Are U.S. Consumers Financially Literate?
Financial literacy is a set of skills used to make informed money management decisions. Individuals who are financially literate are able to assess the cost of borrowing from a lender, establish a budget and savings plan, and understand the dangers of debt traps. Many people learn these skills from their parents or through online resources, since not all states have financial literacy requirements for K-12 students. But 90 percent of Americans believe schools should have a personal finance requirement for graduation, and recent legislative efforts in some states reflect that opinion. Still, U.S. consumers have a long way to go when it comes to achieving adequate knowledge about their finances.
The global outlook for financial literacy
The Standard & Poor’s Ratings Services Global Financial Literacy Survey revealed low levels of financial literacy worldwide, with only one in three adults responding to three out of four topics correctly. The survey, which is the world’s largest and most comprehensive, found that risk diversification was the topic respondents struggled with the most.
57 percent of adults in the U.S. are financially literate, ahead of the 33 percent of adults worldwide, but adults in some other countries had much higher scores. The U.S. ranks only 14th in the most financially literate countries. Young people had particularly low scores, indicating a need for more robust personal finance education requirements in U.S. high schools.
U.S. financial literacy scores are decreasing
A recent FINRA study revealed that financial literacy scores have dropped in the past decade. The percentage of adults who could answer four out of five personal finance questions correctly decreased from 42 percent in 2009 to only 34 percent in 2018. Americans ages 18-34 showed the deepest drop in scores.
Most millennials are aware that they’re graduating high school unprepared to make important financial decisions; more than half said a course in “money management” would be the high school requirement that would benefit them the most. But some states don’t even require that a personal finance course be offered as an elective. The result of inadequate financial education is that young people are struggling more than other age groups to stay afloat, even in a strong economy. Only 16 percent are very optimistic about the future of their finances.
How financial literacy changes behavior
Few requirements for financial education may be to blame for the unstable financial situation most U.S. consumers find themselves in. A lack of financial literacy is reflected in common money behaviors, such as high debt levels and a lack of savings. The FINRA study found that only 58 percent of Americans have a retirement account, and almost half don’t have enough in an emergency fund to cover three months worth of expenses. A recent survey from Charles Schwab also revealed that 59 percent of Americans are living paycheck to paycheck.
Statistics show a correlation between level of financial education and financial behaviors such as banking, saving, and investing. Those who took a business or economics course in high school were more likely to hold a bank account, and adults without a high school diploma who attended a retirement seminar saw their net worth increase about 27 percent. Students in states with financial education requirements were also more likely to save and less likely to make late credit card payments.
Some states fare worse than others
This past year, the American Public Education Foundation released its first report card grading each state on its ability (or failure) to prepare students to manage their finances. Only three states (Missouri, Utah, and Virginia) earned an ‘A’ grade, and 68 percent of states received a ‘C’ or worse on their financial literacy efforts.
Financial education is key to closing the knowledge gap between students from low-income families and those that live in wealthier households. Yet only 21 states require students to take a personal finance course in order to graduate.
Many sources praise Virginia for its model financial literacy legislation, which requires that students receive a year of personal finance and economics instruction taught by teachers with specialized training. Virginia schools also administer standardized tests to assess student knowledge in economics, and many schools issue a financial literacy certificate to students able to pass a test. Virginia is also lauded for unique instructional methods, such as simulations, which are shown to boost student learning.
Financial literacy resources
Because many states lack financial education requirements and not all households educate their children about money management, many adults lack the education to be able to engage in healthy financial habits. Thankfully, a growing list of resources is available to adults looking to improve their financial knowledge. Free resources include:
- The U.S. Financial Literacy and Education Commission provides resources on a range of money topics
- The FDIC has a training program geared towards adults outside the mainstream banking system
- The OCC maintains a directory of financial literacy resources
- Nonprofit Smart About Money provides free online courses in a variety of topics that you can take at your own pace.
- JumpStart Clearinghouse has a searchable database of free money resources for students, teachers, and adults
- Practical Money Skills features games that students can play to learn about personal finance
- OppU is a free personal finance online curriculum featuring videos, quizzes and more.
If you need help establishing a budget, learning about retirement accounts, or evaluating a lender, a wide variety of resources are available to you. Don’t make the mistake of ignoring your financial situation because you’re not sure how to manage money. Learn the skills you need now so you can build healthy financial habits for the future.