New Personal Finance Index Identifies Gaps In Financial Literacy Among American Adults

Index brings new approach for measuring financial literacy; Shows knowledge is lowest in the area of comprehending risk

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Mar 22, 2017, 13:00 ET

NEW YORK, March 22, 2017 /PRNewswire-USNewswire/ -- A new annual personal finance index released today by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) showed that 52 percent of U.S. adults surveyed could not answer more than one-half of the index questions correctly.

In contrast to previous financial literacy studies, which use a limited set of questions to test an individual's understanding of fundamental concepts, the "TIAA Institute GFLEC Personal Finance (P-Fin) Index" framed questions around real-life scenarios to provide a more comprehensive view of individuals' knowledge and understanding. The Index covers eight functional areas which enable sound financial decision-making and effective management of personal finances.

The P-Fin Index showed that financial knowledge is lowest in the area of comprehending risk. This is troubling given that uncertainty is a common challenge when making financial decisions. Future conditions like employment, personal health, interest rates, and investment returns are tough to predict, so comprehending risk and its implications is integral to making appropriate financial decisions. Other key findings from the Index include:

Young adults are working from a limited base of personal finance knowledge. While 10% of those under age 45 have a relatively high level of financial literacy, 30% have a relatively low level. Comprehending risk and insuring are areas where young adult knowledge appears lowest.
Insuring, investing and go-to information sources are the other functional areas where personal finance knowledge is below average – falling below the average of 49% correct answers for all survey questions.
Personal finance knowledge is highest in the area of borrowing and debt management. On average, 61% of the borrowing questions were answered correctly. Knowledge and understanding may emerge from confronting accumulated debt, often from early on in the life cycle.

"We are excited to collaborate on this one-of-a-kind index that provides us critical insight into the current financial literacy levels of Americans," said Stephanie Bell-Rose, Head of the TIAA Institute. "As we see the economic climate of the nation continue to rapidly evolve, it is imperative that individuals have the tools and knowledge they need to successfully navigate their financial lives. Improving the financial knowledge of Americans would lead to a greater financial well-being and a more secure retirement in the future."

The "TIAA Institute-GFLEC Personal Finance (P-Fin) Index," authored by Paul Yakoboski, Senior Economist at TIAA Institute, Annamaria Lusardi, Academic Director at GFLEC, and Noemi Oggero, Research Associate at GFLEC, includes demographic breakdowns by age, gender, race/ethnicity, education level, household income, and exposure to financial education.

"The index data reveal Americans have a relatively low level of knowledge and understanding of personal finances," said Annamaria Lusardi, Academic Director of the GFLEC. "Our findings highlight the need for renewed efforts to increase financial literacy particularly among the young, who face many significant financial decisions early in their working lives."

The P-Fin Index's 28 questions come from these eight functional areas: