P-Fin Index: Concluding Discussion

A myriad of personal finance decisions—both simple and complex—confront individuals in the normal course of life. How well individuals navigate these decisions is dependent, at least in part, on their financial literacy. According to the P-Fin Index, many Americans lack personal finance knowledge that enables sound financial decision making and effective management of personal finances. On average, U.S. adults answered one-half of the P-Fin Index questions correctly. Financial knowledge is particularly low among the young, but it continues to be low even among older individuals who have already made many financial decisions.

The P-Fin Index is unique in its capacity to examine financial literacy across eight areas of personal finance in which individuals routinely function. Personal finance knowledge is lowest in the area of comprehending risk. This is troubling given that risk and uncertainty are inherent in the context of making financial decisions. On the other hand, borrowing is the area where adults tend to have the highest level of knowledge. Debt tends to be a feature of personal finance common across the life cycle for many individuals; knowledge and understanding may emerge from confronting accumulated debt.

Given the link between financial knowledge and financial outcomes, it is evident that individuals would benefit from increased financial literacy levels. This is particularly important in an ever changing financial landscape as financial products, services and opportunities available to individuals continually evolve. Sometimes these changes originate from the financial services industry itself as providers innovate. Other times they are the result of changes in government public policy. For example, the regulations governing employment-based and individual retirement plans have continually evolved since the passage of the Employee Retirement Income Security Act (ERISA) in 1974—with implications for how much individuals can save on a tax-preferred basis, the investment options generally available to them, and when and how they can withdraw money from their retirement savings. Other public policy changes have an immediate, direct effect for individuals. For example, changes in tax rates can result in changes in disposable income for a household. This can mean deciding how best to utilize an increase in disposable income or, alternatively, how best to respond to a decrease in disposable income.

Given the range and complexity of decisions that individuals face today, it is important to step up efforts to provide the requisite financial education in school and the workplace. To this end, GFLEC offers a course in personal finance at The George Washington University School of Business, provides professional development resources for teachers and personal finance curricula for high schools. Comprehensive understanding of the various facets of personal finance equips individuals for sound financial decision making and effective management of personal finances.