somehow we will get less back than we put in. That isn’t the only way to define risk, but the other ideas, like variability, require particular context. For example, do you have a loss if you don’t sell the investment. Not needing to sell is a defense to that kind of risk.

2018 financial literacy test

TIAA Institute and GFLEC at George Washington University have published the outcome of their financial literacy tests for 2018. You can find their press release here.

As you could easily believe, the results are not encouraging.

From the Press release:

The P-Fin Index is unique in its capacity to robustly measure an individual’s overall personal finance knowledge. The survey-based assessment tool asks 28 questions, covering eight areas of functional knowledge:

  1. Earning – determinants of wages and take-home pay

  2. Consuming – budgets and managing spending

  3. Saving – factors that maximize accumulations

  4. Investing – investment types; risk and return

  5. Borrowing/managing debt – relationship between loan features and repayments

  6. Insuring – types of coverage and how insurance works

  7. Comprehending risk – understanding uncertain financial outcomes

  8. Go-to information sources – recognizing appropriate sources and advice

Of these which would you guess to be the most well understood.

Averages don’t tell everything, but the results are clear enough that one can draw conclusions:

  • Borrowing, Saving, Consuming and Earning were the best scores. Over 50% right answers on the test. None over 60% right. Disappointing!
  • Investing, insuring and going to information sources were all under 50% but over 40%.
  • Understanding risk was 35%

Given Google, I would have thought going to information sources would have scored much higher.

  • Males scored slightly higher than females 53% to 47%
  • You had to be over 45 to expect to score over 50%
  • Income over $50,000, you probably passed assuming pass is 50%. Ridiculously low standard.


  • 49% scored 50% or less
  • 16% scored over 75%,
  • 21% scored 25% or less

There may be huge problems with the survey methodology, but even if there is, I doubt the outcome is very wrong.

The questions

I could not find the test itself, but if found three of the questions here. The questions don’t seem especially difficult.

One of them:

“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?”

A) More than $102
B) Exactly $102
C) Less than $102
D) Don’t know
E) Refuse to answer

Financial skill makes life easier.

Start early. Small errors early compound to big problems later.

How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”
Ernest Hemingway, The Sun Also Rises

Repairing the shortfall

All learning begins with humility. There are things people don’t know about managing their finances. If they don’t learn they will continue to receive the same old outcomes. It is not music theory. It is mostly just common sense. But you must start.

The trick will be finding the material.

It is not all about arithmetic and detail.

A great deal of it has to do with the way we think. The way we assess the future. Our time competence. Our curiousity and ability to question what we do.

Learn some basic skills, like the rule of 72. Learn how to read a loan amortization table. Learn about investing and investments. All good.

Learn some material from Daniel Kahneman. We all have thinking errors that recur. Try to avoid the common ones.

Then manage your lifestyle spending so you have some money to do something with. Nothing happens until you save some money. Or pay of debt.

Tip: Pay off the debt with the highest interest rate first. Like I said, it is not music theory.

I help business owners and others to use tax efficiencies and design advantages to achieve more efficient income and larger, more liquid estates.

In previous careers, I have been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. 705-927-4770

2 Comments on “You Can’t Make This Stuff Up

  1. Hi Ron, I thought of you when I read this.  I had to Google 2018 Financial Literacy Test to get the press release as the link didn’t work.   Also I was talking to Don Smith who took PhysEd with you and taught at Bowman while our kids were there.  He said to say hi.   Winter still has its clutches in us with snow two days ago, but the sun still melts snow even if the temperature is below 0.   Jim’s getting over the head cold that I had for 2 weeks.  He”s got his last curling this weekend.    We have’t seen the grand kids for quite awhile due to our successive colds.   Badminton tomorrow morning, Living Green Expo with Leigh in the afternoon and tennis at 4:00.  I should sleep well tomorrow night. (not usually a problem.)   Rob’s in the throes of tax season, so 16/7 or something like that.  If we can take the kids for a couple of hours on Sunday, He and Amanda can get a bit of time together.   So, all in all, we’re dong well and can’t wait until some spring shows up. Love, Holly Ann.

    • Thanks for the note on the link failing. It is repaired now. As to the rest of the comment, I think you have me confused with someone else. Best Don

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