Americans’ already poor money savvy fell even further this year, a worrisome trend, researchers said, because people with weak understanding of basic finances often make poor financial decisions.
On average, adults correctly answer about half of the 28 questions in the Personal Finance Index, a survey of financial knowledge. The average has never topped 52 percent. This year, it was just 47 percent, the lower level in the 10-year history of the survey.
“Certainly, it’s disturbing,” said Surya Kolluri, head of the TIAA Institute, which administers the survey with researchers at the Stanford University Global Financial Literacy Excellence Center. (The institute is the research arm of the investment firm TIAA, which runs retirement plans for many educators.)
The findings, however, aren’t necessarily surprising, Mr. Kolluri said. Americans have been under financial stress of one sort or another since the Covid-19 pandemic, he said, including inflation that has driven up the cost of groceries and gas. At the same time, he said, the spread of self-described financial influencers on social media has made it more difficult for people to discern what advice is truly useful.
“It may be that financial stress is crowding out our cognitive ability to learn,” he said. “We have not enough time and too much information.”
Researchers say people with a poor grasp of basic financial concepts are more likely to be financially “fragile,” meaning they couldn’t come up with $2,000 for an unexpected expense, like a medical bill or car repair, within a month. Higher financial literacy is associated with saving regularly, managing debt effectively and feeling confident about finances in retirement.
What sort of questions does the survey ask?
The core survey poses several questions in eight areas of “functional” knowledge: earning, saving, consuming, investing, borrowing, insuring, comprehending risk and “go-to” information sources. (Extra questions on specific topics may be added each year.)
Many people struggle with assessing risk, as in this query: Lottery A pays a prize of $200, and the chance of winning is 5 percent. Lottery B pays a prize of $90,000, and the chance of winning is 0.01 percent. Expected winnings are greater in which lottery?
Answer choices: Lottery A; Lottery B; They are equal; Don’t know.
Correct answer: Lottery A.
Just 46 percent answered correctly, while 22 percent chose the incorrect answer, 30 percent said they didn’t know and 2 percent entered no response.
(Expected winnings are calculated as the prize amount multiplied by the probability of winning. Lottery A’s expected winnings are $10, or 0.05 times $200; Lottery B’s are $9, 0.0001 times $90,000.)
How did different groups perform this year?
Young adults in Gen Z performed the poorest as a group, answering, on average, 38 percent of questions correctly. That was the same result as last year’s test, and on a par with the two prior years as well.
Americans 80 or older showed the largest decline as a group, answering just 47 percent of questions correctly on average, down from 55 percent last year. Researchers cautioned against drawing conclusions from year-to-year swings for this group, noting that its sample size is relatively small.
John Pelletier, director of the Center for Financial Literacy at Champlain College, isn’t involved in the index, but said such a decline could be a result of waning financial decision-making skills as people get older.
Women have consistently scored below men, who answered 50 percent of questions correctly, on average, this year, compared with 44 percent for women. The discrepancy has been found in other studies as well, and some research suggests that a significant part of the financial literacy “gender gap” — about a third of the difference — may reflect women’s uncertainty about their knowledge, rather than a lack of understanding.
“Women are less confident about their financial knowledge,” said Annamaria Lusardi, academic director of the financial literacy center at Stanford and an author of the index report.
Dr. Lusardi co-wrote a National Bureau of Economic Research working paper that found women disproportionately chose “I don’t know” when it was offered as an answer on tests. When that option was removed as part of an experiment, forcing women to select an answer, they often chose correctly. Women, the paper said, “have lower financial literacy than men, but they know more than they think they know.”
Such a lack of confidence is “not helpful” and suggests that education efforts targeting women are needed, Dr. Lusardi said. That lack of confidence can, for instance, lead women to invest too conservatively or not at all, which over time can result in lower assets invested for retirement.
“Women are half the world,” she said. “If we are not financially literate, we are not doing well.”
What efforts are underway to improve Americans’ financial savvy?
The latest results, Mr. Kolluri of TIAA said, reinforce the need to broadly expand the availability of financial instruction. The survey found that adults who had participated in a financial education program or class — whether offered in high school or college, in the workplace or the community — scored significantly higher than those who had not.
Such efforts are well underway at public high schools. In recent years, many states have passed laws requiring high school students to take a stand-alone personal finance course before graduation. The movement has drawn bipartisan support, leading to financial literacy mandates in both red and blue states.
Requiring instruction, Dr. Lusardi said, ensures that everyone is exposed to important financial concepts. “Mandating it will disproportionately help those who would not have it otherwise,” she said.
Research shows that high school financial instruction improves credit scores and lowers loan delinquency rates, said Carly Urban, a professor of economics at Montana State University who studies financial literacy. It leads more students to use low-interest college financing rather than high-interest loans, and increases repayment rates for first-generation students and those from low-income families.
Dr. Urban is also a co-author of a working paper finding that people who use smartphones for online surveys or quizzes tend to choose “don’t know” answers more often, and to answer incorrectly more often, than people who use desktop computers, laptops or tablets, creating a device “penalty” that could be making financial literacy levels appear worse than they are.
A follow-up study is planned to examine the connection between the device used to complete the survey and performance on the financial literacy questions, said Andrea Sticha, research director at the Stanford Initiative for Financial Decision-Making and a co-author of the index report.
Even as more states require financial instruction in schools, a relatively small proportion of high school graduates are affected, Mr. Pelletier of Champlain College said. So it remains to be seen if overall financial literacy rates will improve in coming years after more states put courses in place.
As of April, just 10 states had fully put into effect personal finance requirements, according to Next Gen Personal Finance, a nonprofit that promotes financial literacy education and develops free instructional materials. An additional 20, however, have adopted the requirements and expect to carry them out over the next five years. They include states with large populations, like California and Texas.
“It makes an even stronger case for financial education,” Next Gen’s founder, Tim Ranzetta, said of the latest index findings.
What effect can financial education in high school have?
An analysis by Tyton Partners, a financial consulting firm, estimated that financial education in high school could have lasting benefits equal to $100,000 per student, on average, over a lifetime.
Roughly $8,000 of that benefit occurs soon after high school, when people are 18 to 30, because of savings from lower-interest-rate credit cards and lower student loan costs. The analysis assumes that those taking a high school course will accrue an extra 30 points in their credit scores, on average.
How can I test my financial knowledge?
Researchers created a shortened, eight-question version of the Personal Finance Index, which is available online.
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