Financial Literacy and Why it Matters

Do you consider yourself good with money? If you're like most Americans, you probably feel very confident in your financial acumen. But when putting those skills to the test, it seems like many of us actually overestimate our financial knowledge. That has major implications for the way we approach spending and saving.

"Few Americans scored well on a test of basic financial knowledge."

The Financial Industry Regulatory Authority has been conducting surveys and publishing studies on Americans' financial knowledge, and their confidence in that knowledge, for several years. FINRA now offers the survey in the form of a short six-question quiz  online. Before taking this test, FINRA researchers asked participants how they felt about their knowledge on money. According to the study, 76 percent of them rated themselves "very high" on the scale. This is a marked increase from recent years - only 67 respondents rated themselves similarly in 2009.

When it came to testing that knowledge, however, few participants met their own expectations. The quiz asked readers about consumer finance topics like mortgages and credit card interest rates, but also included macroeconomic ideas such as how inflation affects savings. Only 37 percent of test-takers got four or more questions right  in 2015. To compare, 42 percent scored high on the exact same quiz in 2009.

Survey says

When comparing this data to demographic information on household income, saving and spending, it becomes clear that the disconnect between perceptions of financial literacy and practical knowledge has real implications on Americans' lives. 

"While Americans as a whole are feeling less financial stress, making ends meet remains a daily struggle for millions — particularly women, millennials, African-Americans, Hispanics, and those lacking a high school education," FINRA said, according to a press release on the study. "This research underscores the critical need for innovative strategies to equip consumers with the tools and education required to effectively manage their financial lives."

Much of the increase in Americans' positive views of their financial literacy likely has to do with generally better economic outcomes since 2009, when the recession was just beginning to wreak havoc. Almost one-third of respondents said they were satisfied with their current financial condition in 2015, almost twice the 2009 figure. And almost half said they were having little trouble covering expenses and paying bills, while only 36 percent could say the same six years ago.

Still, it seems many consumers are finding it hard to save enough for major expenses like retirement or a child's education. Even for regular expenses, some reported occasional stumbles. Of 18-to-34-year-olds with a mortgage, 29 percent have fallen behind on a payment. Racial disparities in income and saving habits abound as well. Hispanics and African-Americans reported being much more apt to use high-interest loans. These so-called "payday loans" are often marketed to lower-income, less formally educated people who may not fully understand the full cost of using such services.

"Large segments of society continue to face financial difficulties, particularly minority populations and those without a college education," the study's authors wrote.

Smart solutions

If more Americans are getting hired into good jobs, why is financial stability still hard to come by? Some think that improvements in personal financial education may be the key to increasing the average savings rate in the U.S. A 2016 report from the Council for Economic Education found that finance education may be hard to come by  in the nation's public schools. Only 17 states require high school students to take a personal finance management course.

FINRA and others argue that making economic education a priority for teens and young adults may be the best way to tackle America's consumer debt problem. When students get reliable information and practice regarding the maintenance of a budget, paying bills and using credit, they are more likely to learn responsible strategies for personal financial management. With better consumer economics skills, it may be possible to reduce burdensome debt and therefore improve outcomes for every U.S. citizen, regardless of their financial knowledge.