Financial Illiteracy: Research, Data, Definition, & Opinions

Americans and other societies throughout the world share a common problem – financial illiteracy is pervasive in cultures around the globe. This epidemic threatens to undermine people’s lives. Not only does bad financial planning affect individual lives, but it often proves responsible for eating away at family cohesion.

It is extremely important to know how to deal with your personal finances prudently. Making the wrong decisions can lead to circumstances from which people might never recover. These problems can be prevented with just a little financial literacy put into practice. Even a small amount of knowledge can lead to more practical financial planning, which can make people’s lives more stable and comfortable.

Financial Illiteracy – What Exactly Is It?

According to the National Financial Educators Council, financial illiteracy is “Lacking the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family, and global community goals.” See other financial literacy definitions.

A person who is financially illiterate may inadequately save for retirement, spend more than their budget allows, and make other financial decisions that provide short-term gratification but result in negative long-term consequences. However, there may be other causes beyond just financial illiteracy that affect a person’s financial situation. Financial problems can occur due to unfortunate behaviors, past mistakes, and even lack of opportunity – all these issues can have an impact equal to or greater than financial illiteracy.

Patterns for Financial Ability Definition Administration

Financial Illiteracy Definition

People are Ashamed of Being Financially Illiterate

44% of Americans aged 22-26 do their own taxes (Bank of America). https://bankofamerica.com

85% claimed they were ‘somewhat’ or ‘very’ unlikely to discuss their amount of credit card debt with strangers, more than the percentage of respondents who would avoid divulging details about their love life (CreditCards.com). https://www.creditcards.com/credit-card-news/poll-credit-card-taboo-subject-2013-1276.php

26% of adults admit to not paying their bills on time (National Foundation for Credit Counseling). https://www.nfcc.org

46 percent of respondents said they either could not cover an emergency expense of $400 or would cover it by selling something or borrowing money (ConsumerFinance.gov). https://s3.amazonaws.com

Financial Illiteracy Statistics

63.3%

Financial Literacy Test Failure Rate

See the latest financial literacy test data.

$0
Average Annual Financial Illiteracy Cost to Americans

See the latest financial illiteracy cost data.

31.9%

Financial Illiteracy & Emotional Impact

See the latest emotional connection survey data.

Targeted Technological Learning Can Improve Financial Literacy

The overarching purpose of financial education is not to transfer knowledge from educator to learner. Rather, the end goal of financial literacy initiatives is to elicit positive financial behavioral change by equipping program participants with the critical thinking framework they need to properly assess financial decisions in their lives.

Plenty of research papers have corroborated that financial literacy, when properly administered by a qualified financial educator, has the ability to make real improvements in the financial health of learners.

The Federal Reserve bank of Philadelphia found that counseling delivered via technology was actually better at molding consumer behavior than face-to-face counseling. Programs that are limited on funds can use technology as a means to reach more people with the same level of efficacy and with lower expenses (Federal Reserve Bank of Philadelphia).
https://www.phil.frb.org

57% of millennials have either an advisor or robo advisor (MoneyConfidentKids.com). https://www.moneyconfidentkids.com

Configurations of Financial Illiteracy Styles

Extensive Financial Illiteracy Opportunities

What the Experts Say About Financial Illiteracy

“I think people don’t understand compound interest because typically no one ever explains it to them and the level of financial literacy in the US is very low.” – James Surowiecki, journalist at The New Yorker and author of “The Financial Page” column

“Without financial literacy, divorce rates soar, families rupture, and women stay with abusive men for financial security. A lack of jobs contributes to riots and illegal activity. Name any situation and it goes back to money. We need to focus on poverty eradication.” – John Hope Bryant, CEO of Operation HOPE

“The good news, though, is that all of us can improve the security of our futures through financial literacy. With a better understanding of the basics of finance—how to save, budget and invest—we can increase both our earning potential and our prospects for a solid financial future.” – Reba Dominski, President of U.S. Bank Foundation

The Dominican Republic says that financial literacy initiatives can simplify financial conceptions to help participants translate their knowledge into real world behavioral change. In addition, as evidenced by the difference between the effect of the two programs on firms and for entrepreneurs, the authors note that programs should be tailored based on the target audience to maximize potency (Poverty Action Lab). https://www.povertyactionlab.org

40.2% of those with low levels of financial literacy relied on parents, friends, and acquaintances as their most important source of financial knowledge, compared to 20.8% of those with the highest levels of financial literacy (National Bureau of Economic Research).
https://www.nber.org/system/files/working_papers/w13565/w13565.pdf

A mere 31% of young Americans thought that their high school education adequately taught them good financial habits(Bank of America). https://about.bankofamerica.com/assets/pdf/BOA_BMH_2016-REPORT-v5.pdf

Financial Illiteracy Statistics Demonstrate the Devastating Consequences

Financial illiteracy has become a point of concern for communities and governments worried about the effects such a critical lack of knowledge can have on the lives of individuals. Limited access to financial literacy classes and education leave people woefully unprepared. Equipped with only a partial and inadequate framework for thinking about financial decisions, too many individuals submit to making poor financial choices with long-term consequences that are difficult – if not impossible – to correct. Preventing and mitigating financial illiteracy requires the continued efforts of employers, governments, and the financial education industry.

