The TIAA Institute-GFLEC Personal Finance Index: A New Measure of Financial Literacy
Annamaria Lusardi, The George Washington University School of Business
and Global Financial Literacy Excellence Center (GFLEC) Noemi Oggero, Global Financial Literacy Excellence Center (GFLEC) Paul J. Yakoboski, TIAA Institute
About the Survey
The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) measures knowledge and understanding which enable sound financial decision-making and effective management of personal finances. The P-Fin Index was developed by the TIAA Institute and the Global Financial Literacy Excellence Center, in consultation with Greenwald & Associates. The initial wave of the survey was fielded online in September 2016 with a nationally representative sample of U.S. adults, ages 18 and older, for a total of 1,043 respondents. The P-Fin Index survey will be an annual study. Future waves will enable analyses of personal finance knowledge over time.
The index builds from the existing academic research on financial literacy and capability. The capacity to produce a nuanced examination of financial literacy across different areas of personal finance is what distinguishes the P-Fin Index from other surveys. The index is based on responses to 28 questions, covering 8 functional areas: earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk, and go-to information sources. Overall, the P-Fin Index highlights the gap between current personal finance knowledge levels and the level needed for sound financial decision-making in the normal course of life.
Personal finance 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.
Sixteen percent of Americans demonstrated a relatively high level of personal finance knowledge and understanding, i.e., they answered over 75% of the index questions correctly, while twenty percent have a relatively low level of knowledge and understanding, answering 25% or less of the questions correctly.
Personal finance knowledge is lowest in the area of comprehending risk; only 39% of these questions were answered correctly. This is consistent with previous research identifying risk-related concepts as the most difficult for individuals to grasp.
Insuring, investing and go to information sources are the other functional areas where personal finance knowledge is below average.
Personal finance knowledge is highest in the area of borrowing and debt management. On average, 61% of the borrowing questions were answered correctly. Knowledge and understanding may emerge from confronting accumulated debt, often from early on in the life cycle.
Young adults are working from a limited base of personal finance knowledge. While 10% of those under age 45 have a relatively high level of financial literacy, 30% have a relatively low level. Comprehending risk and insuring are areas where young adult knowledge appears lowest.
Personal finance knowledge is positively correlated with both general education and financial education, a finding consistent with previous research.
Individuals with greater personal finance knowledge are more likely to have positive personal finance experiences, such as planning and saving for retirement and for other reasons.
The index data reveal Americans have a relatively low level of knowledge and understanding of personal finances. Our findings highlight the need for renewed efforts to increase financial literacy particularly among the young, who face many significant financial decisions early in their working lives.