Putting a Price on Financial Literacy

  A new report claims that Americans lost nearly $1,000 last year due to a lack of financial literacy — and while that was less than the year before, the data seems a little . . . squishy.

The report comes from the National Financial Educators Council,[i] which has been conducting this particular survey for several years now.[ii] They drew their conclusion from a survey of some 1,200 American adults between Dec. 24 and Dec. 28 who responded to the question, 

"During the past year (2025), about how much money do you think you lost because you lacked knowledge about personal finances?"

Now, I’ve previously commented on the inherent unreliability of surveys based on self-reporting of financial matters — and this one, taken in the midst of the holiday season (and the aftermath of Christmas unwrapping) is surely no exception. Moreover, year-over-year comparisons of COMPLETELY different groups of people surely can’t be considered a reliable-trends benchmark (though this wouldn’t be the first survey to attempt that). That these year-over-year comparisons (of highly questionable results) are drawn from completely different groups — and then those “assessments” AVERAGED … well, you begin to appreciate just how “squishy” this conclusion might be.

But then, as if the result wasn’t sufficient to grab your attention, they take that average — and multiply it by the 260 million adult residents (according to a U.S. Census Bureau estimate) to claim that in 2025 more than $246 BILLION in lost revenue. Ah, math…and the “magic” of “compounding” questionable numbers to make them even bigger (and more questionable).  

So, what does this tell us about the cost of financial illiteracy? I’d say — not much.

While I’ve little doubt that a lack of financial acumen costs Americans money, I find little credibility on their self-assessment of that impact,[iii] not to mention what happens to that figure once it’s “averaged” (and then multiplied) — and nothing to suggest that it costs them less now than a year ago, beyond sheer economics. Heck, it probably costs them considerably more than they think.

Once upon a time I, like many of you, advocated for more financial education in schools,[iv] decried the extended emphasis on things like s.ex education and PE with no time or allowance for things like money management and budgeting (which, ironically, was once part of the curriculum of what was actually labeled home “economics”). In recent years, much to my dismay, I stumbled across research[v] that indicated that while financial knowledge can be shared, if there’s no practical application at hand, that knowledge tends to quickly atrophy. And — considering what has happened to my once working knowledge of AP Calculus — well, I find that entirely plausible.

At this point, I’d be remiss if I didn’t acknowledge that about 36 states have some kind of financial literacy requirement tied to high school graduation, and 29 of those require a dedicated personal finance course. I know that many of you are both currently and actively involved in programs to help young people achieve a much-needed level of financial acumen, if not literacy. I continue to see encouraging and inspiring LinkedIn posts and commentary about those activities. Good for you.

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That said, the aforementioned research suggests that knowledge without application of that knowledge fades quickly — and that would seem to suggest that our industry needs to quit holding out as a panacea the notion that financial education programs in school will “solve” the 401(k) education problem. 

That doesn’t mean we should abandon those workplace efforts, certainly not in core areas like budgeting, debt management and saving. At a minimum, it might well dust off the cobwebs of their earlier education, if they were lucky enough to receive it.

There’s certainly a price to be paid for that education (or lack thereof), and even though it might come to actual application later than it might, it’s arguably still better late than never.

• Nevin E. Adams, JD

 

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[i] To their credit, the NFEC actually has a definition of financial literacy: “understanding the topic of money.”  But they expand on that to say, “Financial Literacy is ‘Possessing the financial knowledge, behaviors, systems, team, and plan to confidently take effective action that best fulfills an individual’s personal, family, and global community goals.’” I’m not sure how workable that is in a real-life assessment, though they have an extensive website touting education programs and credentials purporting to do just that.

[ii] According to a press release, the NFEC first fielded this survey in 2017 as part of its research to clarify the status of financial literacy in the country. The organization then leverages the results to advocate for greater economic empowerment. In the three previous years' surveys, Americans reported losing $1,819 in 2022, $1,506 in 2023, and $1,015 in 2024 due to a lack of personal finance knowledge.

[iii] As long as we’re relying on self-reporting, I’d be more curious as to the “how” and “why” than the how much, as that might actually provide some insights on areas where financial education might actually help.

