The Personal Finance Index: The P-Fin Index and Personal Finance Outcomes

Since the P-Fin Index measures knowledge and understanding which enable sound financial decision-making and effective management of personal finances, it should correlate with financial actions and outcomes. Consistent with previous findings, as well as academic research on financial literacy, this expectation holds—individuals with greater personal finance knowledge, as measured by the index, are more likely to have positive personal finance experiences.

As the percentage of P-Fin Index questions answered correctly increases, individuals are:

  • Less likely to be financially fragile, i.e., they are more confident in their ability to raise $2,000 in the near term to meet an unexpected need (Figure 8).

  • More likely to have precautionary savings, specifically, savings sufficient to cover living expenses for three months in the case of job loss, sickness, disability or some other emergency (Figure 8).

  • More likely to have planned for retirement (Figure 9).

  • More likely to have financial investments, aside from retirement accounts (Figure 10).

  • More likely to be current on credit card and loan payments (Figure 11).

P-Fin Index figure 8
P-Fin Index figure 9
P-Fin Index figure 10
P-Fin Index figure 11


As Americans shoulder ever-greater direct responsibility for their financial well-being and security, they must make a myriad of personal finance decisions—both simple and complex—in the normal course of life. For example, in the realm of retirement, individuals must decide how much to save, how to invest their savings, and how to convert their savings to income during retirement. Moreover, as financial markets continue to evolve, individuals are faced with a wide variety of products, many of which are not easy to understand. How well individuals navigate life’s financial decisions is dependent, at least in part, on their knowledge and understanding of personal finances, often referred to as financial literacy.

The P-Fin Index is unique in its capacity to examine financial literacy across eight areas of personal finance in which individuals routinely function, as well as providing a robust indicator of overall personal nance knowledge and understanding. According to the index, personal finance knowledge is lowest in the area of comprehending risk. This is troubling given that risk and uncertainty are inherent in the context of making financial decisions. On the other hand, borrowing is the area where U.S. adults tend to have the highest level of knowledge. Debt tends to be a feature of personal nance common across the life cycle for many individuals; knowledge and understanding may emerge from confronting accumulated debt.

Many consequential financial decisions are faced early in life, decisions with ramifications for financial well-being decades into the future, as well as the present. In addition, basic financial behavior and habits, such as budgeting and tracking spending, often become established early in adulthood, as do general lifestyle decisions. Nonetheless, young adults are operating from a limited base of personal nance knowledge and understanding. Among young adults, the percentage with a relatively low level of financial literacy is triple that with a relatively high level. Comprehending risk and insuring are areas where young adult knowledge appears lowest.

It is clear that individuals would bene t greatly from increased financial literacy levels at the beginning of their careers, meaning that high school and college would be ideal venues for financial literacy programs. Decisions made and outcomes experienced matter not only at the household level, but also for the economy as a whole—an extreme example being the subprime mortgage crisis which devastated household finances and triggered the last recession.

Other strategies to improve financial behavior and decision-making are not substitutes for financial literacy. Strategies such as nudging through choice architecture (e.g., auto- enrollment in retirement savings plans) and guiding with professional investment advice are best viewed as complements to improved financial literacy. For example, auto-enrollment is an effective strategy for getting individuals to begin saving, but eventually they need to actively manage their plan participation (contribution level, asset allocation, and withdrawal strategies) so that it aligns with their individual-specific circumstances and goals. Financial advice is valuable, but ideally individuals would be proactive participants in their advice sessions since final decisions are ultimately up to them. In fact, previous research has shown that financial advice is a complement rather than a substitute for financial knowledge. Beyond that, receiving advice and nudges on every financial decision that individuals face is simply not realistic.

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