Many people hearing about states’ efforts to pass bills requiring financial literacy education in high school may question why students need to take another mandatory class. A statistic highlighting the importance of requiring such a class is that 70 percent of American adults have no financial education. Of surveyed adults, 61 percent were never offered such education as youth, while 9 percent could take such a class but did not. This new data from the FINRA Foundation’s National Financial Capability Study shows the importance of requiring financial literacy education instead of simply providing it as an elective class.
The survey results from FINRA show that the impact of financial literacy is not just academic. There are meaningful differences in financial well-being and preparedness between those who are financially literate and those who are not. A majority of those who met the qualification of having higher financial literacy had positive financial behaviors like spending less than their income (53 percent), having a substantial emergency savings fund (65 percent), having planned for retirement (52 percent) and having at least one retirement account (70 percent). For each category, less than half of those with lower financial literacy exhibited the positive behavior.
Similarly, those with higher financial literacy were much less likely than those with lower financial literacy to engage in unhealthy financial practices, such as utilizing pawn shops, “payday” loans, rent-to-own stores, and tax refund advance loans. FINRA researchers concluded that people with lower financial literacy were especially likely to struggle during economic downturns, such as the recent COVID pandemic, when they might be unaware that not all sources of borrowed funds are of equal quality and risk.
Financial Literacy Declined from 2009 to 2021
While the overall lack of financial literacy in the United States is not new, an analysis of FINRA’s data by Smartest Dollar reveals that financial literacy declined between 2009 and 2021. Over the 12 years, there was a decline in financial literacy regarding basic interest rates, inflation rates, and investment risks. During that same time, despite increased technological access to investing options through smartphones and the Internet, the ratio of American households owning stocks and other investments did not increase. This means millions of families are not enjoying the benefits of growing their retirement funds and nest eggs.
This indicates that financial literacy and the prevalence of middle-class investors are not increasing naturally and that individual financial literacy standards embedded in other courses are insufficient. America needs to make conscious, proactive, directed efforts to improve the financial literacy of its citizens. This can only be accomplished through the “gold standard” policy of a mandatory, standalone PFL class. Additionally, this PFL class should be in addition to, not a substitute for, Economics class. Teenagers and adults need to know how finances work and how the larger economy functions.
Hopefully, proponents of mandatory PFL classes will point to this research to show that financial literacy is not increasing naturally. If you want improvements, you have to make conscious reforms!