Winter 2022
January 05, 2022
What personal finance topics do Americans know most about? What do they know least about? How does personal finance knowledge and financial literacy vary across generations? A recent report from the Global Financial Literacy Excellence Center (GFLEC) and the TIAA Institute explores these questions and more. The report looks at data from the 2021 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index), which measures personal finance knowledge and examines the connection between financial literacy and financial wellness. The P-Fin Index has been administered for the last five years and is a nationally representative sample of the adult population of the United States (ages 18 and older).
For the first time, the report authors were able to compare levels of financial literacy across five generations. The generations included Gen Z, born 1997–2002 (ages 18–23 at the time of the study); Gen Y, born 1981–1996 (ages 24–39); Gen X, born 1965–1980 (ages 40–55); the Baby Boom Generation, born 1946–1964 (ages 56–74); and the Silent Generation, born 1945 and earlier (ages 75 and older).
The survey explored knowledge of these personal finance areas:
- Earning—determinants of wages and take-home pay,
- Consuming—budgets and managing spending,
- Saving—factors that maximize accumulations,
- Investing—investment types, risk and return,
- Borrowing/managing debt—relationship between loan features and repayments,
- Insuring—types of coverage and how insurance works,
- Comprehending risk—understanding uncertain financial outcomes, and
- Go-to information sources—recognizing appropriate sources and advice.
The survey found that the financial literacy level of the U.S. adult population is generally low. This is true across all five generations. Survey respondents answered about 50% of questions correctly. This is a cause for concern, because the ability to make sound financial decisions and manage personal finances effectively depends at least in part on one’s level of financial literacy and financial decision-making. Financial decisions are made throughout every life stage over a person’s lifetime.
Across all generations, respondents scored the highest on borrowing knowledge and scored the lowest on knowledge of comprehending risk and uncertainty.
Comprehending risk and uncertainty is what U.S. adults struggle with the most? Sound the alarm bells! Risk is inherent in all financial decisions. Understanding risk and risk management strategies is key to protecting and preparing for one’s financial future. And, as we've seen during the COVID-19 pandemic, this understanding is also an important factor in the interpretation of health information. The 2021 survey included a new question asking respondents to interpret the probability of infection and spread of disease. Among each generation the majority of respondents answered the question incorrectly. If people are misinterpreting basic health information, how might that negatively impact their risk assessment, decisions, and future health outcomes?
When we look more closely at responses from across generations, we see that financial literacy levels are lowest earlier in a person’s life cycle and increase over time as people gain more financial knowledge and experiences. The report points out that financial literacy levels are particularly low for Gen Z. Knowledge about insurance and comprehending risk are the areas of lowest functional knowledge for Gen Z and Gen Y.
Is it worth taking a closer look at insurance and comprehending risk at a younger age? Would people be better off if they optimized their insurance decisions? Yes, in the earlier stages of life, people’s earnings are lower and being over- or underinsured impacts the resources one has to save, spend, and invest. Comprehending risk has financial implications for more than just insurance decisions. Imagine how this might apply to taking out loans, choosing between job offers, or signing a lease or buying a home. These common financial decisions are rooted in risk analysis where one has to juggle factors such as known vs. unknown, likely vs. unlikely, and happening now vs. happening in the future.
The good news is that 40% of Gen Z respondents had participated in a financial education class. We anticipate that school-based financial education classes will become more mainstream, as the number of states mandating financial education continues to increase. Should there be more emphasis on teaching risk and insurance in the financial education classroom?
The findings from this study suggest that including risk and insurance in the financial education classroom is important. The adage “the best offense is a good defense” summarizes why these topics are essential. Teaching students how to comprehend risk and uncertainty and protect themselves financially can help them improve their financial decisions and financial well-being throughout their lives.