The 2019 TIAA Institute-GFLEC Personal Finance Index

Increases in financial literacy between 2017 and 2019 were concentrated mostly among those with relatively high levels of financial literacy already.

Financial Literacy in the United States and Its Link to Financial Wellness

Introduction

Many Americans lack the personal finance knowledge needed for sound financial decision making.

Summary

This report is the third wave of the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index), an annual assessment of U.S. adults’ financial literacy. The P-Fin Index is unique in its capacity to produce a robust measure of overall knowledge of personal finance along with a nuanced analysis of knowledge in eight areas. The 2019 study also explores financial literacy’s link to financial wellness, showing that greater financial literacy is positively associated with the capacity to handle a financial shock, saving for retirement on a regular basis, being unconstrained by debt and other indicators of financial well-being.

Key Insights

On average, U.S. adults answered only 51% of the P-Fin Index questions correctly.
Personal finance knowledge is highest in the area of borrowing and managing debt and lowest in comprehending risk.
The percentage of P-Fin Index questions answered correctly rose from 49% in 2017 to 50% in 2018 to 51% in 2019.
Financial literacy varies across demographic groups based on sex, age, household income, employment status and education.

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Executive Summary

The 2019 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) represents the third wave of a long-term project to annually assess financial literacy among the U.S. adult population. The P-Fin Index is unique in its capacity to produce a robust measure of overall personal finance knowledge and a nuanced analysis of knowledge across eight areas of personal finance in which individuals routinely function.

Introduction

How well individuals navigate the myriad of financial decisions they face is dependent, at least in part, on their knowledge and understanding of personal finances, typically referred to as financial literacy. Decisions made and outcomes experienced matter not only at the household level, but also for the economy as a whole. So what is the state of financial literacy in the United States? Are there areas where knowledge is particularly strong and, analogously, areas where it is particularly weak? How does financial literacy vary across different segments of the population? How does financial literacy correlate with financial behavior?

2019 P-Fin Index results

Many Americans lack personal finance knowledge that enables sound financial decision making. On average, U.S. adults answered 51% of the P-Fin Index questions correctly. In addition, there is close to a 50/50 split between those who were able to answer one-half of the index questions correctly (53%) and those who were not able to do so (47%) (Figure 1). Eighteen 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 20% showed a relatively low level, i.e., they answered 25% or fewer of the questions correctly.

Functional knowledge

Comprehending risk is the functional area where financial literacy tends to be lowest. On average, survey participants answered only 38% 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.

Is financial literacy improving?

The percentage of P-Fin Index questions answered correctly increased from 49% in 2017 to 50% in 2018 to 51% in 2019 (Figure 3), while the percentage of adults answering more than one-half of the questions correctly increased from 48% to 51% to 53% (Figure 4).7 While these results are noteworthy given that they hint at the possibility of a slow increase in financial literacy, the changes are too small, and the time period too short, to conclude that financial literacy levels are actually increasing.

Demographic variations

Financial literacy varies across demographic groups. Figure 6 shows the average percentage of P-Fin Index questions answered correctly by demographics. These findings are overall consistent with variations identified in previous studies, including previous waves of the P-Fin Index.

Variations by education

Financial literacy is positively correlated with both general education and financial education. Figure 8 shows the average percentage of P-Fin Index questions answered correctly by general education level and by receipt of financial education. These findings are consistent with previous studies, including previous waves of the P-Fin Index.

Financial wellness and the P-Fin Index

Achieving and maintaining financial well-being, or financial wellness, is a goal shared across individuals. Financial wellness can be defined as a state of being wherein a person:

Has control over day-to-day, month-to-month finances.
Has the capacity to absorb a financial shock.
Is on track to meet his or her financial goals.
Has the financial freedom to make choices that allow enjoying life.

Financial advice and the P-Fin Index

Individuals may consult a financial advisor on their own or within the context of an employer-sponsored benefit (most typically, a retirement savings plan) or an employer- sponsored financial wellness program. Results from the 2019 P-Fin Index show that individuals with greater financial literacy are more likely to receive financial guidance from a professional advisor or advisory service (Figure 16).

Discussion

How well individuals navigate the myriad of financial decisions inherent in the normal course of life and the level of financial wellness that they achieve depends, at least in part, on their financial literacy. Many Americans, however, lack personal finance knowledge that enables sound financial decision making and effective management of personal finances. In the 2019 P-Fin Index, U.S. adults answered only one-half (51%) of the index questions correctly, on average.

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