The World’s Shocking Financial Ignorance

A post in my Facebook feed caught my “shocking” attention. The title read; “The World’s Shocking Financial Ignorance”. Several respondents around the world were asked three money related questions to test their level of knowledge regarding money issues. The shocking conclusion was that, roughly half the world couldn’t answer the questions correctly. Even worse, the author of the article, Cullen Roche asserted that 70% of Americans couldn’t answer all three questions correctly. As I read the article, I  wondered who the supposed respondents were. I found the questions to be very basic and anyone who knows elementary math should get them right.

So I posed the same questions that were asked the respondents to a few of my friends including some Whatsapp group members. Now let me state at this point that all of those I put these three questions to are all educated people. The results were astonishing. I was so wrong.

Most of those who attempted the 3 questions got at most one correct and only because I had to explain to them what the questions meant. However, some answered the questions without even blinking. Some also chose to simply stay away which is what i would have done if i had no idea. I’d rather hide my ignorance and keep my dignity. I would also want to believe that there are others who knew but for one reason or another didn’t answer.

But in the end, it was clear that Cullen Roche’s article is not far from right. Majority of us lack basic financial knowledge. I’m also very certain that, if a similar research was conducted here in Ghana amongst our educated folks, the results would be even more dramatic.

Now for you reading right now, here's your chance to measure your level of financial knowledge. Getting it right or wrong will determine which of the halves you belong. If you’re American, you’ll know if you’re in the 30% or the 70%.

Q1.  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.

Q3.  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

Check the bottom of the page for the answers. I hope you get them right.

You may be wondering what the fuss is all about. Well, here are some reasons why i think we all need basic financial knowledge.

Recently a number of microfinance companies have gone bust and people have lost their monies. Capitals, life-time savings, project funds etc. have all been lost due to this microfinance melt down of a sort. There was a glaring trend that was common to these microfinance companies before their eventual demise. They all offered unrealistic interest rates on fixed deposit investment. I remember at the time when the 91 Day treasury bill rate was as low as 11% per annum, a firm like Onward Investment Limited was offering not less than 25%. Basic finance will tell you that the higher the risk, the higher the return. Treasury bill is the safest investment you can ever have because the risk of default by the government is almost zero. So if the almost risk free rate is about 11%, then 25% means a higher risk. If most people knew this, they may have been saved from the debacle.

Wikipedia defines financial literacy as “the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others.”

If you don’t know how money works, attaining financial independence will be a monumental task. What you earn won’t make you rich. What you save won’t make you rich either especially in our part of the world where inflation easily spirals out of control. The sure path to financial freedom is investment. Knowledge is power. The more you know about money, the better your chances of getting more of it.

A quote from Robert Kiyosaki, the author of Rich Dad Poor Dad says “It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”

We were not taught financial literacy in school even though we all need it. Professionals such as lawyers, doctors, engineers, etc. have all fallen prey to Ponzi schemes simply because the lacked the skill to identify such scams. It will not be easy for any investor to tell if a company will go bust or not, but more often than not, an investment firm that offers unusually high interest returns should get you wondering. At the very least, you should ask more questions and understand what you’re going into.

The world desperately needs to become better educated on the topic of money, finance and economics. Africans and for that matter Ghanaians even need it more. Our circumstances are unique. The regulatory regime is not very efficient and that makes us vulnerable. We are therefore our last line of defense. Only information can strengthen that line of defense.   It certainly won’t solve all of our financial problems but it will impact positively empower our financial decisions.  We have a long road ahead of us but it’s not too late to get started. My subsequent articles will try to address some of the basics. Watch this space. 

Answers: 1-A, 2-C, 3-B