Financial Literacy: Still Low – Conversable Economist


There’s literacy and numeracy, and somewhere in the intersection of the two lies “financial literacy.” If you mess up your monthly budget in a mild way, and end up eating beans and rice for week, perhaps no great harm is done. But the consequences can be more extreme: if you don’t have the money to get your car fixed, so you lose your job; or you can’t pay the electric bill, and your power gets turned off; or you run up debt on your credit cards, and the payments start casting a shadow over your days. In practical terms, “financial literacy” means avoiding the financial choices that you will later regret.

In the Fall 2023 issue of the Journal of Economic Perspectives (where I work as Managing Editor), Annamaria Lusardi, and Olivia S. Mitchell discuss “The Importance of Financial Literacy: Opening a New Field.” Lusardi and Jialu L. Streeter offer some additional evidence in “Financial literacy and financial well-being: Evidence from the US” in the Journal of Financial Literacy and Well-Being (published online October 5, 2023).

Surveys to measure financial literacy come in a variety of sizes, but the “Big Three” questions offer a well-tested if very basic approach. Here’s your very own financial literacy quiz:

Q1. “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 left the money to grow?”

a) More than $102 (correct)
b) Exactly $102
c) Less than $102
d) Do not know
e) Refuse to answer

Q2. “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy?”

a) More than today
b) Exactly the same as today
c) Less than today (correct)
d) Do not know
e) Refuse to answer

Q3: “Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’”

a) True
b) False (correct)
c) Do not know
d) Refuse to answer

The first question checks understanding of interest rates; the second question is about inflation; and the their question is about diversification. Their recent survey results for the US population are 69% correct and 15% “don’t know” for the first question; 53% correct and 23% “don’t know” for the second question; and 41% correct and 45% “don’t know” for the third question. Overall, 28% of the respondents got all three questions correct, while 52% answered at least one of the three questions with “don’t know.”

Lusardi and Streeter go through these results in more detail, with breakdowns by groups and questions. But perhaps the key points are that the results of the “Big Three” questions are a fair representation of the state of financial literacy revealed by longer and more detailed surveys, and that when it comes to financial choices like credit card debt, student loans, borrowing money for a house or car, having a nest egg for flexibility in dealing with unexpected expenses, making contributions to a retirement account, and many others, these kinds of results do not fill one with confidence.

My own belief is that pretty much everyone can grasp these kinds of concepts, so that they could answer the questions correctly even if some may have a harder time than others in putting the knowledge into practice. In the last decade or so, financial literacy courses have become more widespread in high schools: 30 states now require a financial literacy course for high school graduation. Such courses are also becoming more common at the college level, sometimes just for general knowledge, sometimes as part of a program for those looking at jobs where becoming a “certified financial planner” is useful. The workplace is another obvious nexus for offering such courses: any workplace that can offer access to physical fitness programs should be able to find ways to offer a basic financial literacy course as well.


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