Most People in the World Have No Idea How to Manage Their Money

Many couldn't pass a simple finance quiz. Can you?
A demonstrator dressed as a banker throws away imitation bank notes during a protest in London. (Suzanne Plunkett/Reuters)

Do you understand money? Let’s see how well you do with the following questions.

1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five 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) do not know; refuse to answer.

2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The correct answers are 1-A; 2-C; and 3-B.

How did you do? Did you respond correctly to all three questions? If you did, then you belong to a surprisingly small global minority.

In Russia, 96 percent of those surveyed could not answer the three questions correctly. While that might be expected of a post-communist nation, the mecca of capitalism didn’t exactly yield glowing results—only 30 percent of Americans aced the quiz. The best-performing respondents were the Germans (53 percent got a perfect score) and the Swiss (50 percent), but this still leaves almost half of each country’s population without a basic understanding of financial matters. In countries with relatively strong economies, the numbers are sobering: 79 percent of Swedes, 75 percent of Italians, 73 percent of Japanese, and 69 percent of French could not respond correctly to all three questions.

These findings were recently published by two economists, Annamaria Lusardi and Olivia Mitchell, and the results reveal startling levels of financial illiteracy across the world. They call attention to a perilous paradox: Financial ignorance is widespread even as the world has changed in ways that make such ignorance more dangerous than ever before. They write, "Financial markets around the world have become increasingly accessible to the ‘small investor,’ as new products and financial services grow widespread. At the onset of the recent financial crisis, consumer credit and mortgage borrowing had burgeoned. People who had credit cards or subprime mortgages were in the historically unusual position of being able to decide how much they wanted to borrow. Alternative financial services including payday loans, pawn shops, auto title loans, tax refund loans, and rent-to-own shops have also become widespread. At the same time, changes in the pension landscape are increasingly thrusting responsibility for saving, investing, and decumulating wealth onto workers and retirees…. [Today], Baby Boomers mainly have defined contribution (DC) plans and Individual Retirement Accounts (IRAs) during their working years. This trend toward disintermediation is increasingly requiring people to decide how much to save and where to invest and, during retirement, to take on responsibility for careful decumulation so as not to outlive their assets while meeting their needs."

Presented by

Moisés Naím

Moisés Naím is a contributing editor at The Atlantic, a distinguished fellow in the International Economics Program at the Carnegie Endowment for International Peace, and the chief international columnist for El Pais and La Repubblica, Spain's and Italy's largest dailies. He is author of more than 10 books, including, most recently, The End of Power. More

Former U.S. President Bill Clinton has said that The End of Power "will change the way you read the news, the way you think about politics, and the way you look at the world." George Soros added that this "extraordinary new book will be of great interest to all those in leadership positions [who] will gain a new understanding of why power has become easier to acquire and harder to exercise."

Before joining the Carnegie Endowment, Naím was the editor in chief of Foreign Policy for 14 years. In 2011, he launched Efecto Naím, a weekly television program highlighting surprising world trends using video, graphics, and interviews with world leaders. The show is widely watched in Latin America today.

Naím’s public service includes his tenure as Venezuela’s Minister of Trade and Industry in the early 1990s, director of Venezuela's Central Bank, and executive director of the World Bank.  He was also a professor of business and economics and dean of IESA, Venezuela's main business school. He is the Chairman of the Board of the Group of Fifty (G-50) and a member of the board of directors of the National Endowment for Democracy, the International Crisis Group, and Population Action International.

Naím also writes regularly for The Financial Times. His columns are syndicated internationally and appear in all of Latin America's leading newspapers. In a 2013, the U.K.'s Prospect, magazine conducted a survey that named him one of the leading thinkers in the world. He has an M.Sc. and Ph.D. from the Massachusetts Institute of Technology.

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