Are Americans getting dumber financially? It’s hard to say

Financial literacy in this country has been steadily declining over the past 12 years, according to a recent study, but the root cause remains unknown.

In 2021, the average respondent answered 2.6 out of 5 financial literacy questions correctly, according to findings from the FINRA Foundation’s National Financial Literacy Study of nearly 30,000 U.S. adults, up from 3.0 out of 5 questions in 2009. Considered high financial literacy by answering more than 3 correctly.

Why financial literacy is declining, how it relates to smart money behaviors, and how to improve it all is troubling to experts who hope any connection can ultimately help more people gain financial security.

“The 14% drop in financial literacy from 2009 to 2021 is certainly remarkable, but far more surprising is the 21% increase in the number of ‘don’t know’ responses to the financial literacy quiz questions over the same period,” FINRA Research. Director Gary Mottola told Yahoo Money. “We still don’t fully understand why so many more people say ‘I don’t know’ in recent years.” One hypothesis is that the increasing complexity of our financial world could suggest that people are becoming increasingly aware of the limitations of their knowledge.’

Financial Literacy Quiz

To assess respondents’ financial literacy, NFCS 2021 used seven quiz questions covering fundamental finance and personal finance.

One reason for the decline in financial literacy scores may be the increasing complexity of our financial world, according to FINRA Research Director Gary Mottola. (Photo: Getty Creative)

The questions ran the gamut of compound interest questions. For example, “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you let the money grow? Possible responses included: more than $102, exactly $102, less than $102, and I don’t know.

Another was: “Imagine the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much could you buy with the money in this account? Answers ranged from more than today, exactly the same, less than today, and I don’t know.

Another question: do you think the following sentence is right or wrong? Buying an individual company share usually provides a safer return than an equity mutual fund.’ See the answers below.

The results show that those with higher financial literacy are more likely to have taken steps to plan for their long-term financial future, such as calculating retirement savings needs (52%, versus 29% among those with lower financial literacy) and a retirement account ( 70% versus 43%). They are 23% more likely to spend less than their income and 26% less likely to use high-cost forms of borrowing than those with low financial literacy, according to the FINRA survey.

Financial education programs are only one piece of the puzzle

How successful financial literacy efforts really are is often disputed. “There is no reliable evidence that these financial education programs actually give people the tools they need to protect themselves or make choices that are optimal for their own situation and values,” said Lauren Willis, associate dean for research and Professor of Law at Loyola University. at a recent financial literacy webinar hosted by the Financial Access Initiative.

“The market changes so quickly that things we teach people, even habits, often end up being outdated. If regulators can’t keep up with the speed of financial innovation, we can’t expect educators to, and we certainly can’t expect their students. Just because you can even calculate the interest rate doesn’t save you from a bank having very detailed information about your online behavior figuring out how to micro-target an offer to you that will be highly profitable for them and sub-optimal for you.”

Mottola is realistic.

School children in uniforms in classroom with tablets

How successful financial literacy efforts really are is often disputed. However, when results like these from FINRA are released, it’s easy to argue that the solution is to raise more money to schools. (Photo Creative: Getty Creative)

“It’s important to note that better financial knowledge is not a panacea,” he said. “Other factors – such as income, educational attainment, systemic racism and lack of access to financial products and services – are associated with indicators of lower financial capability. These factors need to be addressed by policy makers and advocates who want to improve people’s financial capability.”

The bottom line is that while financial intelligence is essential, circumstances make it difficult for a segment of the population to address some of these challenges. “Within these overall gains in economic capability, there are segments that continue to struggle, particularly younger adults, those with lower income and education levels, black/African Americans, Hispanics/Latinos, and those who have been laid off or laid off due to COVID – 19,” Mottola said.

“The reality is that many disadvantaged people face barriers and obstacles that many others don’t,” she said. “For example, those whose parents had a stronger financial foundation are more likely to have learned about money from their families, as well as have better financial outcomes later in life. Therefore, these do not reflect a direct relationship between financial literacy and financial behaviors.”

It takes money to make money

Making good financial choices ‘mostly comes from having enough money that good financial choices are possible, especially having enough money to make a few mistakes – that’s how we all really learn how to manage our finances , not by attending a class.” Timothy N. Ogden, executive director of the Financial Access Initiative at New York University’s Wagner School of Public Service, told Yahoo Money.

couple enjoying honeymoon on luxury boat, luxury yacht in tropical sea, man and woman drinking coconuts and relaxing

“People with more money have more experience with financial tools and services and therefore have higher financial literacy,” Timothy N. Ogden, executive director of the Financial Access Initiative at New York University’s Wagner School of Public Service, told Yahoo Money. (Photo Credit: Getty Creative)

“People with more money have more experience with financial tools and services and therefore have higher financial literacy. Telling someone they should have an emergency fund or save instead of borrowing presumptions that they make more than enough money to cover basic expenses and enjoy life on a regular basis,” he said. “People don’t borrow from payday lenders because they don’t know how compound interest works. They borrow because they don’t have enough money and have no other cheaper alternatives. Teaching them about the importance of retirement planning isn’t going to change the need to pay the rent or the electric bill this month.”

However, when results like these from FINRA are released, it’s easy to fall back on the idea that the solution is to increase more financial classes in schools.

“Financial literacy is seen as a panacea because it makes it so much easier to do something about the difficult and messy policy problems of securing affordable housing, affordable health care, affordable transportation and good-paying jobs,” Ogden said. “You can’t fix this problem with boring, mandatory financial literacy classes taught by high school gym teachers who would rather be doing anything else. It’s crazy to think that compulsory school subjects are a solution to these issues.”

FINRA’s findings are a wake-up call in some ways that more needs to be done to strengthen basic financial skills and will have a lasting impact on the finances of millions of Americans and, in turn, the economy. But it’s only one part of the puzzle.

“I really don’t think it’s the financial literacy community that says financial education alone is going to save everything,” Laura Levine, president and CEO of The Jump$tart Coalition for Personal Financial Literacy, told Yahoo Money. “Financial education is a critical component to achieving financial well-being when combined with things like appropriate products and services, consumer protection, fair and equitable access and opportunity, and clear, reliable information.”

And for those of you checking to see if you had the correct answers to FINRA’s questions: Here it is: Over $102. less than today; false.

Kerry is a Senior Writer and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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