The Personal Finance Index: P-Fin Index results
P-Fin Index results
Personal nance knowledge among U.S. adults is modest. There is essentially a 50/50 split between those who could and those who could not answer one-half of the P-Fin Index questions correctly (Figure 1). On average, U.S. adults answered 49% of the index questions correctly. Sixteen percent demonstrated a relatively high level of personal nance knowledge and understanding, i.e., they answered over 75% of the index questions correctly, while 20% showed a relatively low level, i.e., they answered 25% or less of the questions correctly. It is concerning that so many Americans appear to lack knowledge that enables sound financial decision-making.
Figure 2 shows the percentage of questions answered correctly and the percentage answered with a “don’t know” (DNK) response for the eight functional areas of personal nance outlined above. Analysis of DNK responses is valuable as previous research has demonstrated that a DNK response provides additional information; specifically, it indicates lack of confidence by the respondent in his or her knowledge, in addition to a lack of knowledge and understanding.
Among the functional areas comprising the P-Fin Index, comprehending risk is the one where Americans tend to have the lowest level of knowledge. On average, survey participants answered 39% of these questions correctly, while responding DNK to 28% of them. This finding is consistent with previous research identifying risk-related concepts as the most difficult for individuals to grasp. This finding is particularly troubling given that risk and uncertainty are common features of financial decision-making. Future conditions are simply unknown—employment status and earnings, family status, health status, interest rates, asset returns, relative prices and inflation. Accidents often have financial consequences. Uncertainty regarding how long one will live involves financial consequences resulting from either unexpectedly early death or living to an unexpectedly advanced age. Comprehending risk and its implications is integral to making appropriate financial decisions.
Insuring, investing and go-to information sources are the other functional areas where personal finance knowledge is below average—falling below the average of 49% correct answers for all survey questions.
Personal finance knowledge is highest in the area of borrowing and debt management. On average, 61% of the borrowing questions were answered correctly, while 19% received DNK responses. Debt tends to be a feature of personal finance common across the life cycle for many individuals; knowledge and understanding may emerge from confronting accumulated debt, often from early on in the life cycle.
Consuming and saving are other areas where personal finance knowledge is above average— exceeding the average of 49% correct answers for all survey questions.
Cluster analysis reveals a strong correlation of personal finance knowledge and understanding across four areas: saving, investing, borrowing and insuring. Individuals who answer all or most questions correctly in one of these areas tend to answer all or most correctly in the other three areas as well. In contrast, there is little correlation between knowledge in the areas of earning, consuming, comprehending risk and go-to information sources and knowledge in any other functional area.