[iv] See “Focus” Group.

[v] See The Problem(s) with Financial 'Literacy'.

Financial Literacy — A Skeptic’s Perspective

 It’s an odd thing to admit in Financial Literacy Month — but I’ve been a financial literacy skeptic. 

Not always, of course. Once upon a time I was one of those industry voices decrying the burden placed on employment-based retirement plans. Employers (and advisors) who — in the course of a 25-minute workshop — had to convey the range of concepts required to make knowledgeable investment decisions to an audience of adults who had never been exposed to any of that prior to that session. Considering all the (relatively) useless things that ARE mandated in school curriculums, some basic finance concepts seemed like a pretty reasonable “ask.”

State Steps

And though it’s been a long time coming, a number of states[i] now do require students to take a financial literacy course for high school graduation — and that number continues to climb. That said, what constitutes complying with that requirement — varies. And, if it’s like a lot of the classes I was required to take in high school, that knowledge may not last — at least according to research.[ii]

While the findings in those studies have some limitations — not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) — as someone who has long been one of those voices advocating for greater financial literacy — this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t these programs — why isn’t financial literacy — taking root in a meaningful way?

As I mentioned earlier, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded — because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point. Might that be the case with these personal finance offerings?

Literacy Lessons

But what IS financial literacy? At its core, financial literacy is supposed to be about understanding money — how to manage it, how to grow it, and how not to let it slip through your fingers by the 15th of the month. But in practice,[iii] it often gets reduced to a pop quiz on acronyms (IRA vs. 401(k), anyone?) and the occasional reminder to “live within your means,” as if that’s some kind of revelation.

True financial literacy isn’t about memorizing definitions or passing a multiple-choice test. It’s about giving people the tools and confidence to make informed financial decisions at every stage of life. It’s not just knowing what a mutual fund is — it’s understanding when and why you might want to invest in one. It’s not just grasping compound interest — it’s appreciating that there is a huge impact of starting to save in your 20s versus your 40s.  Math, while surely helpful, shouldn’t be required, certainly not at the outset (though I may get some pushback on that).

‘Know’ Hows

Over the years employers — aided by plan design — have done a lot to help those who lack the knowledge (or courage) to make savings decisions on their own. And, courtesy of developments like auto-enrollment, target-date funds, and more recently managed accounts, we’ve managed to help workers make better decisions, without their action, but often (always?) without their knowledge or understanding. 

But true financial literacy — or what these days gets labeled financial “wellness” — connects knowledge to action. Because here’s the uncomfortable truth: most people already know the basics. They know they shouldn’t be spending more than they earn. They know they should be saving for retirement. At some level they know high-interest debt is a trap, even if they can’t do the math. 

Look, we’ve spent decades pushing retirement savings, but if someone’s living paycheck to paycheck, telling them to max out their 401(k) may feel like a cruel joke. Financial literacy has to start with the foundation: how to manage daily cash flow, how to build an emergency cushion, how to understand a pay stub or a credit report. The “long-term” can wait until the basics are covered — and the basics DO need to be covered, and with any luck before they find themselves sitting in a 401(k)-enrollment meeting (which, of course, is rarer by the day).

At the end of the day, it’s not about what people know — it’s about what they do with what they know. And financial literacy, when it’s done right, turns hesitation into action. 

And “skeptics” into believers.

• Nevin E. Adams, JD

 

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[i]  See Which States Require Financial Literacy for High School Stud - Ramsey:  Alabama, California, Connecticut, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Louisiana,  Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, West Virginia, Wisconsin

[ii] Indeed, the research on the subject of financial literacy in schools — at least pre-college — is not encouraging. According to a 2016 paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?,” only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.” Similarly, a 2014 paper by three professors reviewed 168 different papers covering some 200 studies on the topic of financial literacy and financial education — and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

[iii] Noted academics have boiled that complicated concept down to three fairly fundamental questions —though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

A Need to 'Know' Basics

Back in the middle of the pandemic, my then 91-year-old mother was presented with two options—one a specialist recommended, the other favored by her trusted general practice physician. And of course, it was to be…her decision.

