A new survey finds individuals with greater financial literacy are much more likely to be able to cope with a financial shock than those with a low level of literacy.
Not particularly surprising on its own, perhaps, but a little more noteworthy these days when you add that the survey found 77% of individuals with a high level of literacy would be able to come up with $2,000 if an unexpected need arose vs. just 21% of individuals with a low level of literacy.
The fourth annual Personal Finance Index (P-Fin Index), conducted before the coronavirus pandemic and released this week by TIAA Institute and the George Washington University School of Business (GWSB) Global Financial Literacy Excellence Center (GFLEC), shows a slight improvement in financial knowledge among Americans.
This year’s survey also provides insights about the amount of time people spend at work on personal financial issues and about the financial literacy of Gen Z.
The P-Fin Index provides an annual snapshot of the financial literacy levels and understanding of the American population. In the context of the current pandemic and resulting economic crisis, the index provides a glimpse into the economic strength and preparedness of Americans going into the crisis and their ability to best navigate a recovery.
On a positive note, the percentage of personal finance questions answered correctly has increased by 1 percentage point each year since the inaugural index in 2017. In 2020, U.S. adults correctly answered 52% of the P-Fin Index questions, on average, compared to 49% in 2017.
This represents a statistically significant increase in Americans’ financial literacy over this period. However, Gen Z notably answered only 41% of the index questions correctly—this generational data is reported for the first time.
Overall, just 20% demonstrated a relatively high level of financial literacy, i.e., they correctly answered more than 75% of the index questions, while 17% showed a relatively low level, i.e., they correctly answered 25% or fewer of the questions.
“Particularly as the world navigates the current health crisis, we are reminded that a sound understanding of the basic tenets of personal finance is critical to overall financial wellbeing,” said Stephanie Bell-Rose, Head of the TIAA Institute. “This year’s P-Fin Index provides essential data to help us better understand the financial literacy topics Americans are actually struggling to understand and how we can help them prepare for unexpected financial challenges in the future.”
Understanding risk a trouble spot
While overall financial literacy is improving, this year’s survey also revealed that many Americans incorrectly assess their own aptitude on a variety of financial literacy topics. Those surveyed identified consuming and earning as areas where they felt most knowledgeable; however, the topic of borrowing is where Americans show the most proficiency.
Similarly, adults believe investing is a topic where they are least knowledgeable, while comprehending risk is actually where significant knowledge gaps remain.
The study also says achieving financial security, or financial well-being, is a goal shared across individuals. An increased employer focus on employee financial well-being has manifested itself in workplace financial wellness programs. These programs are more holistic than predecessor programs, which typically focused on a single aspect of personal finances, e.g., saving for retirement or investing in retirement accounts.
Additionally, the survey found that Americans spend significant time during their workday navigating money management problems. U.S. adults with low financial literacy spend an average of 12 hours per week—including six hours while at work—dealing with personal finance issues, compared to three hours for those with high financial literacy—including one hour while at work.
“Even before the COVID-19 pandemic hit the economy, there were signs of financial fragility and financial distress. This report reminds us that it is during a storm that sailing knowledge (financial literacy) shows its worth. Going forward, it is going to be even more important to have the skills and knowledge necessary to build financial resilience,” said Annamaria Lusardi, the Denit Trust Endowed Chair of Economics and Accountancy at GWSB and the Academic Director of GFLEC.
The P-Fin Index includes a total of 28 questions across eight areas of personal finance in which individuals routinely function, including earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk, and finding information.
The 2020 P-Fin Index survey sampled 1,008 U.S. adults in January 2020. The full report can be found HERE.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