[1] National Financial Educators Council, “Financial Illiteracy in America“

Research, Statistics & Quotes

The US Census shows that 1 in every 2 people are poor or low-income. Nearly half of Americans are low-income as rising expenses and unemployment shrink the middle class.

Forbes

39.4% of adults said their families had trouble meeting at least one basic need for food, health care, housing, or utilities last year.

Urban Institute Survey as reported by MarketWatch

Lack of knowledge about personal finance cost Americans over $280 billion in 2017.

National Financial Educators Council

Only one in four have a written financial plan.

Charles Schwab

The lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success.

Employee Benefit Research Institute

65% of workers have less than $100K saved for retirement, with nearly 50% having less than $25K. AARP 2017 retirement confidence survey

A couple can expect to spend $275K in out of pocket medical expenses in retirement.

Washington Post

1 in 4 young people dip into 401(k)s to pay off debt

CNBC

About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA).

Government Accountability Office

Studies have shown that retail investors lack an understanding of how compound interest or inflation work. The losses that result are estimated to set our economy back by some $10 billion a year.

DALBAR

Americans had $1.021 trillion in outstanding revolving credit of which $1 trillion is credit card debt. The average monthly balance for borrowers who cannot pay their balance in full is $9,600 and $1,254 is paid in credit card interest each year.

The Hill

Over 2.5% of those age 60 have student loan debt.

Consumer Financial Protection Bureau

The average student in the Class of 2016 has $37,172 in student loan debt.

Forbes

Americans owe $1.3 trillion in student loans. More than seven million borrowers are in default, and millions more are behind on their payments.

New York Times

Currently, 43% of card holders carry a balance each month. Their ranks actually fell 1% in the second quarter of 2017, after rising slightly in the first quarter.

Experian

About 32% of Americans pay the minimum amount monthly on their credit card debt.

FINRA

Credit card debt is at an all-time high with an average American in debt to the tune of $6,375 as reported by Credit Karma; this is a 3% increase from 2017.

CNBC

Two-thirds of US would struggle to cover $1,000 crisis.

The Associated Press-NORC Center for Public Affairs Research

A recent Federal Reserve Survey found that 44% struggle to come up with $400 for an unexpected expense. This lack of a well-funded emergency fund happens throughout the income scale.

Federal Reserve

50% do not have a “rainy day” fund.

FINRA

Nearly half of Americans say their expenses are equal to or greater than their income. And for those aged 18 to 25 the percentage is over half, up to 54%.

Study by the Center for Financial Services Innovation as reported by CNN Money

A Gallup study shows 33% of Americans prepare a detailed household budget and a U.S. Bank study shows similar results with only 41% having a budget.

Gallup & https://stories.usbank.com/dam/possibilityindex/USBankPossibilityIndex.pdf

More than 19 million households in America (or about 30 percent of all renters) pay more than half of their monthly income on housing.

Department of Health & Human Services as reported by Olympian Management

Younger adults are spending a stunning amount of money on rent — $93,000 by age 30, according to a new study. More important, rent sucks up about 45% of their income during their first, critical decade in the workforce. That leaves precious little left over to save for a down payment and work toward entering that second phase of adulthood — household formation.

USA Today

Nearly a third of Americans have a credit score lower than 601 according to credit bureau Experian.

Fox Business

About 77 million Americans, or 35 percent of adults with a credit file, have a report of debt in collections. These adults owe an average of $5,178 (median $1,349).

Urban Institute

Small/medium business owners and managers across the United States were asked, “Has your company conducted a credit or financial background check as a condition of hiring or giving a promotion?” The results indicated that 25.9% answered “Yes.”

National Financial Educators Council

The NFEC asked 3,514 individuals, “Has an employer or potential employer ever conducted a credit or financial background check as a condition of hiring you or giving you a promotion?” Of the 1,100 respondents, 26.3% answered “Yes,” with 4.08 saying they were turned down for a job.

National Financial Educators Council

A Career Builder study found 78% of full-time workers said they live paycheck to paycheck; these results are similar to a Charles Schwab study that found 3 out of 5 Americans living paycheck-to-paycheck.

CNBC & Charles Schwab

“One in four unemployed Americans have been required to go through a credit check when applying for a job, and one in ten have been denied jobs due to information in their credit report.

