A large share of Americans lack the knowledge associated with making sound financial decisions, and financial literacy levels are especially low in the area of comprehending risk, according to the findings of an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business.

This second wave of the “P-Fin Index” survey was conducted online in January 2018 with a nationally representative sample of 1,012 U.S. adults aged 18 or older. The results of the survey were presented in a report released on April 4. To compile the index, the researchers asked respondents 28 core questions, with three or four questions devoted to each of the eight areas of functional financial knowledge covered in the survey: earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk, and go-to information sources.

On average, the respondents answered only 50% of the 28 survey questions correctly. While 16% of the respondents demonstrated a relatively high level of personal finance knowledge and understanding by answering more than 75% of the index questions correctly, 21% showed a relatively low level of knowledge by answering 25% or fewer of the questions correctly.

The results further showed that financial literacy is the lowest in the area of comprehending risk, as, on average, just 35% of the questions on risk were answered correctly. According to the report’s authors, this finding is in line with other research identifying risk-related concepts as the most difficult for individuals to grasp, and is consistent with the findings from the 2017 P-Fin Index.

However, the survey also revealed that personal finance knowledge levels were relatively high on the topics of borrowing and debt management: on average, 60% of the questions on those subjects were answered correctly. Researchers speculated that for many individuals, knowledge and understanding of debt-related topics may emerge from confronting accumulated debt across the life cycle, often starting with student loans.

Moreover, the survey showed that financial literacy levels varied across demographic groups. Financial literacy was found to be significantly higher among men than women, as 21% of the male respondents, but just 12% of the female respondents, answered 75% of the survey questions correctly. Older respondents were also shown to have more financial knowledge than younger respondents: 7% of the respondents aged 18-28, but 22% of the respondents aged 60+, answered 75% of the survey questions correctly. Financial knowledge was also found to increase with income, as 30% of the respondents with an annual income of $100,000+, compared with 15% of respondents with an annual income of $50,000-$99,999, answered 75% of the survey questions correctly.

Not surprisingly, financial knowledge was shown to increase with education, with 33% of respondents with a college degree answering 75% of the survey questions correctly, compared to 6% with a high school degree only. However, the results indicated that respondents who reported that they have participated in a financial education class or program answered more of the questions correctly on average than those who had not: 24% of those who had received financial education answered 75% of the survey questions correctly, versus 13% of those who had not.

The survey also looked at how the financial knowledge levels of the respondents correlated with their financial outcomes. The findings indicated that of those respondents who said they certainly or probably could not come up with $2,000 if an unexpected need arose within the next month, 49% answered less than 26% of the survey questions correctly, while just 8% answered 75% of the survey questions correctly. Moreover, of the non-retirees who reported that they have tried to figure out how much they need to save for retirement, only 22% answered less than 26% of the survey questions correctly, while 65% answered 75% of the survey questions correctly.

From Benefit Trends Newsletter, Volume 61, Issue 5

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