The ‘disruptive generation’ is changing the structure of industries, and redefining socialization
by Stephanie Bell-Rose and Annamaria LusardiStephanie Bell-Rose is a Senior Managing Director of TIAA and Head of the TIAA Institute.
Annamaria Lusardi is the Denit Trust Chair of Economics & Accountancy; Academic Director, at the Global Financial Literacy Excellence Center (GFLEC).
Millennials use of digital technology has transformed the way they socialize and form communities. Their interest in streaming services has upended the entertainment industry. Their preference for online shopping has forced businesses to revolutionize the models they have relied on for decades.
We’ve all seen the headlines. Over 90% of millennials have a smartphone and half say they are mostly or almost always online and connected. It is no surprise that the generation that has grown up with technology have become reliant on it for almost every aspect of their lives. When it comes to personal finance, the behavior of this increasingly influential demographic is no different. The TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business came together to produce Millennial Financial Literacy: Findings from the 2018 TIAA Institute-GFLEC Personal Finance (P-Fin) Index, which examines not only the personal finance knowledge of millennials but also how that knowledge intersects with the use of financial technology.
Transforming Personal Finance
The results remind us how much has changed when it comes to personal finance. Eighty-two percent of millennials use their smartphone to comparison shop, 68% to pay bills, 67% to track spending, and 58% to deposit checks. That’s over half of a generation who may never visit a brick and mortar bank.
However, all of this technology, the banking websites and apps like Mint and Venmo that we use to make our lives easier, don’t compensate for a lack of financial literacy. Our second annual Personal Finance (P-Fin) Index revealed that on average, U.S. adults of all generations answered only half of the P-Fin index questions correctly – covering earning, consuming, saving, insuring, and recognizing appropriate information resources and advice. These topic areas affect everything from the ability to pay bills on time, to one’s credit score, to being able to retire with enough money to live comfortably.
For Millennials in particular, the results are even more revealing. Older Millennials answered 47% of the P-Fin Index questions correctly, on average, compared to 49% for Gen X. For younger Millennials, that number was just 41%.
Financial literacy among both younger and older Millennials is lowest in the areas of comprehending risk (at 36% for older Millennials and 33% for younger Millennials) and insuring (at 39% for older Millennials and 31% for younger Millennials), whereas it’s highest in the area of borrowing and debt management. On average, 58% of the borrowing questions were answered correctly by older Millennials and 52% by younger Millennials.
Given the regularity with which Americans begin accumulating debt, often early in life, this is not surprising. However, risk and uncertainty are also inherent elements of financial life, and insurance presents a method of mitigating certain risks. The low rate at which questions in these areas are answered correctly raises questions about the effectiveness of millennial’s decision-making when it comes to their own finances and mitigating related risks
Many consequential financial decisions are faced early in life, decisions with ramifications for financial well-being decades into the future, as well as the present. Additionally, basic financial behavior and habits, such as budgeting and tracking spending, often become established early in adulthood. Nonetheless, young adults are operating from a limited base of personal finance knowledge and understanding.
Individuals with greater financial literacy are less likely to overdraw their checking account or be financially fragile, and more likely to plan for retirement and have non-retirement investments.
While technology continues to make our lives easier, it’s important to note that the best complement for financial technology is strong financial literacy skills. Understanding and accepting where financial literacy is the weakest is the first step to making sure that individuals have the tools and knowledge they need to successfully navigate their financial lives. Working with GFLEC, the TIAA Institute provides this kind of data to inspire individuals and institutions to have more conversations about the best pathway to close these gaps in financial literacy, and improve long-term financial well-being.
Stephanie Bell-Rose is a Senior Managing Director of TIAA and Head of the TIAA Institute.
Annamaria Lusardi is the Denit Trust Chair of Economics & Accountancy; Academic Director, at the Global Financial