Despite the depth of information and education available today, financial literacy has not improved among US adults. A financial advisor can help you improve your financial literacy to better understand your money.
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On average, American adults correctly answered only 50% of the questions in the 2022 Personal Finance Index, an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business.
Since researchers from TIAA and George Washington University began measuring financial literacy among adults in 2017, functional knowledge has not improved. The place where people struggle the most? Understanding financial risk. Here’s a look at the survey’s findings and some of the questions asked.
Financial Literacy Is Not Improving
Unfortunately, this year’s survey and previous studies reveal that many US adults operate with a poor understanding of financial topics. On average, US adults answered only 50% of the index’s questions correctly by 2022, a figure that has remained constant since 2017.
While only 18% of respondents correctly answered between 76% and 100% of the 28 questions asked in this year’s survey, nearly a quarter of adults (23%) got at least 75% of the questions wrong. questions. Worse, the percentage of adults with poor financial literacy is rising. In 2020, only 17% of respondents got three-quarters of the questions wrong.
Assessing financial risk is an area where functional knowledge is consistently lowest among US adults, the survey found. Only 36% of risk-related questions were answered correctly, a 3% decrease from the first survey in 2017.
“Understanding risk includes, for example, understanding that the expected outcome of a given scenario depends on the range of possible outcomes, the financial implications associated with each outcome and the likelihood of each outcome occurring, ” according to the study.
What financial subject do American adults know the most about? Borrowed money. On average, 60% of questions related to borrowing were answered correctly, followed by questions focusing on saving (53%) and consumption (52%), the survey found.
Can You Answer These Questions Correctly?
TIAA shared with SmartAsset a sample of questions asked of respondents as part of the 2022 survey. The questions talk about financial risk, as well as how interest accrues on savings and how it affects the loan balance. Here are three questions that will be part of the 2022 survey:
There is a 50/50 chance that Malik’s car will need an engine repair within the next six months that will cost $1,000. At the same time there is a 10% chance that he will need to replace the air conditioning unit in his home, which will cost $4,000. What is the greater financial risk for Malik?
Anna saved $500 a year for 10 years and then stopped saving more money. At the same time, Charlie had saved nothing for 10 years but received a $5,000 gift, which he decided to keep. If Anna and Charlie earn a 5% return each year, who will have more money in savings after 20 years?
Jose owes $1,000 on a loan with an interest rate of 20% per year compounded annually. If he defaults on the loan, at this interest rate, how many years will it take to double the amount he owes? (Possible answers: less than 5 years; 5 to 10 years; More than 10 years; Don’t know)
1. Although the air conditioning repair may cost Malik $4,000, the probability of a $1,000 car repair is greater, which means that it has a greater financial risk.
2. Anna will have more money after 20 years than Charlie, considering that her savings have a 10-year head start to accumulate interest.
3. If your answer to the third question is “less than 5 years,” you may be one of the respondents who answered it correctly. Without paying off his car loan, Jose’s loan balance will double in four years.
Why Financial Literacy is Important
TIAA-GFLEC points to a direct link between financial literacy and financial well-being. The more money-savvy adults are, the better off they are.
The survey found that those with a low level of financial literacy are six times more likely to have difficulty making ends meet compared to adults with a high level of financial literacy. They are also five times more likely to lack enough emergency savings to cover a month’s expenses and three times more likely to be unable to withstand a $2,000 financial shock.
“It is evident again that greater financial literacy tends to translate into higher financial well-being and lower financial literacy is generally associated with lower financial well-being,” the authors of the study concluded.
Meanwhile, a separate study calculated how much a lack of financial literacy costs a person. At the end of 2021, the National Financial Educators Council (NFEC) conducted a survey of 3,389 adults and found that the average adult loses about $1,389 per year due to a lack of financial knowledge, including personal finance and investment.
Unfortunately, financial literacy is not improving among American adults. On average, respondents to the 2022 TIAA Institute-GFLEC Personal Finance Index answered only half of the questions correctly, a troubling number that has not improved since the first year of the survey in 2017. Understanding financial risk is an area where adults need the most improvement, as only 36% of risk-related questions were answered correctly in 2022.
Tips to Improve Your Financial Literacy
Working with a financial advisor is one of the best ways to improve your understanding of financial topics, including investing, saving and planning for retirement. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor matches for free to decide who’s right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started today.
SmartAsset has many reference articles to help you better understand your finances, as well as specific guides focused on particular topics, including investing, estate planning, taxes and more.
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