Millennial Financial Literacy and Fin-tech Use: Financial knowledge across functional areas
The P-Fin Index gauges personal finance knowledge and understanding in eight functional areas:
1. Earning—determinants of wages and take-home pay.
2. Consuming—budgets and managing spending.
3. Saving—factors that maximize accumulations.
4. Investing—investment types, risk and return.
5. Borrowing/managing debt—relationship between loan features and repayments.
6. Insuring—types of coverage and how insurance works.
7. Comprehending risk—understanding uncertain financial outcomes.
8. Go-to information sources—recognizing appropriate sources and advice.
Financial literacy among younger millennials is lowest in the areas of comprehending risk and insuring (Figure 3). These are troubling findings because risk and uncertainty are inherent in most financial decision making, and because individuals face a range of choices regarding which events to insure and how to structure their coverage.
Understanding how insurance works (e.g., the trade-off between deductibles and premiums) and what constitutes appropriate coverage comprise functional knowledge in this area. Poor insurance decisions can leave an individual under-insured for some risks and over-insured for others, as well as overpaying for coverage.
Comprehending risk and insuring are the two areas of lowest knowledge among older Millennials as well. Nonetheless, insuring is where the difference in financial literacy between younger and older millennials is greatest (9 percentage points). The following question demonstrates younger Millennials’ lack of knowledge regarding the basics of insurance.
Sebastian wants the premium payments for his car insurance to be as low as possible. What can he do?
• Increase the deductible on his car insurance (correct answer; chosen by 40% of younger millennials)
• Lower the deductible on his car insurance (chosen by 9%)
• Nothing, because his premium payments are dictated by his driving record (chosen by 14%)
• Don’t know (chosen by 37%)
Financial literacy is highest in the area of borrowing and debt management for both younger and older millennials. On average, 58% of the borrowing questions were answered correctly by older millennials and 52% by younger millennials (Figure 3). Debt is common across the life cycle for many individuals; knowledge and understanding may emerge from confronting accumulated debt, often from early in life.