How Much Financial Knowledge Do People Acquire as They Age? Not Much.

People often argue that financial knowledge can be acquired with experience. But if the evidence from a new survey index is any indication, that way of learning may, in fact, be very slow or not work well at all.

The TIAA Institute-GFLEC Personal Finance Index, or P-Fin Index for short, provides a snapshot of Americans’ understanding of basic financial concepts. And the results don’t look too promising.

U.S. adults surveyed only answered about half the questions in the index correctly. Just 16% demonstrated a relatively high level of personal-finance understanding; they answered more than three-quarters of the questions correctly. But what was surprising is that Americans’ knowledge of personal finance is low even among people who have already made many important and fundamental financial decisions. This includes older Americans who own investment assets.

Specifically, by age 45 only 10% of respondents could answer more than three quarters of the survey questions correctly.

More unsurprisingly, younger adults fared the worst. Just 30% of people aged 18 to 30 were able to correctly answer only a quarter—or fewer—of the questions in the P-Fin Index.

This is worrisome as young people today have to deal with important and consequential decisions, from whether to invest in education and how to finance that education, to saving and investing in retirement accounts that are much more dependent today than in the past on an individual’s savvy. It is also worrisome because, if we can infer how learning progresses with age by looking at the experience of the older survey cohorts, we see from the index that learning, overall, is slow.

We can get further insights on that learning from the concepts the index covers. While previous surveys gauged financial knowledge by using only a handful of questions, the P-Fin Index encompasses 28 questions covering eight functional areas: earning, consuming, saving, investing, borrowing, insuring, risk and reliable sources of information and advice.

For most topics, American adults can barely answer half of the questions correctly, even when the topics affect decisions that are made regularly. Take risk and risk management. It is a feature of most, if not all, financial decisions since financial decisions relate to the future, which is by definition uncertain. On average, U.S. adults answered only 39% of the risk-related questions correctly. Risk is a very complex concept, and perhaps this is what limits learning by experience.

One example of a question measuring risk:

There’s a 50/50 chance that Malik’s car will need engine repairs within the next six months which would cost $1,000. At the same time, there is a 10% chance that he will need to replace the air conditioning unit in his house, which would cost $4,000. Which poses the greater financial risk for Malik?

– The car repair (correct answer; chosen by 41% of respondents)
– The air-conditioning replacement (chosen by 19% of respondents)
– There is no way to tell in advance (chosen by 19% of respondents)
– Don’t know (chosen by 20% of respondents)

Interestingly, most U.S. adults understand borrowing. But knowledge about debt seems the exception rather than the rule. On average, 61% of the questions about borrowing were answered correctly. Debt is now a standard component of American life, and it may be that knowledge and understanding is generated from confronting accumulated debt, often while young.

Many of the index’s findings, while troubling, point to avenues for putting consumers on a safer financial track, which was one of the objectives of collecting these new data. We know people are making financial decisions that are important to their future and to society, yet their choices rely on a base of very limited personal-finance knowledge. We also know from P-Fin Index data that only 40% of U.S. adults have been exposed to financial-education programs. Clearly, access to financial education should be embraced and expanded.

School is one logical place to start. As I have written previously, a mandatory personal-finance course in college would provide a powerful boost. But we could—and should—start even earlier. Financial literacy in primary and high schools would prepare the young, including informing the decision to go to college.

Financial education in the workplace is another important avenue, particularly now that individuals carry greater responsibility for managing their pensions and health coverage. Workplace education also may be a way to reach older individuals.

Young people do not have the financial understanding they need to make informed decisions about their future. And now we see that U.S. adults, even late in life, have still not acquired that knowledge. Just relying on experience for enlightenment may offer too little and deliver it too late.