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A large portion of Americans do not have the requisite personal finance knowledge that lets them make sound financial decisions, according to a new study.
Fifty-two percent of U.S. adults correctly answered questions on the 2020 edition of the Personal Finance Index commissioned by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at The George Washington School of Business. Additionally, 53% of the adult respondents answered at least half of the questions correctly.
TIAA and GFLEC suggested that, slowly but steadily, more Americans are becoming smarter about their personal finances. In 2017, only 48% of adults correctly answered questions on the P-Fin Index — that figure has increased by 1% each year since. But that's no reason to bust out the champagne yet, they warned.
"Particularly as the world navigates the current health crisis, we are reminded that a sound understanding of the basic tenets of personal finance is critical to overall financial wellbeing," said Stephanie Bell-Rose, the head of the TIAA Institute, in a statement. "This year's P-Fin Index provides essential data to help us better understand the financial literacy topics Americans are actually struggling to understand and how we can help them prepare for unexpected financial challenges in the future."
The two groups noted that, on average, many Americans could only answer about half of the P-Fin Index questions correctly. They find that "many individuals do not know what they do know. Likewise, many do not know what they do not know."
For instance, the index found that while many Americans think they don't know anything about investing, they actually know the least about risk comprehension. Similarly, many Americans believe they know the most about consumption and earning money when they actually know the most about borrowing.
There are also generational and financial trends that played a role in how Americans answered the P-Fin Index. The index found that Generation Z, the youngest generation, had the lowest financial literacy while Baby Boomers had the highest. Similarly, individuals who are wealthy had higher literacy scores than individuals who were poor.
Financial illiteracy has real-world implications, according to the index's findings. Financially literate employees spend, on average, one hour a week during work dealing with personal financial issues. By contrast, employees who aren't financially literate spend about six hours a week dealing with those same issues while at work.
The two groups found a similar dynamic occurring when it came to needing money in a pinch — out of the individuals who have high levels of financial literacy, 77% of them said they can drum up $2,000 if needed. But only 21% individuals with low financial literacy levels could do that.
The survey was conducted in January 2020, well before the COVID-19 pandemic's economic effects could be felt in the United States at-large. But the economic effects associated with the pandemic have emphasized the need for better financial literacy amongst Americans, one of the index authors said.
"Even before the COVID-19 pandemic hit the economy, there were signs of financial fragility and financial distress," said Annamaria Lusardi, the academic director of GFLEC, in a statement. "This report reminds us that it is during a storm that sailing knowledge (financial literacy) shows its worth. Going forward, it is going to be even more important to have the skills and knowledge necessary to build financial resilience."
David Thomas is a reporter covering the business of law, with an emphasis on national and global law firms for The American Lawyer, Law.com and other ALM publications.
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David Thomas
I'm a reporter covering the business of law, with an emphasis on national and global law firms for The American Lawyer, Law.com and other ALM publications.