This kind of thing happens all the time in the medical field where such things often seem as much art as science, with a myriad of factors to consider, not the least of which is the skill and experience of the medical professionals putting forth their recommendations. Not that it’s limited to life-and-death decisions. Indeed, it’s the kind of decision with which we’re often presented; when that annual auto inspection detects a hitherto undetected major repair need, when that leaky toilet repair uncovers some long-standing, but unobserved water damage, when that last minute call to fix a water heater or air conditioner reveals that it might—but might not—last the season. Those things routinely involve experts of one sort or another turning to us relative (or complete) amateurs, presenting us with complicated choices that often involve a complex weighing of factors we may not even understand. And yet we do.

Or, if you’re a 401(k) participant these days, we just do it for you. 

But don’t retirement plan participants need to have some idea about what’s going on with their retirement savings? In a “do-it-for-you” default enrollment/investment paradigm, aren’t we basically creating a generation that simply trusts and accepts the decisions of their “betters”—who, to be honest, aren’t always deserving of that trust. Said another way, where’s the “check engine” light for your 401(k) account?

That brings me to the continued focus of the need for “financial literacy.” Long touted as something of a panacea for the apparent shortcomings of our education system when it comes to practical financial applications, I remain skeptical.[i] Not that it wouldn’t be nice to have participants who had a basic appreciation for the markets, the impact of fees, the balance between equity and fixed income, and perhaps even a fundamental understanding of what a mutual fund is. But I think financial “literacy”—though its definition is surely fluid—is perhaps a higher bar than needed for most.

I still think effective financial education begins early, and at home. Not about the markets, perhaps—but the basics of a budget, the discipline of an allowance—better still, one anchored on household obligations.[ii]    

That said, a recent acquaintance has suggested what I think is an outstanding idea—and perhaps a way to not only expand the knowledge of the current generation of savers, but to build for the future; take that financial literacy training you may already be doing for your 401(k) clients—and expand it (in a separate session) to include…their kids!

Odds are you’ll not only provide valuable insights to that next generation of savers—but I wouldn’t be at all surprised if you find that help fulfill their “need” to know as well!

What do you think? 

- Nevin E. Adams, JD

 

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[i] See The Problem(s) with Financial ‘Literacy’.

[ii] Don’t get me wrong—IMO kids should also have things they do around the house to help as members of the family. 

The Problem(s) with Financial ‘Literacy’

April is, of course, National Financial Literacy Month—and for as long as I can remember, the retirement industry has been talking about the need for some kind of personal finance education in public schools—there’s just one problem.

First off, there actually are such programs already in existence at the moment. Half the country (25 states) now requires high school students to take a course in economics, and 21 states now require high school students to take a course in personal finance. Granted, they may still be too well dispersed to show up on your normal “radar”—but they’re growing in number and dispersion. 

Those efforts[i] notwithstanding—and while there’s some anecdotal evidence that this has helped (some) with regard to better decisions with regard to college financing—I’ve little sense that it’s moved the needle much with regard to participant knowledge or financial decision making (feel free to disagree in the comments below, if you’ve had a different experience—or if you haven’t).

In fact, a 2014 paper by from three professors reviewed 168 different papers[ii] covering some 200 studies on the topic of financial literacy and financial education—and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

Or said another way, “not much.” 

A more recent paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” echoes those findings, concluding, “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?”, only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.”

While the findings in those two studies have some limitations—not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) - as someone who has long been one of those voices advocating for greater financial literacy—this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t[iii] these programs—why isn’t financial literacy—taking root in a meaningful way?

Turns out there might actually be a reason.

The researchers who had examined those 200+ studies did offer a perspective: “like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention,” they write.

In fairness, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded—because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point (beyond passing the exam, and ensuring that I would never again have to consider the subject—particularly among the classes I was required to take. Might that be the case with these personal finance offerings? It seems reasonable. 

So, what can we do? 

Well, considering that the time gap between that high school personal finance class (if there is one, and I’m not sensing any movement to require such things on college campuses) and employment is frequently longer than 20 months, it’s little wonder that the needle hasn’t moved much, certainly not as much as one who is trying to engage with these individuals in financial planning might wish. Rather, as the researchers note, “There must be some immediate opportunity to enact and put to use knowledge or it will decay. Moreover, without a ready expected use in the near future, motivation to learn and to elaborate may suffer.” 

