Investment IQ

How Financial Literacy Varies Among U.S. Adults

For all financial decisions, life’s paths are not always ’normal’

A recent study from TIAA Institute, the 2022 TIAA Institute-GFLEC Personal Finance Index annually assess the financial literacy of adults in the U.S. population. Excerpts are presented below, and you can access the complete study at tiaainstitute.org.

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) is an ongoing project now in its sixth year that annually assesses financial literacy among the U.S. adult population. The P-Fin Index is unique in its capacity to produce a robust measure of overall financial literacy plus a nuanced analysis of personal finance knowledge across eight areas in which individuals routinely function. The index relates to common financial situations that individuals encounter and can be viewed as a gauge of “working knowledge.”

The P-Fin Index survey also includes indicators of financial well-being which enables examining the relationship between financial literacy and financial well-being.

Key findings include:

  • Many Americans function with a poor level of financial literacy—a consistent finding over the first six years of the P-Fin Index. On average, U.S. adults correctly answered only 50% of the index questions in 2022. Eighteen percent correctly answered over 75% of the index questions, while 23% correctly answered 25% or fewer of the questions.
  • Comprehending risk is again the area where functional knowledge tends to be lowest among U.S. adults. On average, 36% of these questions were answered correctly in 2022, a figure lower than its 2017 level (39%).
  • Asian Americans were oversampled for the first time with the 2022 P-Fin Index, along with Black and Hispanic Americans. Financial literacy levels among Asian Americans and Whites tend to be equal; the former correctly answered 54% of the index questions, on average, and the latter 55%. Analogously, functional knowledge levels among Hispanic and Black Americans tend to be equal.
  • Financial literacy tends to be low within each of the five generations comprising the U.S. adult population, but particularly so among those in early adulthood. The average percentage of P-Fin Index questions answered correctly in 2022 by Gen Z and Gen Y is 42% and 46%, respectively. The analogous figure among baby boomers and the Silent Generation is 54% for each.
  • It is evident again that greater financial literacy tends to translate into higher financial well-being and lower financial literacy is generally associated with lower financial well-being. For example, compared to those with very high levels of financial literacy, those with very low levels are 6 times more likely to have difficulty making ends meet, 3 times more likely to be debt constrained, 3 times more likely to be unable to cope with a $2,000 financial shock, 5 times more likely to lack emergency savings sufficient to cover one month of living expenses, and 4 times more likely to spend ten hours or more per week dealing with personal finance issues.
  • The same link between financial literacy and financial well-being holds across race and ethnicity groups. For each well-being indicator, there is typically a double-digit decrease in the percentage of adults experiencing a poor personal finance outcome when comparing those with relatively high financial literacy to those with relatively low financial literacy across the four groups.

Life’s Paths Are Not Always Normal

Individuals are confronted with myriad financial decisions—big and small, simple and complex—in the normal course of life. Furthermore, the course of life is not always “normal” as evidenced by the COVID-19 pandemic and its economic consequences. In an environment of economic turbulence and uncertainty, the value of making appropriate financial decisions is only heightened. Financial literacy, in turn, is knowledge and understanding that enable sound financial decision making and effective management of personal finances. Thus, an individual’s financial well-being depends, at least in part, on his or her financial literacy.

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index), a long-term project begun in 2017, is an annual barometer of financial literacy among the U.S. adult population. The P-Fin Index relates to common financial situations that individuals encounter and can be viewed as a gauge of “working knowledge.” Beyond providing a robust measure of overall financial literacy, the index is unique in its capacity to produce a nuanced analysis of personal finance knowledge across eight areas in which individuals routinely function.

1.) Earning—determinants of wages and take-home pay.

2.) Consuming—budgets and managing spending.

3.) Saving—factors that maximize accumulations.

4.) Investing—investment types, risk and return.

5.) Borrowing/managing debt—relationship between loan features and repayments.

6.) Insuring—types of coverage and how insurance works.

7.) Comprehending risk—understanding uncertain financial outcomes.

8.) Go-to information sources—recognizing appropriate sources and advice.

In addition to the core set of questions that assess financial literacy, the P-Fin Index survey contains questions that are indicators of financial well-being. This enables examining the relationship between financial literacy and financial well-being. The P-Fin Index survey is fielded online in January each year with a sample of U.S. adults ages 18 and older. Responses are weighted to be nationally representative, and results are available across various socio-demographic segments of the population.4 The 2022 P-Fin Index survey was completed by a sample of 3,582 individuals. Black and Hispanic Americans, and for the first time Asian Americans, were oversampled for at least 500 respondents each.6 In addition, Gen Z was oversampled for at least 450 respondents age 18 or older.

Overall Financial Literacy

Unfortunately, many Americans function with a poor level of financial literacy— a consistent finding over the first six years of the P-Fin Index. On average, U.S. adults correctly answered only 50% of the index questions in 2022. In fact, this figure has remained steady around the 50% mark since the initial 2017 survey. This is troubling since the P-Fin Index is a barometer of working knowledge related to financial situations encountered in the normal course of life.

In an environment of economic turbulence and uncertainty, the value of making appropriate financial decisions is only heightened...

Likewise, the distribution of correct answers with the P-Fin Index has been relatively stable over the six years. With that said, more U.S. adults (23%) demonstrated a very low level of financial literacy (i.e., they correctly answered 7 or fewer of the 28 index questions) in 2022 than in any previous year. The difference in this figure compared to 2017 is statistically significant. At the same time, the percentage correctly answering over one-half of the index questions is slightly greater in 2022 (51%) than 2017 (48%), though the difference is not statistically significant.

Demographic Variations In Financial Literacy

Asian Americans were oversampled for the first time with the 2022 P-Fin Index. Financial literacy levels among Asian Americans and Whites tend to be equal. The former correctly answered 54% of the index questions, on average, and the latter 55%. Approximately one-quarter of Asian Americans and Whites have very high levels of financial literacy (i.e., they correctly answered 22 or more of the 28 index questions) and 18% of each have very low levels of financial literacy (i.e., they correctly answered 7 or fewer of the 28 index questions).

Likewise, financial literacy levels among Black Americans and Hispanics tend to be equal, albeit at lower levels than Asian Americans and Whites. The former correctly answered 37% of the index questions in 2022, on average, and the latter 38%. Approximately one-third of each group have very low levels of financial literacy. Top-level differences in financial literacy across race and ethnicity do not mean inherent differences in capability. There are demographic differences a level down across groups that matter, such as age, education and income distributions. Beyond that, other dynamics which data do not capture are in play, including systemic factors and issues. A more rigorous empirical analysis points to this.

Financial literacy remains lower among Black Americans and Hispanics relative to their White peers after controlling for other socioeconomic factors such as household income and education. Asian Americans also have lower financial literacy levels compared to Whites after controlling for these other factors. Analogous to overall financial literacy, functional knowledge levels among Asian Americans and Whites tend to be equal.

Three areas where there is a statistically significant difference are earning and insuring (both with higher financial literacy among Whites) and comprehending risk (higher financial literacy among Asian Americans). Likewise, functional knowledge levels among Black Americans and Hispanics tend to be equal. Overall, the rank ordering of functional areas by financial literacy levels is very similar across the four groups. One difference that stands out is earnings being the second weakest area among Asian Americans, which is not the case with the other three groups.

Read the full report at www.tiaainstitute.org