Financial Literacy in the United States

What is financial literacy?

The World Bank defines the term as “the level of aptitude in understanding personal finance. It often refers to awareness and knowledge of key financial concepts required for managing personal finances.” 

In other words: do you know how to manage your money and make informed and responsible decisions with it? For too many Americans, the answer is not really. 

There are many facets to financial literacy. The Milken Institute breaks down its components into four parts: knowledge, skills, attitudes, and behaviors. Knowledge includes understanding key financial terms (inflation, interest, etc.), an awareness of financial services and products, and everyday know-how such as making credit card payments and opening a bank account. Skills includes the ability to work with numbers as well as reading comprehension. Attitudes concerns the reasons someone has for making financial decisions (like saving, borrowing, and investing), feelings about the future, confidence in one’s own retirement plans, and one’s tendencies toward budgeting, saving, lending, and so on. Finally, behaviors involves what someone actually does with their finances, such as money management, long-term planning like preparing for emergencies and retirement, the ability to choose appropriate financial products, and seeking out financial advice. Anyone lacking in one or more of these areas will struggle to make decisions that lead to their financial well-being.

The state of financial literacy in the US

In the United States, nearly every study on the subject has found that Americans’ financial literacy is woefully lacking. Recent studies from the U.S. Financial Literacy and Education Commission have found that only one-third of adults could correctly answer at least four out of five questions about basic financial concepts like mortgages, interest rates, inflation and risk. Similarly, a 2020 study from Walden University found that roughly four in seven Americans are financially illiterate and say they are unable to manage their finances. 

The situation looks even worse for the coming generation. A three-year study by the FINRA Investor Education Foundation in 2019 found that younger Americans could not answer a majority of financial literacy questions accurately. In particular, younger adults aged 18-34 saw a drop in financial literacy since the Great Recession of 2008 that was greater than for any other age group. 

A strong argument could be made that out of all generations, Millennials are the most in need of financial literacy skills. Student loan debt is at record highs, climbing to $1.56 trillion as of 2020. Surveys have found that more than half of millennials express concern about their ability to repay student loan debt, and more than six in 10 say they feel anxious thinking about their financial situation.

Credit card debt is a concerning burden in the financial lives of many Americans as well. In 2020 credit card debt owed by Americans hit a record high of more than $1 trillion, according to the Federal Reserve Bank. The prior year, survey data from the National Foundation for Credit Counseling showed that six out of 10 of adults in the U.S. had credit card debt, and nearly two in five carried balances from month to month, leading to more expenses for interest and late fees. Unlike student loans, credit card debt is especially risky because it can quickly spiral into a cycle of debt driven by high interest rates and low minimum payments. 

It’s no wonder, then, that even thinking about personal finances brings up anxiety for more than half of American adults. Nearly that many – 44 percent – say that talking about their finances is stressful.

The cost of financial illiteracy

There is plenty of evidence showing that poor financial literacy can lead to significant money problems down the road for individuals. A lack of knowledge about topics like economics, interest rates, savings, loans, investments, and long-term financial planning, for instance, can be a major barrier to economic opportunity and mobility for Americans. This is especially true if they don’t feel like they have anyone they can trust for advice and guidance (which is more than one in five Americans, according to the National Financial Educators Council). Moreover, poor financial literacy can also ruin consumers’ credit scores, which makes it harder to obtain loans and credit cards and creates an additional barrier to purchasing a home or even securing certain types of employment. 

One study from the National Financial Educators Council found that financial illiteracy cost each American about $1,600 on average in 2020. That adds up to $415 billion annually. For most Americans – and especially those in need of more financial education – that’s a significant amount of money.

Financial literacy, or the lack thereof, can also cost workers valuable time throughout the week. According to the Milken Institute, workers with high financial literacy rates spent one hour of work time per week dealing with financial issues, while those with lower literacy rates spent six hours per week on such issues. The disparity is similar when it comes to dealing with personal finance issues. Individuals with lower financial literacy spend an average of 12 hours each week dealing with their personal finances, compared to only three hours per week for those with higher financial literacy.

Opportunities for financial education

The education system in the United States is hit or miss when it comes to providing Americans with a solid base of financial literacy. As of 2020, less than half of U.S. states required students to take a personal finance course (though 45 states offer some form of personal finance education in their K-12 standards). 

It doesn’t appear that all of these states are “making the grade” in their education programs. In 2017, a report card-style study gave 27 states a grade of C, D, or F for subpar handling of high school financial literacy. And in 2019 the Council for Economic Education found that even though 70 percent of American high schoolers had the opportunity to take a personal finance course, less than one in five chose to do so. 

The good news is that no one has to wait for the government at any level – federal, state, or municipal – to improve their financial literacy. Many resources are available to help Americans teach their children and themselves valuable principles of financial literacy. 

Here at AIF, we plan to offer a variety of articles and online events aimed at educating Americans about financial literacy and fiscal policy. 

There are many other financial literacy resources around the web. For K-12 students and educators, a trove of resources are available from the Council for Economic Education. The Fed’s ​​EconLowDown digital library has more than 400 free courses in English and Spanish for students in kindergarten all the way through college. The Federal Deposit Insurance Corporation offers a free program called Money Smart that is updated regularly with content designed to boost people’s financial skills and improve banking relationships. Money Smart has courses tailored for students as young as Kindergarten all the way to adults and senior citizens vulnerable to financial exploitation.

Additionally, there are programs from the Consumer Financial Protection Bureau, the U.S. Department of Treasury, and the Securities and Exchange Commission, just to name a few.