Have you ever wondered how much you truly understand about money? Two professors — Annamaria Lusardi (Stanford University) and Olivia Mitchell (Wharton) — developed three simple questions that give you a surprisingly accurate answer. Known as the Big Three, these questions been used around the world to measure how well people understand powerful money concepts.
Ready to test yourself? Grab a pencil and see how you do.
Question 1
Imagine you have $100 in a savings account and the interest rate is 2% interest each year. After 5 years, how much would you have if you left the money to grow?
A. More than $102
B. Exactly $102
C. Less than $102
Question 2
Suppose that the interest rate on your savings account earns 1% interest per year, and inflation is 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
Question 3
Buying a single company stock usually provides a safer return than a stock mutual fund.
A. True
B. False
The correct answers
- A: More than $102
- C: Less than today
- B: False
Didn’t do so well? You’re not alone. Only about one in three adults worldwide can answer all three correctly. But don’t let that discourage you. Read on and you’ll learn what more than 70% of people around the world don’t know.
What each question measures and why it matters
1. Interest and Growth:
This first question is about how compound interest works. In other words, how money grows over time on both the original balance AND on the interest it earns, too. Compound interest is one of the most powerful money concepts to understand, and most of us seriously underestimate it. The way your account grows doesn’t look like a straight line that angles upward. It grows “exponentially,” which looks like the letter J on a chart. Your balance starts growing slowly, then rapidly climbs upward. What’s sobering (and most people really don’t get this), is that compound interest also applies to debt. Which is why credit card balances, which carry high interest rates, grow so rapidly if you’re making only minimum payments. Your balance increases slowly at first, then spirals up fast.
2. Inflation and Spending Power:
The second question is about purchasing power — what your money can actually buy. A 2% inflation rate means that prices, overall, are rising by 2% on average. If your savings account is only earning 1%, you’re losing ground. Knowing this helps you see why letting money sit in low-interest accounts can feel “safe” but actually costs you over time. Exploring other types of accounts like a high-yield savings account or Certificate of Deposit (CD) can help you maintain buying power on your short-term savings. Investing in mutual funds or index funds can be powerful ways to outpace inflation for longer-term savings.
3. Risk and Diversification:
The last question tests your sense of risk. Owning just one stock is risky because you’re betting on a single company. If that company struggles and its price declines, you lose money. A mutual fund or index fund spreads your money across many companies, so the failure of just one doesn’t impact your entire investment. That makes your investment safer and more stable. It also makes it easier to get started with investing, because you don’t have to “pick stocks” to benefit from growth in the stock market
Takeaway
It’s amazing what learning just three concepts can do for your money confidence. Once you understand a few basics — how money grows, how inflation works, and how to manage risk — you make better decisions. And now you know three things most adults miss.