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TIAA: Financial Literacy Linked to Financial Wellness

Many Americans continue to lack the personal finance knowledge necessary to make sound financial decisions, according to the third annual Personal Finance Index (P-Fin Index) released by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business (GWSB).

The 2019 P-Fin Index identified critical gaps in financial literacy among American adults and underscored the connection between financial literacy and financial wellness, which is the ability for a person to control their finances and meet their financial goals. Borrowing and debt management remains the area where knowledge is highest, likely due to Americans confronting accumulated debt in early adulthood. Comprehending risk – a critical component of making personal finance and investment decisions – is where financial literacy is lowest.
“The P-Fin Index is the preeminent annual barometer of Americans’ personal finance knowledge,” said Stephanie Bell-Rose, Head of the TIAA Institute. “Understanding the connection between financial literacy and financial wellness was a particular focus this year to help us create a better roadmap for improving the financial well-being of Americans.”
“This long term collaboration with the TIAA Institute has allowed us to study not only the level of personal finance knowledge but also to assess its changes over time. Findings from this third survey show that we need to step up the effort to improve financial knowledge among the U.S. population,” said Dr. Annamaria Lusardi, Denit Trust Endowed Chair of Economics and Accountancy and Academic Director of the GFLEC at GWSB.
On average, U.S. adults answered only 51 percent of the P-Fin Index questions correctly. Other key findings from this year’s P-Fin Index include:
  • Those with greater financial literacy are more likely to save and plan for retirement. Eighty-eight percent of those who answered between 76 and 100 percent of P-Fin questions correctly save for retirement on a regular basis, compared to 37 percent of those who answered less than 26 percent of P-Fin questions correctly.
  • Those with greater financial literacy are more likely to have non-retirement savings. Eighty-six percent of those who answered between 76 and 100 percent of P-Fin questions correctly have non-retirement financial savings, compared to 34 percent of those who answered less than 26 percent of P-Fin questions correctly.
  • Those with greater financial literacy have a greater propensity to track spending. Sixty-three percent of those who answered between 76 and 100 percent of P-Fin questions correctly usually or almost always tracked their spending, compared to 54 percent of those who answered less than 26 percent of P-Fin questions correctly.
  • Those with greater financial literacy are less likely to be financially fragile. Eighty-five percent of those who answered between 76 and 100 percent of P-Fin questions correctly could certainly come up with $2,000 if an unexpected need arose within the next month, compared to 25 percent of those who answered less than 26 percent of P-Fin questions correctly.
The P-Fin Index is unique in its capacity to produce a robust measure of overall personal finance knowledge as well as an analysis of knowledge across different areas of personal finance. The survey asks a total of 28 questions about the following eight functional 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.
  • Go-to information sources: recognizing appropriate sources and advice.
The full report can be found here.

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