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Tuesday, August 22, 2017

By Carolyn Bigda, Chicago Tribune (TNS)

Few of us would probably call ourselves financial pros, but a new survey finds that many people worldwide don’t understand even basic money concepts.

According to the global survey published recently by Standard & Poor’s Ratings Services, only one in three adults around the world are considered financially literate.

The survey, made up of five questions, was conducted in 2014. The results were based on answers from more than 150,000 adults in 144 countries, including Afghanistan, Brazil, France, Turkey and the U.S.

To make the questions relevant for such a diverse population, the survey focused on four principles of personal finance: risk and diversification, inflation, interest and compound interest.

“You can’t ask about something as specific as FICO (credit) scores because there’s no such a concept in a place like Afghanistan,” said Annamaria Lusardi, academic director of the Global Financial Literacy Excellence Center at The George Washington University, who worked on the survey.

The results. For Lusardi, the survey’s findings were striking.

“To me, it speaks to the fact that financial literacy is a global problem,” she said. “Financial markets are more complex around the world and the population is not keeping up with the changes.”

Adults who took the survey were considered financially literate if they could correctly answer questions about three of the four financial concepts. Based on the results, some two-thirds of people globally — an estimated 3.4 billion people — are illiterate.

But some countries performed better than others.

In Canada, for example, 68 percent of adults are financially literate, and in the United Kingdom 67 percent. In the U.S., 57 percent of adults had a passing score.

Some of the lowest scores were in developing economies, such as Romania, where only 22 percent of adults are considered financially literate and Yemen, where the rate is 13 percent.

In almost every country, however, fewer women are financially literate than men. In the U.S., the gap is 10 percentage points — 62 percent of men are literate and only 52 percent of women — double the worldwide average.

Risk diversification. The concept that most people didn’t understand was risk diversification, or the idea that you need to diversify assets to minimize potential losses.

Lusardi, who teaches an elective course on personal finance to graduate business students at George Washington University, says she’s not surprised.

“I’ve seen the same thing in my class,” she said. “It’s just a harder concept because you’re talking about probabilities. And with diversification, you have to think about correlation. It’s just more complex.”

But understanding risk is critical to a person’s financial well-being. As Lusardi noted, most financial decisions involve some type of risk, from buying a home to deciding how much money to save for retirement.

And worldwide, it is becoming increasingly important to teach about risk and other financial basics.

In China, for example, the number of people who have credit cards has nearly doubled to 16 percent since 2011, and yet less than half of cardholders in the survey correctly answered the question about interest.

In the U.S., interest was the least understood topic, with 40 percent of adults answering the related question incorrectly, even though the country has some of the highest credit card usage and student loan debt in the world.

“You have the rise of a middle class around the world and, unfortunately, it’s made up of people who don’t understand what it takes to repay a loan,” Lusardi said.

Want to test your financial literacy knowledge?

Take the survey at finlit.mhfi.com.

ABOUT THE WRITER

Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoney@tribune.com.

©2015 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: Tax Credits via Flickr