By Roger W. Ferguson, Jr., President and CEO at TIAA
Americans’ household debt is at an all-time high of $13.1 trillion, while the nation’s personal saving rate of 3.4 percent sits far below long-term averages. Against that backdrop, the results of the 2018 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) are especially sobering.
Those results show that most Americans lack the personal finance knowledge they need to make sound decisions about routine financial matters. On average, respondents correctly answered just half of the 28 questions on the P-Fin Index survey.
This year’s aggregate results mirrored those from 2017, when the index was launched by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business. The index is unique in its breadth, gauging Americans’ “working knowledge” of eight common financial activities: earning, consuming, saving, investing, borrowing/managing debt, insuring, understanding risk, and information-gathering.
Besides finding low levels of financial literacy across the board, the index shows how knowledge varies across different areas of financial decision-making and among different demographic groups:
- Americans scored lowest in the area of comprehending risk; they scored highest on measures of borrowing and debt management.
- Men scored higher than women.
- People older than 45 scored higher than their younger counterparts.
- Personal finance knowledge increased with household income and with education.
- The unemployed scored lower than people with jobs and retirees.
The P-Fin Index underscores the link between financial literacy and financial outcomes. People with higher financial literacy scores were more likely to report having positive personal finance experiences. They were less likely to be “financially fragile” (a phrase that economists use to describe people who could not pull together $2000 in cash within 30 days in an emergency) and to overdraw their checking accounts. They were more likely to plan for retirement and to have non-retirement investments.
There are no easy solutions to America’s financial literacy challenge, but the P-Fin Index results show the power of education in addressing it. Respondents who had participated in a financial education class or program answered more of the survey questions correctly, on average, than those who had not received financial education.
It’s critical that we boost financial education for all ages, through educational programs in K-12 schools, on college campuses, and in workplaces. College is a particularly important time to intervene, since many students are taking on key financial responsibilities for the first time in their lives. TIAA and the Council of Graduate Schools have identified a number of innovative approaches to financial education for college students. You can read about them in our report outlining best practices and tips from model financial education programs at 34 colleges and universities nationwide. The report also provides information about the specific financial challenges college students face.
As we mark National Financial Literacy Month, the P-Fin Index shows that we have much work to do as a nation. The bottom line is that a more financially literate populace is vital, not just for the financial well-being of individuals who face an increasingly complex landscape in financial decision-making but for the nation’s future economic strength. It’s time to make financial literacy a national priority.