Originally Published by TIAA.
A new report, released by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business, found there is a financial literacy gap among millennials. The report also found that while most millennials use their smartphones to manage their personal finances, financial technology (fin-tech) does not necessarily improve their personal finance management practices.
The “Millennial Financial Literacy and Fin-Tech Use: Who Knows What in the Digital Era” study utilized the TIAA Institute-GFLEC 2018 Personal Finance Index (P-Fin Index) to examine the personal finance knowledge of millennials. Millennials answered 44 percent of P-Fin Index questions correctly, compared to 50 percent of the US adult population. Moreover, younger millennials (ages 18-27) answered 41 percent of P-Fin Index questions correctly, compared to 47 percent of older millennials (ages 28-37).
Financial literacy among both older and younger millennials is lowest in the areas of comprehending risk and insuring. Understanding insurance, in particular, saw the greatest gap between younger and older millennials. Financial literacy is highest in the area of borrowing and debt management for both younger and older millennials.
The report also examined how millennials use technology to manage their personal finances and the effect of financial technology on financial outcomes. Approximately 80 percent of millennials use their smartphone for transactional purposes like paying bills and depositing checks, and 90 percent use their phones for informational activities like tracking their spending.
While fin-tech offers a convenient way to manage finances, users do not always make savvy financial decisions. Almost 30 percent of millennials who use their smartphone to make mobile payments report overdrawing their checking account, compared with 20 percent who do not make mobile payments. Further, one-quarter of those who track spending with their smartphone report overdrawing their accounts, compared with 20 percent of those who do not track spending via their smartphone.
Fin-tech users benefit from being financially literate; those with high levels of financial literacy are less likely to overdraw their checking accounts. “The millennial oversample in this year’s P-Fin Index sheds a light on the use of mobile technology, and the impact that it has had on an increasingly influential generation,” Stephanie Bell-Rose, Head of the TIAA Institute. “As technology continues to develop ways to make our lives easier, it is clear that we cannot exclusively rely on it to guide us through our financial lives. Our research underscores the importance of financial literacy and its complementary relationship with fin-tech in producing good outcomes.”
“The low level of financial literacy among millennials speaks of the importance of equipping this large generation with the knowledge and skills that are needed to make financial decisions in the digital era,” Annamaria Lusardi, Academic Director at GFLEC and the Denit Trust Chair of Economics and Accountancy at GW. “This study shows that fin-tech users have different needs and characteristics, providing many opportunities for innovation for fin-tech developers.”
The P-Fin Index examines financial literacy across eight areas of personal finance in which individuals routinely function. The survey provides a robust indicator of overall personal finance knowledge and understanding. The 2018 survey leveraged a special set of questions to examine millennial fin-tech use and its impact on personal finance.
The report with new insights on financial literacy levels of millennials was authored by Paul Yakoboski, Senior Economist at the TIAA Institute, Annamaria Lusardi, Academic Director at GFLEC, and Andrea Hasler, Assistant Research Professor in Financial Literacy at GW’s GFLEC.
The full report can be found HERE .