Financial literacy (a.k.a. FinLit) is the education and understanding of various financial areas, such as saving, spending, investing, insurance, budgeting, retirement and tax planning. The positive impacts of financial education on people are clear, as are the negative impacts to those that lack FinLit.
From a global perspective, there is a positive association between GDP per capita (i.e., standard of living indicator) and FinLit among the richest 50% of world economies, based on research from Standard & Poors (S&P).
At the national level, people in the United States (US) with higher levels of FinLit plan for retirement and have double the wealth of people who do not plan for retirement, as reported by Investopedia. Alternatively, the Federal Reserve Bank of St. Louis reports that lower levels of measured FinLit in the US has been associated with lower rates of retirement planning and asset accumulation, and higher levels of debt.
In the declaration of financial independence, it is abundantly clear that the “pursuit of happiness” is easier if you are knowledgeable about personal financial matters.
If you follow financial news closely you’ve no doubt heard how poor FinLit test scores are across the globe and here in the US. If you haven’t been following, here are just a few headlines to help you get up to speed:
- Two-thirds of the world can’t pass a basic 5-question FinLit test, according to the S&P Global FinLit survey
- Only 48% of Americans pass a FinLit test from the National Financial Educators Council (NFEC)
- Just 24% of Millennials exhibit basic FinLit, based on report by the Global Financial Literacy Excellence Center (GFLEC)
In the US, this lack of FinLit has resulted in poor financial decisions and behavior from consumers. The National Foundation for Credit Counseling (NFCC) produces an annual report on FinLit that tracks consumer behavior. In the 2017 survey, the NFCC found that credit card debt is on the rise, and a large percentage of American adults are continuing the trend of not saving enough for retirement. And although younger generations have received more traditional education than prior generations, many of these same troubling trends are continuing. According to GFLEC, “Millennials are a generation at risk” with high debt levels, low savings, and a lack of FinLit.
If that doesn’t get your attention, maybe appealing to your competitive side will. Comparing ourselves globally to other countries and locally within the US is another way to evaluate our results. At a global level, there are 12 countries that have more financially literate adults than the US, including our neighbors to the north (Exhibit 1).
Financial literacy is not just a challenge for adults in the US. American teenagers also struggle to demonstrate financial capabilities when compared to international students. In a study conducted by the Program for International Student Assessment (PISA), the US ranked 7th in the evaluation of 15-year-old’s financial aptitude, but what’s more concerning is the fact that our scores have not improved since the last study in 2012. Billy Hensley, senior director of education with the National Endowment for Financial Education, offers this assessment of the results:
“The initial release of PISA findings (2012) revealed American teens were completely average when it comes to demonstrating a strong knowledge of financial skills. That measurement gave us a baseline to see room for growth or decline. It’s concerning with these latest findings to see that we haven’t moved the needle, and we still have significant work to do to provide meaningful access to teaching youth about money.”
Trenton, we have a problem
When looking at results by state, I focused on my home state of New Jersey (NJ). Unfortunately for NJ, we don’t stack up too well. Based on FINRA survey data, the average score on a basic 6-question financially literacy test was 3.04, or 57% correct. Not only is the score itself disappointing, but even more concerning is that we rank 40th overall, and fall below the national average and two of our three neighbors (Exhibit 2).
Download the FINRA results by state here: FINRA financial literacy test scores by state. Congrats Montana for having the most financially literate adults!
In my local community, I frequently engage parents on the topic of financial literacy education (as you can imagine, I’m very popular at parties). Considering our performance at the state level, I’m not surprised to hear “I don’t know” or “not much” when I ask about the personal financial education their children have received. The high school my children attend requires its students to take a course and pass a test, but much of what the students learn is very basic and not retained by the time they need to put it into practice. Parents also tell me it doesn’t get better at the college level, and while some can help their children with the basics, many are often not prepared to do more.
What can be done?
Although there are a number of publicly and privately funded organizations that focus on financial education and provide useful research and tools, the test results at all levels are still an issue. Making April financial literacy month just doesn’t seem to be working the way we hoped it would. So then, what can be done? Here are a few suggestions:
- Make federal and state governments and schools accountable. The US Department of Education should make financial literacy part of the core curriculum, like math, and be held accountable for sharing performance results with the nation. This can be done by creating a standardized national test required to be taken by seniors in high school, and college students that attend public colleges and universities. I’m not a fan of creating more standardized testing, but in this case it’s warranted. The test doesn’t need to be onerous. An existing test, like the 30-question test from NFEC is more than sufficient. Results can be linked to public funding. We need evidence that all of the efforts undertaken are producing positive and sustainable results.
- Create direct financial incentives. Offer college scholarship contests and grants focused on financial literacy and proficiency. To bring awareness to the importance of being financially literate and recognize individuals for exhibiting proficiency, DIYmoneytrack.com recently launched a financial literacy education scholarship. The scholarship is open to all college students and is being partially funded by proceeds from the sale of my digital products.
- Ask the corporate sector to do more. Corporations are not only in a position to help their own workforce become more financially literate, but may also be able to help other businesses. For example, financial service firms that provide corporate investment and banking services to companies could also offer personal financial education to employees of the companies they service.
To declare our financial independence as a country we need to not only arm the people of our nation with tools and skills to fight for their financial freedom, but also rally them to the cause with incentives and the promise of ongoing support. If you have other ideas on how to improve financial literacy test results in US, please share.