Financial Literacy in the United States and Its Link to Financial Wellness
general population, financial status and behavior
The 2019 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) represents the third wave of a long-term project to annually assess financial literacy among the U.S. adult population. The P-Fin Index is unique in its capacity to produce a robust measure of overall personal finance knowledge and a nuanced analysis of knowledge across eight areas of personal finance in which individuals routinely function. Key findings for 2019 include:
- Many Americans lack personal finance knowledge that enables sound financial decision making. On average, U.S. adults answered only 51% of the P-Fin Index questions correctly.
- Comprehending risk is the functional area where financial literacy tends to be lowest. Given that risk and uncertainty are inherent in most financial decision making, this is particularly troubling. Personal finance knowledge is highest in the area of borrowing and debt management. Debt tends to be a feature of personal finance common across the lifecycle for many individuals; knowledge and understanding may emerge from confronting accumulated debt.
- The percentage of P-Fin Index questions answered correctly increased from 49% in 2017 to 50% in 2018 to 51% in 2019, while the percentage of adults answering more than one-half of the questions correctly increased from 48% to 51% to 53% in that time period. In addition, six of the eight functional areas saw small increases in the percentage of questions answered correctly. While noteworthy, these changes are too small, and the time period too short, to conclude that financial literacy levels are actually increasing.
- Financial literacy varies across demographic groups. Men tend to answer a greater percentage of the P-Fin Index questions correctly. Personal finance knowledge tends to increase with age, as well as household income. Financial literacy varies with employment status—those unemployed or disabled have markedly less personal finance knowledge than those employed and those retired. In addition, financial literacy is positively correlated with both general education and financial education.
- Some demographic groups experienced increases in the percentage of questions answered correctly between 2017 and 2019: men, those in the 30-44 age group, those with household income of at least $100,000, those with a college degree, and those who have received financial education. Thus it appears that any increases in financial literacy have been concentrated mostly among those with relatively high levels of literacy already.
- The P-Fin Index also highlights the link of financial literacy to financial wellness. The 2019 index survey contained several new questions indicative of financial wellness. In each case, greater financial literacy was positively associated with financial wellness indicators. For example, as the percentage of P-Fin Index questions answered correctly increases, individuals are more likely to have the capacity to handle a financial shock, more likely to save for retirement on a regular basis, and less likely to be debt constrained.