The main reason so many Americans are in a precarious financial situation is that they do not know how to manage their money. The situation is particularly concerning among adults aged 18 to 24 who score lowest of all generations on a test of financial literacy.
These conclusions are drawn in a new TIAA Institute study conducted by the Global Financial Literacy Excellence Center at the George Washington University School of Business.Read More »
The study says that a third of Americans in Gen X are not only struggling to make ends meet and to pay their bills, but they also are unable to cope with financial setbacks. The number who are struggling—which is significantly more than for other generations—corresponds with those who score low in financial literacy.
The lack of understanding among Americans on how to handle money, particularly in the younger generations, is deeply concerning, says Annamaria Lusardi, the founder and academic director of the center and a professor at George Washington University.
Until education on finances is offered in school, higher educational institutions, and workplaces, generations of adults will struggle with their personal finances, she adds.
People face a mass of financial decisions over their lives, but there is no trial period, the study says. Making decisions on money starts at the time adulthood begins, if not sooner. The need to make financial decisions continues throughout a person’s life and never ends.
The way in which people make their way through decisions on money depends to a significant degree on their knowledge of how to handle their money.
The study finds that many Americans start out their adult life with too little knowledge of how to manage their money. As a result, they are less likely to enjoy financial wellbeing. As they become older, they learn more about handling money, but their understanding remains on the low side for much of their lives until they retire.
In addition, the COVID-19 pandemic has created an environment of financial turbulence and uncertainty that has heightened the need to make appropriate decisions on money, the researchers say.
The study found that the lack of financial know-how was most acute among the younger generations.
• Two-thirds of Gen Z answered only half or fewer of the questions correctly, the lowest among all generations. In comparison, about 40 percent of Baby Boomers and the Silent Generation answered no more than half of the questions correctly. This indicates that people typically start adulthood with a low understanding of money. Although it improves over time, financial literacy still tends to stay low.
• Within Gen Z, financial literacy is lowest among those who have never attended a college; they answered only 39 percent of the questions correctly. Students and those who previously attended college answered 41 to 45 percent of the questions correctly.
• Gen X, the parents of Gen Zers, are only slightly better at understanding their personal finances. Half still score low on tests of their financial knowledge. Many report that they find it difficult to make ends meet in a typical month. They cannot pay all their bills—including payments on credit cards and loans—on time and in full in a typical month.
• The Silent Generation and Baby Boomers scored best on the questionnaire.
Wellbeing linked to knowledge
Over the last five years, the results from the questionnaire have consistently found that monetary wellbeing is linked to an understanding of how to handle money, the researchers says. Low scores on financial literacy are always linked with lesser monetary wellbeing.
The study found that those with lower levels of financial literacy:
• Have difficulty coming out on their money in a typical month
• Are unable to raise $2,000 for an expense that is unexpected (with the exception of those 75 and older)
• Are prevented by debt from dealing effectively with other monetary priorities; and
• Spend more time trying to handle issues and problems that relate to personal finances than others who handle their money well.
What they should learn
Based on the questions asked in the survey, these are the issues that people of all ages should learn to boost their understanding of how to handle their money.
• Earning: How to determine wages and take-home pay.
• Consuming: How to draw up a budget and manage your spending based on the budget.
• Saving and investing: How you should invest your money in order to balance income and risk.
• Retirement savings: Those who are new to the workforce should know how much to save for retirement as against other monetary needs. They should understand what portions of their retirement savings they should invest in such vehicles as aggressive stocks, conservative stocks, bonds, and so on.
Those who are in retirement need to decide on a strategy for spending their savings when they cannot know what future expenses might occur or for how long they will live.
• Borrowing and managing debt: How to understand different kinds of loans and repayments.
• Insurance: How to decide what types of insurance to obtain and what the benefits of each are.
• Information sources: How to recognize sources of knowledge and obtain advice that is appropriate and reliable.
The study did have one piece of good news. It found that four out of 10 adults say that the economic turmoil caused by COVID-19 has encouraged them to increase their understanding of how to handle their personal finances. The desire is greater among Gen Z than other generations.
To read the full study go to: Financial literacy and well-being in a five generation America.