Said another way, you have to “use it or lose it.”

The paper offers some possible remedies. Specifically, they suggest that future education might be more productively focused on teaching “soft skills like propensity to plan, confidence to be proactive, and willingness to take investment risks more than content knowledge about compound interest, bonds, etc.” They note that in their meta-analysis, “measured knowledge of financial facts had a weak relation to financial behavior….” Which, I have to say, seems to validate my sense of the inadequacy of current financial “literacy” measures. 

They also suggest that content knowledge “may be better conveyed via ‘just-in-time’ financial education tied to a particular decision, enhancing perceived relevance and minimizing forgetting.” They acknowledge that it “may be difficult to retrieve and apply knowledge from education to later personal decisions… particularly decisions coming years after the education.” The authors of the second paper cited suggest additional mathematics training, which they found “leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.”

All of this seems to suggest that our industry needs to quit holding out as some panacea the notion that financial education programs in school will “solve” the 401(k) education problem.[iv] However, that doesn’t mean we should abandon those efforts, certainly not in core areas like budgeting, debt management and saving. 

The “problem” with financial literacy may well be that many still lack that exposure—but more significantly that even for those who get that exposure, there’s been little opportunity for applying that personal finance knowledge in high school and college, though arguably it shouldn’t be.

In sum, true financial “literacy” is perhaps not so much whether you can talk the talk—but being given both the knowledge—and the opportunity - to walk that walk.

- Nevin E. Adams, JD

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[i] Another problem in evaluating the impact is defining what constitutes “financial literacy” in the first place. Noted academics have boiled that complicated concept down to three fairly fundamental questions—though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

[ii] The reference list alone runs 26 pages! And there are more to go with the multiple appendices.

[iii] At this point, I’ll align my opinion with that of the authors of the second paper: “Our findings do not necessarily imply that financial literacy does not matter, or that financial education is never effective.”

[iv] Not that it wouldn’t help to slip in some basic understandings of the markets and investing alongside those math problems about two trains heading toward each other at variable speeds.

"Make" Shift

Financial literacy has long been touted as something of a “silver bullet” in helping workers make better financial decisions – and now there’s a call to make it a mandatory employment offering. 

Now, we all know that lots of workers get their first (and for many only) exposure to financial markets via their workplace retirement plan. Ditto their only education about investing, diversification, or even mutual funds. Little wonder that those who are tasked with delivering those lessons have long championed the need for some basic level of financial education in school curricula.

The issue was most recently raised earlier this year in a paper titled “Defined Contribution Plans and the Challenge of Financial Illiteracy.” Authored by Jill Fisch of the University of Pennsylvania Law School, as well as financial literacy icon Annamaria Lusardi and Andrea Hasler from George Washington University School of Business, the paper compares the relative financial acumen of what it terms “workplace-only” investors with active investors.

The report notes that the former (some 28% of the investor group) only have investments through an employer-sponsored plan, the latter have private retirement accounts that they have set up themselves and/or other investments. Arguably, and as the paper acknowledges, some of those in the latter group may well have begun their investment experience in workplace plan, but have now rolled those investments into an IRA (the paper says that about half of this group have both a self-directed account and “other financial investments”).

Mandate State?

It’s this combination – what they claim are big gaps in financial literacy coupled with a reliance on a defined contribution-oriented retirement system that is so dependent on individual choices – that has now led these academics to call on for a mandate on employers to fill the gap with financial literacy programs.

Specifically, they propose that employers be required to provide a self-assessment “enabling their employees to measure their financial knowledge and capability.” They suggest that the Labor Department “could introduce minimum requirements as to what should be included in a program to provide the working knowledge and skills necessary to navigate the defined contribution system” – requirements that could, they note, “include both specific information about the 401(k) plan, the investment options contained in that plan, and the process of saving and investing for retirement,” but that could also “extend to more general components of personal financial decision-making that contribute to an employee’s financial well-being.”

