Take This 3-Question Financial Literacy Test Now!

Reading time: 7 minutes

Published: February 27, 2025

I was startled to learn how low the scores were when people took a financial literacy test measuring basic money knowledge. It made me wonder—are my Raining Pennies blog posts too complicated? Are important personal finance topics getting lost because they aren’t explained simply enough? Or should I be incorporating more real-world math examples to help readers understand these concepts?

The Big Three financial literacy test, which was designed by Professors Annamaria Lusardi ↗ and Olivia Mitchell ↗ and comprises three questions, has been used for years to measure fundamental financial knowledge. But the results continue to reveal serious gaps in understanding. While the questions may seem simple, many people struggle with these concepts, which has major consequences for saving, investing, and long-term financial health.

Take the quiz below and see how you compare!

Test Your Financial Literacy: The Big Three

Answer these three questions and click/tap on Submit Quiz to see the correct answers. Be sure to select the radio button next to each answer before submitting.

1. Suppose you had $100 in a savings account and the interest rate was 2% 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

Correct Answer: a) More than $102.

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, with the money in this account, would you be able to buy…

a) More than today
b) Exactly the same
c) Less than today

Correct Answer: c) Less than today.

3. Do you think 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) Don’t know

Correct Answer: b) False.

Submit Quiz

Answer Key & Explanations

If you answered a, c, and b, congratulations—you got them all correct! But don’t worry if you missed some; here’s why these are the right answers.

Question 1: Compound Interest (Correct Answer: a – More than $102)

At first glance, you might think the answer is “b” (Exactly $102) if you assume interest is only applied once instead of compounding annually. Someone might think, “That’s $2 of interest, so the final amount must be $102 after five years.”

But that’s not how interest works. Because of compound interest, you earn interest on both the original $100 and on previous interest earned.

To simplify the example, assume interest is computed and compounded yearly; the future value is computed as follows:

• Future value at end of year 1: $100 + ($100 x 2%) = $100 + $2 = $102
• Future value at end of year 2: $102 + ($102 x 2%) = $102 + $2.04 = $104.04
• Future value at end of year 3: $104.04 + ($104.04 x 2%) = $104.04 + $2.08 = $106.12
• Future value at end of year 4: $106.12 + ($106.12 x 2%) = $106.12 + $2.12 = $108.24
• Future value at end of year 5: $108.24 + ($108.24 x 2%) = $108.24 + $2.16 = $110.40

You might want to use this financial formula to quickly compute the future value, especially if the number of years is large:

Future Value = (Principal Value) x (1 + Rate)^Term = $100 x (1 + 0.02)⁵ = $110.41 (rounded up).

After five years, you’d have more than $110—proving why time and compounding matter in saving and investing.

Question 2: Inflation’s Effect on Buying Power (Correct Answer: c – Less than today)

If the interest rate on your savings account is 1% per year, but inflation is 2% per year, the real value of your money is shrinking.

Even though you technically have more money numerically, its buying power has decreased. If a product cost $100 today, a year later it would cost $102 due to inflation. Your 1% interest only gives you $101, which means you can afford less than before.

This is a crucial concept for retirement planning—if your savings don’t grow faster than inflation, you’re actually losing money in real terms.

Question 3: Diversification and Risk (Correct Answer: b – False)

As I discussed in Stock Market History Proves One Simple Investment Truth, a single stock is much riskier than a diversified stock mutual fund:

• If that one company fails, you could lose everything.
• A mutual fund spreads the risk across many different stocks, making it much safer over the long term.

Not surprisingly, this was the most incorrectly answered question in past surveys. Many people overestimate the safety of individual stocks, not realizing how crucial diversification is to long-term investing.

How Did You Score?

A national survey found that less than half of respondents answered all three questions correctly. Women and younger respondents fared even worse.

One factor contributing to the gender gap may be traditional financial roles, where, in some households, men historically handled investing and long-term planning. While this has been changing, the lingering effects can mean fewer opportunities for financial education and lower confidence in making money-related decisions.

For younger people, the challenge has been a lack of formal personal finance education. Many high schools don’t require it as part of their curriculum, though this is starting to change. Some states, like California, are now considering or implementing financial literacy requirements, signaling a positive shift toward equipping the next generation with better money management skills.

But here’s the good news: Financial literacy can be learned!

At Raining Pennies, our goal is to simplify personal finance and help you make smarter financial decisions. Whether it’s breaking down compound interest, inflation, or investment strategies, we’re here to make personal finance clear and practical—so that you can build wealth and avoid costly mistakes.

If you enjoyed this quiz, be sure to subscribe to Raining Pennies so you never miss another post! Let’s grow your financial knowledge together.

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