The 2020 TIAA Institute-GFLEC Personal Finance Index: Discussion

The first four years of the P-Fin Index hint at a slow increase over time in financial literacy among U.S. adults. The percentage of index questions answered correctly has increased 1 percentage point each year from 2017 to 2020, rising from 49% to 52%. The percentage of adults correctly answering more than one-half of the index questions increased from 48% to 53% over this period, and the percentage correctly answering more than 75% rose from 16% to 20%. Each of these differences in financial literacy between 2017 and 2020 is statistically significant.

In addition, financial literacy in seven of the eight functional areas comprising the P-Fin Index increased from 2017 to 2020, with three of them showing statistically significant changes in the percentage of questions answered correctly: earning, saving and go-to information sources.

Nonetheless, many Americans lack personal nance knowledge that enables sound financial decision making and effective management of personal finances, as they could correctly answer only about one-half of the P-Fin Index questions, on average. In addition, many individuals do not know what they do know. Likewise, many do not know what they do not know.

Comprehending risk is the area of lowest knowledge among U.S. adults, but they disproportionately pick investing as the area where they think they know the least. Analogously, while borrowing is the area of greatest financial literacy, many do not indicate borrowing but, rather, consuming and earning as the areas where their knowledge is highest.

Low financial literacy is associated with low financial wellness. The P-Fin Index survey contains several questions, some new, indicative of financial wellness. In each case, financial literacy is strongly associated with the financial wellness indicator.

Of particular note is first-time data regarding how much time U.S. adults spend thinking about and dealing with issues and problems related to their personal finances, including time spent doing so while on the job. Those with high levels of financial literacy spend three hours per week, on average, thinking about and dealing with personal nance issues. By comparison, those with low financial literacy spend an average of 12 hours per week on personal nance issues.

An even more pronounced dynamic exists in the workplace—workers with high financial literacy spend one hour of work time per week, on average, dealing with financial issues; workers with low financial literacy spend six hours of work time per week on personal nance issues. Improving employee productivity by decreasing the amount

of work time lost to personal nance issues is a primary motivation for employer- sponsored financial wellness programs, and addressing low financial literacy should be a key element of such programs.

The importance of financial literacy for financial wellness highlights the importance of increased focus on efforts to improve financial knowledge and understanding among all Americans, not only in the workplace, but in school as well.