Despite the vast amount of information and education available today, financial literacy is not improving among adults in the US
A financial advisor can help you improve your financial literacy to better understand your money. Find a fiduciary advisor today.
On average, American adults answered only 50% of questions correctly in the 2022 Personal Finance Index, an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at George Washington University School of Business.
Since researchers at the TIAA and George Washington University began measuring financial literacy in adults in 2017, functional knowledge has not improved. The area where people struggle the most? Insight into financial risk. Here’s a look at the survey’s findings and some of the questions that were asked.
Financial literacy is not improving
Unfortunately, this year’s survey and previous studies have shown that many adults in the US function with a poor understanding of financial topics. On average, U.S. adults answered only 50% of index questions correctly in 2022, a figure that has remained stable since 2017.
While only 18% of respondents could correctly answer between 76% and 100% of the 28 questions asked in this year’s survey, nearly a quarter of adults (23%) answered at least 75% of the questions incorrectly . Worse, the percentage of adults with poor financial literacy is on the rise. In 2020, only 17% of respondents got three quarters of the questions wrong.
Assessing financial risk is the one area where functional knowledge is consistently lowest among American adults, the study found. Only 36% of risk-related questions were answered correctly, down 3% from the first survey in 2017.
“Understanding risk, for example, involves understanding that the expected outcome in a given scenario depends on the range of possible outcomes, the financial implications associated with each outcome, and the likelihood of each outcome occurring,” the study said.
What financial topic do American adults know the most about? Borrow money. On average, 60% of the questions related to borrowing were answered correctly, followed by questions about saving (53%) and consumption (52%), according to the survey.
Can you answer these questions correctly?
TIAA shared with SmartAsset a sample of the questions respondents were asked as part of the 2022 survey. The questions relate to financial risk, but also to how interest on savings is built up and how this affects a loan balance. Here are three questions that were part of the 2022 survey:
There’s a 50/50 chance Malik’s car will need engine repairs within the next six months, which would cost $1,000. At the same time, there is a 10% chance that he will need to replace the air conditioning in his home, which would cost $4,000. What is Malik’s greatest financial risk?
Anna saves $500 every year for 10 years and then stops saving extra money. At the same time, Charlie saves nothing for 10 years, but then receives a gift of $5,000, which he decides to save. If both Anna and Charlie make 5% returns each year, who will have more savings after 20 years?
Jose owes $1,000 on a loan with an interest rate of 20% per annum, compounded annually. If he doesn’t pay off the loan, at this interest rate, how many years will it take for the amount he owes to double? (Possible answers: Less than 5 years; 5 to 10 years; More than 10 years; Don’t know)
1. Despite Malik’s air conditioning repair costing $4,000, the odds of a $1,000 auto repair are much higher, meaning it carries greater financial risk.
2. Anna would have more money than Charlie after 20 years, as her savings would have a 10-year head start to accrue interest.
3. If your answer to the third question was “less than 5 years”, you would have been one of the respondents who answered the question correctly. Without paying his car loan, Jose’s loan balance would double within four years.
Why financial literacy is important
The TIAA-GFLEC points to a direct correlation between financial literacy and financial well-being. The more knowledge adults have about money, the better off they are.
The study found that people with low levels of financial literacy were six times more likely to have trouble making ends meet compared to adults with high levels of financial literacy. They are also five times more likely to have insufficient emergency savings to cover a month’s worth of expenses and three times more likely to fail a $2,000 financial shock.
“It is again clear that greater financial literacy usually translates into higher financial well-being and lower financial literacy is generally associated with lower financial well-being,” the study authors concluded.
Meanwhile, a separate study calculated how much a lack of financial literacy could actually cost a person. In late 2021, the National Financial Educators Council (NFEC) conducted a survey of 3,389 adults and found that the average adult loses about $1,389 annually due to a lack of financial literacy, including personal finance and investments.
Unfortunately, financial literacy is not improving among American adults. On average, respondents to the 2022 TIAA Institute-GFLEC Personal Finance Index answered only half of the questions correctly, a disturbing figure that hasn’t improved since the survey’s first year in 2017. Understanding financial risk is the only area where adults the most improvement, as in 2022 only 36% of questions related to risk were answered correctly.
Tips for Improving Your Financial Literacy
Working with a financial advisor is one of the best ways to improve your understanding of financial topics, such as investing, saving and planning for retirement. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset has a wealth of reference articles to help you better understand your finances, as well as guides that focus specifically on certain topics, including investing, estate planning, taxes, and more.
Photo credit: ©iStock.com/ilona titova, ©iStock.com/designer491, ©iStock.com/damircudic
The message 23% of adults get three-quarters of financial literacy questions wrong: Can you get them right? appeared first on SmartAsset Blog.