More than half the world doesn’t understand this basic financial principle

Compound interest is what makes money grow.
Compound interest is what makes money grow.
Image: via Flickr/CC-BY-2.0
We may earn a commission from links on this page.

Less than half of adults understand one of the key principles to making money grow: compounding interest—the idea that interest earns more interest over time.

That’s one of the findings from the new large-scale survey (pdf) on financial literacy and financial inclusion by the Organisation for Economic Co-operation and Development (OECD), which interviewed 51,650 adults in 30 developed and developing countries from around the world. And the financial smarts situation does not look good.

Participants in the study were asked questions to assess their financial knowledge, attitudes and behavior, and could earn a maximum score of 21 based on the results of the survey. The average score across all 30 countries surveyed, which included OECD member and non-member countries, was a lackluster 13.2. The average for OECD countries only was 13.7. France, the country that came in with the highest average, was only slightly better at 14.9. Poland sat at the bottom with an average score of 11.6.

The survey asked participants whether a $100 savings account compounding at an interest rate of 2% a year would total more or less than $110 over five years. Only 42% knew the correct answer (more). The results for more simple math were only slightly better: 58% of participants knew that a savings account starting with $100 and a guaranteed interest rate of 2% would result in $102 at the end of one year.

When it comes to behavior, the weakest areas for respondents related to planning ahead and getting independent advice. Only 60% of adults said they maintained a household budget, while just half said they set long-term financial goals and tried to achieve them. For those who had chosen a financial product in the last two years, only 44% tried to shop around, while just 19% sought independent information to evaluate their choices.

Americans, who were not included in the OECD survey although they are part of the organization, likely would not have fared much better. In another worldwide financial literacy survey from 2015 by Standard & Poor’s, 57% of American adults were considered financially literate, ranking 14th in the world.

“The results are always dreadful,” Annamaria Lusardi, a professor who studies financial literacy at George Washington University, told the Wall Street Journal. “If the US had participated, they would not have scored in the top 10. Because you’re born in a country with high GDP per capita, you don’t acquire financial literacy by breathing in the air.”