The Personal Finance Index: Young adult personal finance knowledge
Consistent with previous studies, the P-Fin Index finds that young adults tend to have lower levels of financial literacy than their older peers. On average, respondents under age 45 answered 41% of the P-Fin Index questions correctly, compared with 55% among those ages 45 and older. Among young adults, the percentage with a relatively low level of personal finance knowledge (30%) is triple the percentage with a relatively high level (10%.)
Furthermore, an age gap in personal finance knowledge exists across all functional areas, ranging from 10 percentage points for go-to information sources to 19 percentage points for insuring. Even though individuals need to take responsibility for saving and investing early in life, these areas have knowledge age gaps of 16 percentage points each. Comprehending risk and insuring are the areas where young adult financial literacy appears lowest with one-third of the questions in each answered correctly.
The low level of personal finance knowledge among young adults is particularly problematic given that many consequential financial decisions are faced early in life, such as:
Whether to attend college and how to nance it?
When to start saving for retirement? Then, how much to save and how to invest?
Whether to buy a home, and how much home to buy?
In addition, basic personal finance behavior and habits, such as budgeting and tracking spending, often become established early in adulthood, as do general lifestyle decisions. In short, young adults are making a myriad of decisions with ramifications for their financial well-being from a limited base of knowledge and understanding.
Results from a specific question in the P-Fin Index survey highlight the challenge. Young adults are endowed with time, and time is a valuable resource in the context of saving for retirement given the impact of compounding returns. But as illustrated by responses to the following question, many young adults do not grasp the magnitude of that impact:
Anna saves $500 each year for 10 years and then stops saving additional money. At the same time, Charlie saves nothing for 10 years but then receives a $5,000 gift, which he decides to save. If both Anna and Charlie earn a 5% return each year, who will have more money in savings after 20 years?
Anna (correct answer; chosen by 44% of young adults)
Anna and Charlie will have the same amount (chosen by 22% of young adults)
Charlie (chosen by 6% of young adults)
The share of respondents answering correctly increased steadily from 42% among those ages 18–29 to 59% among those ages 60 and older. Many individuals would likely make different (and better) decisions at younger ages if their personal finance knowledge and understanding were greater.