SHOCKINGLY LOW FINANCIAL LITERACY IS OBSTRUCTING STRONG FINANCIAL DECISIONS
There is a significant gap between self-perceived financial literacy and actual financial literacy among households in the United States and Canada. As we enter a period of harsher economic conditions, it is vital that individuals have adequate knowledge to understand and navigate stormy waters. More must be done to bridge the gap between perception and reality.
WFG commissioned an independent research agency to conduct a Financial IQ survey to better understand how households in the United States and Canada think about their finances.
Strong financial knowledge enables people to make more informed decisions about their finances, such as when to spend or save, comparing prices before a big purchase, and planning for retirement. However, our research finds that the level of financial literacy among households in the United States and Canada is shockingly low.
To test the financial literacy of households across the United States and Canada, those surveyed were asked the “Big Three” financial literacy questions. Developed by Drs. Annamaria Lusardi and Olivia Mitchell in conjunction with the Organization of Economic Co-operation and Development (OECD), these questions assess a person’s financial knowledge, in particular their understanding of compounding interest, inflation, and risk diversification.
Only 27% of the general population answered all three of the “Big Three” financial literacy questions correctly. Of particular concern, especially given the current economic climate, is that 45% of the general population was unable to answer the question related to inflation.
Financial literacy is strongest among those aged over 55, men and those earning an annual income over $80,000. This inconsistency in financial literacy means those with the most at stake when making financial decisions are the most likely to make the wrong ones.
While households across the United States and Canada score poorly on financial literacy overall, nearly half (47%) said they feel able to understand financial matters when it comes to managing their short and long-term finances. This presents a gap between perceived understanding and measured understanding, raising concerns about the methods of financial planning available to the general population.
Two-fifths (41%) of households use only their own knowledge of personal finance when developing their financial plans. This is a troubling reality for those with lower financial literacy, as households that understand less about financial matters are at a far greater risk of making the wrong financial decisions, despite the fact that they have more on the line.
To prevent this from happening to you, it is important to test your financial literacy, educate yourself, and seek professional advice when making big financial decisions. WFGIA agents, with high levels of financial literacy and training, are committed to offering the guidance and education that can help you build a more secure future for you and your family.
These findings are taken from an independent research study conducted by H/Advisors Cicero on behalf of WFG to better understand how households think about money, their goals and aspirations and their financial confidence, control, and understanding. This is part of their commitment to improving financial well-being and financial literacy for households across the United States and Canada.