A New Report Reveals How Americans Are Faring With Their Finances

Knowledge@Wharton High School joined other members of the financial education community this month in Washington, D.C., for the announcement of extensive research about people’s financial habits in the U.S.

But first, some definitions.

Financial literacy means different things to different people. As it turns out, though, the people who actually conduct academic research on this topic have quite a clear idea of how it is defined. Financial literacy is a deep understanding of how money works in the world, including basic concepts like earning and saving, as well as more complex ideas like inflation and compound interest. People who are financially literate are better able to use knowledge and skills to make informed decisions about their finances and manage money effectively throughout their lifetime. Wharton professor Olivia Mitchell, known worldwide for her research on financial literacy, uses this go-to definition: “By financial literacy, we mean peoples’ ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions.”

Financial capability, another term that is tossed around quite often, is not just what you know about money management, but whether you have the willingness, confidence and opportunity to act. As Microfinance Opportunities, an organization that develops ideas and solutions that help the financial community better serve the low-income consumer, has said, “It is not enough to provide people with new knowledge about money management and financial services. Those providing financial education should do so in ways that change how a person behaves.”

It is that financial behavior that is at the heart of ongoing research by FINRA Investor Education Foundation and the Global Financial Literacy Excellence Center (GFLEC) at The George Washington University School of Business in Washington, D.C. On July 12, 2016, GFLEC hosted the release of FINRA’s newest National Financial Capability Study (NFCS). Now in its “third wave,” this ongoing study involving more than 27,000 U.S. adults, generates data to help policy-makers, educators and others better understand and build financial capability in America.

The most current 2015 study (the other two were conducted in 2009 and 2012) has an especially in-depth and inclusive representation of age, race, education and gender. Additionally, the study allows for state-by-state comparisons of financial literacy. “The richness of the data is enormously exciting,” noted Richard G. Ketchum, CEO of FINRA and chairman of the FINRA Foundation during the study’s release on July 12. Ketchum was joined by Geraldine M. Walsh, president of FINRA, as well as a host of other high-profile members of the financial education and research community, including Sarah Bloom Raskin, deputy secretary of the U.S. Department of the Treasury; Mary Jo White, chair of the U.S. Securities and Exchange Commission; and Annamaria Lusardi, academic director of GFLEC.

The key findings of the latest report titled, “Financial Capability in the United States 2016,” are:

• The financial circumstances of Americans have improved over the last several years. Americans are finding it easier to pay their expenses and save for a rainy day, and they are more satisfied with their financial condition. According to the report, “The ability to make ends meet is a central component of financial capability, encompassing the extent to which people balance monthly income and expenses, and how they deal with everyday financial matters.”

• Even so, some groups are still struggling. As detailed in the report, measures of financial capability continue to be much lower among younger Americans, those with household incomes below $25,000 per year, and those with no post-secondary educational experience.

• Debt continues to be a problem for many Americans. For example, 1 in 5 Americans have unpaid medical debt and 4 in 10 survey respondents feel they have too much debt. Other important numbers: 47% of Americans carry a credit card balance and 22% have been contacted by a debt collection agency in the past year.

• Absolute levels of financial literacy are low and financial literacy is down since 2009. The survey data shows that a gap exists between self-reported knowledge and real-world behavior. Slightly less than a third of respondents report having been offered financial education at a school, college or workplace, suggesting that financial education is not widely available.

The report concludes that “Both policy and education are needed to broaden access to financial products, protect consumers from predatory practices and foster greater participation in health, life-long financial practices.”

For a more detailed look at FINRA’s latest National Financial Capability Study, visit www.usfinancialcapability.org. Go to the Global Financial Literacy Excellence Center at www.gflec.org for more information about the July 12 data release.