Are You Financially Literate? A Stanford Economist Says Just 3 Questions Will Tell You

The average American, a recent poll found, loses $1,819 a year because of a lack of financial literacy. Add that together and that means Americans lose something like $436 billion annually because they lack financial savvy. 

And that’s far from the only scary statistic about just how much our lack of basic financial knowledge costs us. Financial illiteracy hurts our peace of mind as well as our pocketbooks. A 2022 FINRA study found more than half of Americans are anxious about their finances and 42 percent think about their finances every day.

Are you among those who are at risk of making your life harder due to a lack of knowledge about basic financial matters? The ins and outs of dealing with your money can seem complex and intimidating, even for entrepreneurs. But according to Stanford researchers, just three questions will give you a solid sense of whether you need to brush up on the financial basics. 

3 questions to test your financial know-how 

I’ll hit you with the bad news first. Stanford economist Annamaria Lusardi and her collaborators have been studying financial literacy around the world for two decades, and her findings confirm that we Americans have a lot of room for improvement. In 2021, just 29 percent of us aced Lusardi’s financial literacy quiz. 

“The continuous surprise is just how low financial literacy is in the United States and around the world,” commented Lusardi. 

But while we may be shaky on financial fundamentals as a nation, the good news is that figuring out where you stand personally and then improving your knowledge is likely easier than you may think. Lusardi’s extensively validated test, which has become a globally used tool for assessing financial literacy, is all of three questions long. It asks:  

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?

To check your answers, visit the free website laying out this “Big Three” approach to measuring financial literacy. 

Stop psyching yourself out about money 

The simplicity of this test is good news for the financially shaky because it implies that mastering your money is a lot less complicated than you may fear. Sure the world is jam-packed with complex financial instruments and dubious get-rich-quick schemes, but avoid all that noise — decades of quality research suggests you need to master just a handful of essential concepts around interest rates, risk, and inflation. 

Lusardi’s test might be the most thoroughly researched illustration of this truth. But other financial experts have been shouting the same message for years. 

Helaine Olen and University of Chicago professor Harold Pollack wrote a whole book insisting the essentials of your financial life should fit on an index card. One-time presidential candidate Elizabeth Warren promoted a three-line budgeting scheme earlier in her career. And, just recently, financial guru Suze Orman opined that you can skip complicated systems if you master two essential points: live below your means, and know when to buy what you can afford and when to settle for what you need. 

The point of all this for entrepreneurs who avoid digging into their finances for fear of facing a thorny subject is that you really need to stop psyching yourself out. Not only is it easy to assess your level of financial savvy, it’s also likely easier to master the knowledge you need than you likely think.