The 2018 TIAA Institute-GFLEC Personal Finance Index

The State of Financial Literacy Among U.S. Adults

Introduction

Financial knowledge has been shown to correlate strongly with financial outcomes. So what’s the state of the nation’s financial literacy?

Summary

This report on the second wave of the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) provides a comprehensive barometer of U.S. adults’ readiness to make sound financial decisions. The P-Fin Index is unique in its capacity to examine financial literacy across eight common financial activities: earning, consuming, saving, investing, borrowing, insuring, understanding risk and gathering information. The results of the first wave were reported in 2017.

Key Insights

  • Most Americans lack the knowledge necessary to make routine financial decisions. 
  • Financial literacy tends to be lowest in the area of comprehending risk and highest concerning debt and debt management.
  • Individuals with greater financial knowledge are more likely to experience positive financial outcomes. 
  • Comprehensive financial literacy across functional areas matters for sound financial outcomes, but no specific area is more important than the others.  

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Executive Summary

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) is an annual barometer of knowledge and understanding which enable sound financial decision making and effective management of personal finances among U.S. adults. It is unique in its capacity to examine financial literacy across eight areas of personal finance in which individuals routinely function. The 2018 data represents the second wave of the P-Fin Index.

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Introduction to the P-Fin Index

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index, for short) measures the knowledge and understanding that enable sound financial decision making and effective management of personal finances. The P-Fin Index relates to common financial situations that individuals encounter and thus can be viewed as a gauge of “working knowledge.”

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P-Fin Index Results

Many Americans lack personal finance knowledge that enables sound financial decision making. On average, U.S. adults answered 50% of the P-Fin Index questions correctly. In addition, there is essentially a 50/50 split between those who were able to answer one-half of the index questions correctly and those who were not able to do so (Figure 1). Sixteen percent demonstrated a relatively high level of personal finance knowledge and understanding, i.e., they answered more than 75% of the index questions correctly, while 21% showed a relatively low level, i.e., they answered 25% or fewer of the questions correctly. These figures are essentially identical to financial literacy levels in the 2017 P-Fin Index.

P-Fin Index Figure 1

Functional Knowledge

Comprehending risk is the functional area where financial literacy tends to be lowest. On average, survey participants answered only 35% of these questions correctly (Figure 2.) This finding is consistent with other research identifying risk-related concepts as the most difficult for individuals to grasp. It is also consistent with the findings from the 2017 P-Fin Index. 

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P-Fin Index Figure 2

A DNK ("I don't know") response for a question provides information beyond an incorrect answer. Previous research has found that a DNK response typically signals a more acute lack of knowledge and understanding relative to an incorrect answer. 

P Fin Index Figure 5

Demographic Variations

Financial literacy varies across demographic groups. Figure 5 shows the average percentage of P-Fin Index questions answered correctly by demographics; Figure 6 presents the distribution of correct answers within each demographic group. These findings are overall consistent with variations identified in previous studies, as well as the 2017 P-Fin Index findings.

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P Fin Index Figure 7

Variations by Education

Financial literacy is positively correlated with both general education and financial education. Figure 7 shows the average percentage of P-Fin Index questions answered correctly by general education level and by receipt of financial education; Figure 8 presents the distribution of correct answers. These findings are consistent with previous studies, as well as the 2017 P-Fin Index findings. 

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P Fin Index Figure 9

The P-Fin Index and personal finance outcomes

Since the P-Fin Index measures knowledge and understanding that enable sound financial decision making, it should correlate with financial actions and outcomes. This expectation holds—individuals with greater financial literacy as measured by the index are more likely to have positive personal finance experiences.

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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.

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