‘Big’ Deal

I think it’s fair to say that there are lots of retirement plan savers who aren’t very investment savvy, though I’ve a sense that the academics are overly broad in their characterizations, and perhaps lack a full appreciation for the education that is currently provided in the context of workplace plans. Further, for their assessment of financial literacy (more precisely, the lack thereof), they rely on the responses to a “big three” set of questions. 

Now, those “big three” questions have been utilized in academic circles for years as an assessment as to whether an individual is financially literate or not. I’ll accept at face value the belief of gifted individuals who have studied the subject of financial literacy in far more detail, and with more expertise in such matters than I, that a correct response to those questions constitutes a level of literacy in financial matters.

I’m happy to say that I have, for years, been able to accurately answer those “big three” questions that purport to provide an accurate gauge of financial literacy[i] – but to this day I am unable to articulate exactly how those specific knowledges would help me answer the questions that seem most pertinent to achieving retirement financial security; notably how much should I save, how should I invest those savings, when should I rebalance, and – ultimately – how (and when) do I draw down those savings in retirement.

The studies I have seen – and a point made by the authors of this proposal – suggest that timing is critical to retention. In other words, teaching someone about investments years before they actually have any investments probably won’t have much retentive impact. That’s why the best financial wellness programs are effective – because, rather than one-size-fits-all education, they focus on specific people and targeted groups of people who have specific needs – and do so in a manner proximate in time to either when those decisions must be made, or will have an impact.

It’s hard to argue that a greater focus on financial literacy wouldn’t be of some benefit – though I would say preferably sooner and more consistently than is likely in the employment context. That said, I’m skeptical about the impact of a financial literacy campaign mandate on employers. First off, the vast majority of employers who sponsor a plan already provide some level of education (does anyone not?), on their own, or with the assistance of a recordkeeper, TPA or advisor. A growing number are doing so with the broader emphasis on outcomes and financial wellness. The Labor Department might well be able to craft a more practical set of financial literacy guidelines than the academics, but I doubt it – and that’s assuming they’d even want the job.

Putting that obligation on employers ignores decades worth of experience that many, perhaps most, individuals don’t take full advantage of the education materials already furnished. Moreover that they appreciate – and in most ways and many cases are better served by the convenience of plan design solutions – like automatic enrollment and qualified default investment alternatives – that counter human misbehaviors and help even the financially literate make better choices than busy lives often allow.[ii] 

More significantly, I suspect that a financial literacy mandate on employers who sponsor plans would only mean fewer employers sponsoring plans – and that’s before we consider the potential for a brand new angle for the plaintiffs’ bar.

In sum, there seems little to be gained from a financial literacy mandate on employers. But it’s worth keeping in mind that those who currently participate in those employment-based retirement programs have something to lose.

- Nevin E. Adams, JD

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[i]The Big Three
Consider that, even in making the case that there is a financial literacy gap, the academics rely on what they call the “Big Three” financial literacy questions, specifically:

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?

A. More than $102, B. Exactly $102, C. Less than $102 

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?

A. More than today, B. Exactly the same, C. Less than today

3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” 
♦True ♦False

[ii]Those are mostly accumulation options, however. On the drawdown/withdrawal side, while there are certainly many alternatives, there is arguably still a gap.

A Second Opinion on "Self-Medicating" Your 401(k)

At a recent event, one of the speakers was taking our industry to task for expecting too much from participants. “We don’t expect individuals to diagnose and treat their own illness,” he said, going on to note that with 401(k)s we expect people who don’t have any knowledge or training in investments to decide how to invest those balances.

Admittedly, those 401(k) investment decisions can be complicated for some — and, since it (mostly) is their money, after all, most do give individual participants the ability to decide how it will be invested. As nice as it would be if individuals were exposed to the basics of finance — saving, budgeting, investments — sometime in their lives ahead of that workplace plan enrollment meeting, or the pages of that 401(k) enrollment kit, that’s not the current system’s fault.

In reality, individuals are routinely asked to make decisions on things in which they have no real knowledge or training. On numerous occasions, I’ve had plumbers and mechanics ask me to make decisions to either replace or repair enormously expensive systems with no ready information other than the explanation of the alternatives from the professional who is asking me to make that decision. A professional who, in some cases, has a relationship dating back only to the point in time at which his or her name was gleaned from the Internet (or Yellow Pages). Fortunately, most of those decisions aren’t matters of life and death, even if there is all-too-frequently a certain urgency to them.