Demos survey as reported by CNN

The national survey of 1,000 adults found that 42 percent of all cardholders have neglected at least one card payment. The most common reason was forgetting (60 percent), followed by not having enough money (35 percent), being too busy (13 percent), and traveling (11 percent).

CreditCards.com

Almost one-fifth (18 percent) of consumers have incurred an overdraft penalty fee in the last year.

Pew Trust

More than two of five (28%) marketplace enrollees and a quarter of people with employer health insurance plans are underinsured.

Commonwealth Fund

Half (52%) of underinsured adults reported problems with medical bills or debt and more than two of five (45%) reported not getting needed care because of cost.

Commonwealth Fund

A RAND Health study shows that the doubling of health costs between 1999 and 2009 largely wiped out an average family’s real income gains. In fact, in 2009 the family had a net gain of only $95 per month. If health care costs had tracked general inflation over the decade, the family would have had nearly $5,400 more in 2009.

RAND

Insurance premiums expected to rise 4% to 6%, before factoring in COVID

Society of Actuaries as reported by Yahoo! Finance

In 2018 the average annual premium for employer-based family coverage rose 5 percent to $19,616; for single coverage, premiums rose 3 percent to $6,896. Covered workers contributed 18 percent of the cost for single coverage and 29 percent of the cost for family coverage, on average, with considerable variation across firms.

NCSL

NFEC Position Statement

People are going through financial hardships. From kids who lack basic necessities, to families seeing their dreams of retirement slip away – the financial challenges people face today have powerful impact on their health, well-being, and security. The epidemic of financial problems is vast.

It is the NFEC’s mission to provide tools, training, and resources to those who teach personal finance and advocate for increased access to financial literacy education. We honor our financial education champions and partner with them to spur this vitally important movement forward. No matter the size and scope of a program, our goal is to help it expand, improve results, and scale, so the effort can reach more people with this much-needed information.

Financial Illiteracy

Americans and other societies throughout the world have a share problem – financial illiteracy is pervasive in cultures around the globe. This epidemic threatens to undermine people’s lives. Not only does bad financial planning undermine individual lives, it is often responsible for eating away at familial cohesion

It is extremely important to know how to deal with your personal finances in a prudent manner. Making the wrong decisions can lead to circumstances from which people might never recover. These things can be prevented with a little financial literacy put into practice. A little knowledge can lead to prudent financial planning, which can lead to a stable, comfortable life.

Financial Illiteracy is a Worldwide Debilitating Condition.

Financial illiteracy is the lack of an ability to efficiently handle personal finance matters involving budgeting, saving, investing, and more. Surveys run by government agencies and financial education programs expose the lack of financial knowledge among both Americans and individuals globally. Financial competency is a basic requirement to lead a healthy financial life. Individuals afflicted by financial illiteracy are simply not able to discern between different financial choices and are often unable to reach their financial goals.

Need for Money Management Knowledge Growing, According to Financial Illiteracy Statistics

Financial illiteracy statistics reveal lack of confidence in financial matters for teens and young adults.According to the American Dream Education Campaign, most students aged 15-21 report feeling unprepared to navigate today’s complex financial landscape. This finding is just one of the compelling financial literacy statistics that have driven the National Financial Educators Council into action. The NFEC, an independent financial education group with a social enterprise model, takes a holistic approach to promoting financial literacy – an approach which rests on the foundation of empirical research using rigorous methodologies.

A good deal of the research upon which NFEC programs are based was conducted by the organization itself. The NFEC relies heavily on empirical data to guide curriculum development and measure campaign success. One example was a study that took place across 2012-13 wherein more than 1,300 students aged 15-18 responded to an online financial literacy test. These data were analyzed and compiled into a set of youth financial literacy statistics that are available on the NFEC website (www.FinancialEducatorsCouncil.org). According to these findings, young people’s need to build money management skill sets is growing – a total 72.7% of respondents scored lower than 70% on the test, with an average score of 58%.

The recent Great Recession in the U.S. served to underscore how poorly prepared our citizens have become to handle their personal finances. Although some recent indicators point to economic recovery, staggering problems such as bankruptcy, foreclosure, and crushing debt loads remain rampant. When the NFEC conducted a second research study with U.S. adults in 2012-13, the findings indicated that 96% of those who completed a web-based survey believed college students should be mandated to complete a financial education course before taking out a student loan. A further 93% of respondents expressed the opinion that the fact that students do not completely understand the terms and consequences of such loans was a “very big” or “big” problem. These are exactly the kinds of financial education statistics that form the impetus behind the NFEC’s state-of-the-art programming to teach money skills and accurately measure the impact of such programs.

The NFEC is working to address financial illiteracy in the U.S. and abroad by developing a comprehensive set of personal finance coursework for all ages. In addition, the organization offers tools to quantify the results of financial education and raise awareness about the financial literacy movement.