Findings from the National Financial Capability Study (NFCS), released this month by the FINRA Investor Education Foundation , show that quite a few Americans possess relatively low levels of financial literacy and have trouble with applying financial decision-making skills to real-life situations.
To determine financial knowledge, NFCS study participants were tested on five questions and a bonus question covering basic concepts of finance that may be encountered in everyday life. The questions require test takers to choose between three to five possible answers, none of which require too much calculation. What is being tested is a person’s fundamental understanding of real-life issues and decisions involving personal finance. These questions include things like calculations involving interest rates and inflation and principles relating to risk and diversification.
The proof that Americans are largely financially illiterate can be found in some troubling statistics. It is not just that the average American doesn’t have enough savings to cover a small emergency — an unexpected medical expense or being let go from a job — but nearly 33 percent of American adults have also saved zero dollars for retirement. In terms of debt, the statistics are even grimmer: 38 percent of households have some credit card debt (the average of which is $16,000) and an average APR of 16.47 percent. If you don’t know what that means, you are not alone. APR stands for annual percentage rate. Not only do most Americans not understand how much it will cost them to pay back their loans, but a staggering 43 percent of people with student loans aren’t even making payments or are behind on payments.
How did millennials fare on the test?
Read it and weep. Unfortunately, millennials answered 44 percent of the questions correctly while older adults answered 50 percent of the questions correctly. And, interestingly, older millennials answered 47 percent of the questions correctly compared to younger millennials who only answered 41 percent correctly. This is despite the fact that millennials are tech savvy and use their tech for financial matters.
In 2019, it is projected that millennials will outnumber baby boomers, which is giving economists anxiety about how the economy will function given millennials’ lack of financial acumen. Is it possible that the gap in financial literacy between millennials and older Americans is due to a lack of life experience rather than a lack of education or intelligence? In any case, take the test and see how you do yourself! Whether it is lack of experience, intelligence or education, these concepts are important to get under your belt.
Have something to add to this story? Comment below or join the discussion on Facebook.
Header image: ShutterStock