However, the event speaker’s assertions notwithstanding, while we may not expect individuals to accurately diagnose their illnesses, we do ask them to make decisions on complicated matters in which they lack expertise. For example, several years back, a friend of mine received a troubling diagnosis from his regular physician. Now the area of concern was beyond the particular expertise of that doctor, so he suggested that my friend seek the opinion of a specialist. He did, only to find that the specialist’s opinion directly contradicted that of the doctor he knew and trusted.

Now my friend had to make a decision — and one in which he had a vital interest — even though he lacked the personal expertise to fully evaluate and appreciate the options.

Keeping up with a 401(k) isn’t like when the plumbing starts to leak, or the “check engine” light comes on — clear signals that there is a problem that requires prompt attention. For the most part, retirement investment and planning issues are less obvious, though even that hardly makes them unique. My friend’s serious medical situation was diagnosed only because he had gone in for a checkup because he was of an age where you schedule them whether you think you need one or not.

Similarly, you don’t need to be a financial expert to manage your retirement savings — you just need to have the common sense and discipline to schedule regular financial checkups with someone who does.

- Nevin E. Adams, JD

State “Capital”

I recently had the opportunity to attend The National Financial Capability Study Roundtable, where a variety of researchers (including EBRI’s Sudipto Banerjee) presented, discussed, and challenged a variety of research papers on topics ranging from financial literacy and retirement planning to financial advice, and from financial literacy and financial behavior to “Prohibition, Price Caps and Disclosure”. Taken as a whole, the day’s discussions focused on ways to better understand and measure the factors that appear to influence individual behaviors regarding their finances.

Simply stated, financial literacy is generally described as the ability to understand finance. More recently, some have begun to focus on financial capability¹. Research has shown that people with higher levels of financial literacy approach retirement with much higher levels of wealth. However, a growing body of research also suggests that most Americans have limited knowledge about concepts such as inflation, compound interest, and risk diversification at a time when they face an increasingly complex financial planning process alongside an expanding set of saving, investment, and decumulation options.

Drawing on data from the National Financial Capability Study (NFCS)², designed by the FINRA Investor Education Foundation (an ASEC member firm), Dr. Banerjee’s report³ noted that the chances of having a bad financial behavior decreases with age, and that the chances of exhibiting a bad financial behavior go down with education and income. Interestingly enough, full-time and part-time workers, homemakers, sick or disabled, and unemployed or laid-off individuals were all more likely to have bad financial behavior than self-employed people.

That said, the report specifically examined the role of where you live – specifically the state in which individuals live – in explaining financial literacy and behavior. It also ranked all U.S. states in terms of financial literacy and financial behavior of its residents.

Financial literacy and financial behavior are strongly associated with an individual’s age, income, education and other demographic characteristics. The study shows that, after controlling for the effect of these individual demographic characteristics, most bottom-ranked states had a statistically significant effect on their residents’ financial literacy and almost all states have a statistically significant effect on their residents’ financial behavior. However, the chance of exhibiting “worse”financial behavior increased as the financial behavior ranking dropped.

According to the report, this suggests that there might be factors shaping individual financial literacy and behavior other than individual demographic characteristics – and they might be influenced by the state in which people live.

- Nevin E. Adams, JD

¹ The National Financial Capability Study identifies four key components of financial capability as (1) making ends meet, (2) planning ahead, (3) managing financial products, and (4) financial knowledge and decision-making. See http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf

² The National Financial Capability Study is available online at http://www.finrafoundation.org/programs/p123306

³ Banerjee’s paper, including the state rankings, is online at https://custom.cvent.com/09056B0B33C34EC2BECC8C4A235B766F/files/event/51EB0D7B12344774B422F6A615E9B8B9/0c08c7cd98d74c01bf954ad368275ff4.pdf. See also“How Do Financial Literacy and Financial Behavior Vary by State?” in EBRI Notes, November 2011 at http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=4936