Key Findings
- Only 57% of adults in the United States are financially literate.
- Missouri, Utah and Virginia boast the best financial literacy rates, while Alaska, Washington, D.C. and South Dakota have the worst financial literacy rates.
- Over 40% of Americans are unfamiliar with Roth IRAs, money market accounts and high-yield savings accounts, but nearly 70% of Americans familiar with 401(k)s don’t use them.
What is Financial Literacy?
Financial literacy refers to the knowledge you have about money and the options you have for saving and investing it. It’s the imaginary toolbox you reach into to achieve a particular financial goal, such as:
- Saving for a large purchase
- Funding a college education
- Preparing for retirement
- Buying a house
- Paying off debt
- Investing for your future
Organizations may measure financial literacy in different ways, but they generally involve survey questions about economic and personal finance topics. The Federal Reserve, for example, defines someone as financially literate if they can answer questions surveyors pose about interest, inflation and risk diversification. The Financial Industry Regulatory Authority (FINRA) has a seven-question quiz about savings accounts, probability and investments.
Financial Literacy Demographics
Understanding how financial literacy compares among U.S. citizens of differing ages, races, genders and education levels can reveal what factors may inhibit higher literacy rates.
Financial Literacy by Age
Older generations tend to be more financially literate. According to a MarketWatch Guides survey, baby boomers are the most likely to be familiar with saving and investment products like 401(k) and Roth IRA retirement accounts, money market accounts and CDs.
At the same time, more than half of Generation Z members were unfamiliar with CDs, high-yield money market accounts or Roth IRAs.
Financial Literacy by Gender
Women tend to have lower levels of financial literacy than men, according to a 2022 study from the Federal Reserve. That figure is based on having more incorrect or “don’t know” answers than their male counterparts on a three-question survey.
Financial Literacy by Race
There are also differences in financial literacy by race, as estimated by a FINRA report. High financial literacy is associated with better money habits, like saving for retirement.
FINRA found that 65% of Asian/Pacific Islanders over 55 years old in the U.S. have a retirement account, compared to 57% of whites in the same age group. Black/African American and Hispanic/Latino populations were less likely than whites or Asians/Pacific Islanders to have a retirement account.
Financial Literacy by Education
Higher education also correlates with greater financial literacy, the FINRA report found. Over 70% of college graduates have established an emergency fund and opened a retirement account. Only a third of high school graduates reported possessing a retirement account, while 38% reported setting aside emergency funds.
Financial Education Requirements By State
Despite the importance of financial literacy, U.S. states are inconsistent in how they teach these concepts to public school students. The Nation’s Report Card rated each state’s financial literacy educational requirements, giving a letter grade as follows:
- A: Offers financial literacy in each grade, K-12, as well as a standalone personal finance course in high school.
- B: Requires a course that includes financial literacy to graduate high school or has financial literacy standards for both high school and K-8 grade levels.
- C: Has financial literacy standards for high school and some K-8 grade levels.
- D: Lacks financial literacy instruction in either high school or K-8 grade levels.
- F: No financial literacy instruction.
Only three states – Missouri, Utah and Virginia – consistently earned a perfect score in terms of financial literacy education
Three other areas – Alaska, Washington, D.C. and South Dakota – earned “F” grades through the duration of the study. Roughly half of U.S. states earned “B” grades.
How Financially Literate are Americans?
Fifty-seven percent of American adults are considered financially literate, according to a survey from credit rating agency Standard & Poor’s (S&P). And our research found varying degrees of familiarity with key savings vehicles like 401(k)s and CDs.
Americans Are Missing Out on Wealth-Building Tools
A MarketWatch Guides survey also found that:
- More than 40% of Americans are unfamiliar with money market accounts, Roth IRAs and high-yield savings accounts.
- Nearly 70% of adults are familiar with 401(k)s but don’t use them.
- Over 46% of the U.S. adult population knows of CDs, money market accounts, 401(k)s, high-yield savings accounts and Roth IRAs, but doesn’t use them.
- More than half of the Generation Z population doesn’t know what a Roth IRA is.
- Over three-quarters of Baby Boomers and the Silent Generation know of 401(k)s but don’t use them, compared to two-thirds of Millennials.
The Cost of Financial Illiteracy
Americans lost an average of $1,506 in 2023 due to financial illiteracy, according to the Financial Educators Council. This includes losing money due to:
- Credit card interest and fees
- Overspending
- Overdraft fees
- Fraud
Financial Literacy Impacts Savings
Individuals with higher financial literacy are more likely to live within their means, have three months’ worth of income in an emergency fund and have at least one kind of retirement account, according to the FINRA report.
Only 35% of Americans with lower financial literacy rates reported spending less than they earn. Forty-two percent had saved the equivalent of three months’ income, while only 43% had a retirement account.
How to Improve Financial Literacy
Like any other form of knowledge, your financial literacy can grow with practice. Start by putting your money to work, taking control of your spending habits and using money as a tool.
Learn about Financial Options
Exploring how to use financial tools to your advantage can improve your financial literacy and help you establish a fiscal safety net.
“Imagine playing a game your entire life without ever learning the rules,” said Delyanne Barros, a financial mentor who operates the business Delyanne the Money Coach. “How can you expect to succeed? How can you expect other players to not take advantage of your ignorance?
Barros said that upping your knowledge of financial topics can help you avoid scams and create a “safety net” for yourself in case of emergency.
“Money will no longer be this mysterious force in your life, but a tool that you will know how to expertly use to your advantage,” she told MarketWatch Guides.
Make Your Money Work For You
Increasing your savings and diversifying your investments can help you apply your financial literacy toward achieving the goals of stockpiling funds and compounding your earnings for a future nest egg.. If you’re looking for a safe way to invest, online banks offer some of the best CD rates since they lack traditional overhead costs. You can also find some of the best high-yield savings accounts from online financial institutions to help boost your emergency fund.
Create a Budget
Multiplying your savings with safe investments can help grow your income, but your budget represents your most valuable financial literacy tool. Creating a budget enables you to understand where you earn, spend and save to prevent running out of money at the end of each month. Instead of living paycheck to paycheck, you gain control over your finances by knowing exactly where your money goes.
Plan a budget for the upcoming month by totaling your income and fitting your expenses within that limit. Review your progress at the end of the month to see how well you managed your money.
The Bottom Line
Financial literacy allows the average American to make more informed monetary decisions to obtain greater financial security. Yet many states struggle to provide students with the foundational education necessary to develop this critical tool. While a lack of financial literacy can result in tangible economic loss, you can take control of your finances to improve your spending and saving habits.
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