Despite the wealth of information and education available today, financial literacy is not improving among adults in the United States. A financial advisor can help you improve your financial literacy to better understand your money. Find a trustee today.
On average, American adults answered only 50 percent 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 the George Washington University School of Business.
Since researchers at TIAA and George Washington University began measuring financial literacy among adults in 2017, functional knowledge hasn’t improved. The area where people struggle the most? Understanding financial risk. Here’s a look at the survey results and some of the questions that were asked.
Financial literacy is not improving
Unfortunately, this year’s survey and previous studies have revealed that many adults in the United States function with little understanding of financial topics. On average, US adults answered only 50% of the index questions correctly in 2022, a figure that has remained stable since 2017.
While only 18% of respondents were able to answer between 76% and 100% correctly of the 28 questions asked in this year’s survey, nearly a quarter of adults (23%) answered at least 100% incorrectly. 75% of questions. What’s worse, the percentage of adults with low financial literacy is on the rise. In 2020, only 17% of respondents got three quarters of the questions wrong.
Financial risk assessment is the only area where functional knowledge is consistently lower among U.S. adults, the survey found. Only 36% of risk-related questions were answered correctly, a 3% drop from the first survey in 2017.
“Understanding risk involves, for example, understanding that the expected outcome in a given scenario depends on the range of possible outcomes, the financial implication associated with each outcome, and the likelihood of each outcome occurring,” according to the study.
What financial topic are American adults most knowledgeable about? Borrow money. On average, 60% of loan-related questions were answered correctly, followed by questions focused on savings (53%) and consumption (52%), according to the survey.
Can you answer these questions correctly?
TIAA shared with SmartAsset a sample of the questions it asked respondents as part of its 2022 survey. The questions touch on financial risk, as well as how interest accrues on savings and the impact on loan balances. Here are three questions that were part of the 2022 survey:
There’s a 50 percent 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 have to replace the air conditioning unit in his home, which would cost $4,000. What represents the greatest financial risk for Malik?
Anna saves $500 every year for 10 years and then stops saving any additional money. At the same time, Charlie saves nothing for 10 years but then receives a gift of $5,000, which he decides to save up. If both Anna and Charlie earn a 5% return each year, who will have the most money to save after 20 years?
Jose owes $1,000 on a loan that has an interest rate of 20% a year compounded annually. If he doesn’t pay the loan, at this interest rate, how many years will it take him to double the amount he owes? (Possible answers: less than 5 years; 5 to 10 years; more than 10 years; I don’t know)
1. Although it may cost Malik $4,000 to repair his air conditioning, the likelihood of a $1,000 car repair is much greater, meaning he poses a more significant financial risk.
2. Anna after 20 years would have more money than Charlie, considering that 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 old”, you would have been among the respondents who answered correctly. Without making payments on his car loan, Jose’s loan balance would double within four years.
Why financial literacy matters
The TIAA-GFLEC indicates a direct correlation between financial literacy and financial well-being. The more adults know about money, the better off they are.
The survey found that people with low levels of financial literacy are six times more likely to have difficulty making ends meet than adults with high levels of financial literacy. They are also five times more likely to not have enough emergency savings to cover a month of expenses and three times more likely to be unable to withstand a $2,000 financial shock.
“It is evident again that higher financial literacy tends to translate into higher financial well-being, and lower financial literacy is generally associated with lower financial well-being,” concluded the study authors.
Meanwhile, a separate study calculated what a lack of financial literacy could actually cost someone. At the end of 2021, the National Financial Educators Council (NFEC) conducted a survey of 3,389 adults and found that the average adult loses approximately $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 troubling figure that hasn’t improved since the survey’s first year in 2017. Understanding financial risk is the only area in which adults need the most improvement, as only 36% of risk-related questions were answered correctly in 2022.
Tips to improve your financial literacy
Working with a financial advisor is one of the best ways to improve your understanding of financial topics, including 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 reach your financial goals, get started now.
SmartAsset has a wealth of reference articles to help you better understand your finances, as well as guides specifically focused on particular topics, including investing, estate planning, taxes, and more.
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