Quiz: Are you money smart?
Or do you fail this basic test?
There is often a discrepancy between our actual behaviours or skills – and how good we think we are.
Back in the early 70s there was an American survey on magazine readership. The results showed heavy consumption of Time magazine and low readership for Playboy.
Funny that.
This was the exact opposite of the actual readership numbers, with Playboy ranking in the top 10 magazines (seven million copies a year) and Time magazine which didn’t make the cut.
Perception is a wonderful thing, isn’t it. All those people thought they were reading the current affairs bible, but they actually weren’t.
So how does this work with financial literacy?
How good are you at understanding money basics? What’s your perception and what’s reality?
Here are five quick questions to test your skills:
- Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?
- Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?
- Do you think that the following statement is true or false? ‘Buying shares in a single company usually provides a safer return than buying shares in a number of different companies’.
- Again, please say whether you think the following statement is true or false: ‘An investment with a high return is likely to be high risk
- Suppose that by the year 2024 your income has doubled, but the prices of all of the things you buy have also doubled. In 2024, will you be able to buy more than today, exactly the same as today, or less than today with your income?
We’ll share the answers in a moment, but first you may be interested to know that Australians have gone backwards on this basic literacy test between 2016 and 2020.
A major study of household wealth and wellbeing called Household, Income and Labour Dynamics in Australia (HILDA), has found that the overall score in 2020 was worse than the previous one:
- Respondents aged 15 to 24 scored an average of 3.4 out of 5 in 2016, and just 2.9 out of 5 in 2020 (this was the worst score).
- Respondents aged 25 to 34 scored 3.9 out of 5 in 2016, and only 3.6 in 2020.
The news for those nearing retirement was slightly better, with both age groups performing better than those who were younger; but still worse compared with 2016:
- Respondents aged 45 to 54 scored an average of 4.2 out of 5 in 2016, compared with 4.1 in 2020.
- Respondents aged 55 to 64 also scored 4.2 out of 5 in 2016, compared with 4.1 in 2020.
Why have things gone pear-shaped?
We’ve had relatively favourable economic conditions – or at least until the pandemic hit – so perhaps some people haven’t had the exposure in recent years to the type of pitfalls that have occurred more recently. For instance, the need for diversification of assets. To those more familiar with mitigating risk, it may seem standard to spread their investments across several stocks and assets to lower the risk. However, to those less familiar with long-term investments, the concept of investing across many different assets may seem riskier as there are more areas to monitor.
Too much information?
Maybe the lower scores are related to the sheer deluge of information most people receive on a daily basis? As the old saying goes, information is not knowledge and knowledge is not wisdom. One can lead to the other, but information needs to be accurate, relevant and timely for it to be helpful and a basis of knowledge. Sometimes it’s just really hard to sort the chaff from the wheat.
You can check your financial literacy results using the link below. But regardless of how you’ve gone, why not treat this small test as a wakeup call if you got any of the answers wrong? Gaps in our knowledge can be fixed, so it may be time to find out more about how to make your money work harder for you.
How did you go?
Answers:
- $102
- Less
- False
- True
- Exactly the same
If you feel some gaps in your knowledge could be affecting your finances you can always book a consultation.
question 5 answer is incorrect. If income doubles, you move to a new tax bracket and Tax takes more of your money leaving less disposal income
Hi James, thank you for keeping us on our toes! You are correct, for the sake of simplicity we presumed that our readers would not take gross income into account and would understand income to mean a doubling of your net income.
The answer to Question 1 is not correct if you pay tax.
Hi Andris, thanks for taking the quiz! Whilst yes tax payments may reduce your overall standing, the ATO would not deduct a fee from the account just because it earnt interest.
I’m 82 years old, a retired Mining Engineer & Company Director and i answered all 5 correctly., but I qualified the answers to questions 1 and 5; one needs to know whether interest is calculated daily, monthly or annually and for question 5, whether income is before or after tax (or, as the Italians say “dirty or clean”).
In the late 60’s the only way I could buy a house was through an insurance company loan at 6% pa flat, calculated monthly plus I had to take out a life policy to cover the loan!
Since retirement in 1995 I lost 50% of my allocated pension assets when my Financial Advisor undertook to ensure their security when I directed him to do so but he breached those undertakings, and I became dependent on a part old age pension.
I was assessed under the Assets test, and all was fine until Abbott doubled the taper rate (which led to many spending their assets to qualify for a full pension and place more pressure on the government). Then with Covid my meager allocated pension income was halved but my assets were preserved so I got no increase at all in my part aged pension payments. and they were at times even reduced if my allocated pension assets increased with share market volatility.
This has made it very hard to budget and such variability has taken much time and added stress at the stage in life when we are less able to handle it all wit3h aplomb.
If you don’t get all answers correct on this quiz you need more than financial guidance
Thanks for the little quiz – proud to say I got 100% correct. I think that as the Superannuation Pool continues to grow to very large amounts, unless someone, somewhere takes action the situation we currently have will just become more complex. Unfortunately, when it comes to money, people and organisations will do all sorts of things to convince you to part with it – I did read ‘Banking Bad by Adele Ferguson – no wonder I don’t trust these people. The system needs to be far less complicated. It’s hard to be interested when the rules chop and change.
The answer to question 5 would depend on your tax bracket wouldn’t it? Double an income may put you in a higher tax bracket which means you could not purchase as much if prices had also doubled.
Hi Bev, thanks for joining the conversation! Yes you are correct regarding the tax, to keep it simple we meant “income” as net income, not gross.
These questions were so easy. I can’t believe anyone with any degree of intelligence would not score 5/5. Perhaps the lower scores between the respective years is a reflection on a basic understanding of basic finance?
Well I got all five correct although the last was a lucky guess.
Thankyou RetirementEssentials for maintaining contact with me since the end of 2021
when I didn’t have you lodge my application for Age Pension. There was no real
reason to stop …. I just did. Then several months later re-applied directly with
Centrelink and was happy to have all the info assembled. Thank you for being there
to provide assistance and advice to many people. CQ.
In question 5 I would say it is not the same as the taxes would be rather higher with the doubling of income. I can see that with the smaller income years ago I could buy a lot more than with a higher income today.
Hi Mx Hardy, thanks for jumping in! A couple of other readers queried this also and we’ve clarified the issue in previous comments if you’d like to read more.
What does a consultation involve?
Is it ethical to compare what your current financial adviser suggests with another adviser.
Hi Bob, thanks for seeking further clarity! Our consultations are designed to help you better understand your needs and goals in retirement and some of the actions you can consider to help you achieve those goals. We will not try to sell you any particular products to invest in and instead focus on what key pieces of help do you need or need to know more about regarding your current situation vs what other options could be good for you.
Regarding the ethicality of comparing advice, you should not be worried at all. Most advisers will have slightly varied takes on the best course of action for you depending on their different backgrounds and experiences. The important thing is that you understand the advice you are being given and your options so that you can decide what you believe is best rather then blindly trusting what you are told.
Hello. Nice quiz and I’m happy and agree with 1-4. I would though challenge the reply for Q5, based on the following interpretation:
Income doubles from say $50k to $100k pa.
Prices have doubled and costs go from say $40k to $80k pa.
This means I now have $20k disposable income (vs. $10k previously). As such, I would be able to buy more today.
If though I previously had balanced spend, or even negative; the same would not be true.
I do get the intent of the question and this is a good article.
Thanks for your time.