Society management

Which generation is the most financially educated?

Yes, younger generations have lower levels of financial literacy, but the results of a new study suggest the overall levels and implications may not be what you think.

According to the report from the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business, financial literacy is alarming among each of the five generations: the silent generation, the baby boomers, generation X , Generation Y. and Generation Z, but it is the lowest of Generation Z.

Two-thirds of Gen Z respondents were only able to correctly answer 50% or less of the P-End Index questions of the study. About 40% of Baby Boomers and the Silent Generation answered more than 50% of the questions correctly, but the average is only 55%. The percentage of questions answered correctly by Gen X, Gen Y, and Gen Z was 49%, 48%, and 43%, respectively.

The P-Fin Index is an annual barometer created by the TIAA Institute and GFLEC to assess the financial literacy of the adult U.S. population, measuring knowledge and understanding of financial decision making and effective management of personal finances. It is based on responses to a 28-question survey covering eight areas:

1. Earnings: determinants of wages and net wages
2. Consume: budgets and expense management
3. Savings: factors that maximize accumulations
4. Investment: types of investment, risk and return
5. Loan / Debt management: relationship between loan characteristics and repayments
6. Insure: types of cover and how insurance works
7. Understand risk: understand uncertain financial results
8. Indispensable sources of information: recognize the appropriate sources and advice

Functional knowledge

According to the results, overall functional knowledge tends to be highest across generations in the areas of borrowing and saving. Financial literacy in these areas tends to be lower earlier in the life cycle, especially among Gen Z, the report notes. Among Gen Z, financial challenges tend to be more common among those who have never attended college (now or before) than current students and non-students who have attended college before.

On the other end of the spectrum, the study found that functional knowledge about insurance tends to be particularly low among Gen Zers and Millennials, showing the biggest gap with older generations. For Gen Z, this is the area with the lowest financial literacy, with an average of just 28% correct answers to questions.

Additionally, the P-Fin Index has consistently found that financial well-being is linked to financial literacy, a finding that applies to all five generations, the report notes. Interestingly, the differences in financial well-being between people with relatively high financial literacy and those with relatively low financial literacy tend to be more pronounced among Millennials.

Financial challenges

Even though Gen Z has the lowest levels of financial literacy, trends in financial well-being indicators show that Gen X faces the greatest financial challenges. According to the results, 28% of Gen X respondents say they have difficulty making ends meet in a typical month, which is far more than any other generation. In comparison, about 20% of Gen Z, Millennials, and Baby Boomers, and 11% of the Quiet Generation say they are struggling to make ends meet.

“These results indicate that individuals generally start in adulthood with low financial literacy and, although it increases over time, financial literacy nonetheless tends to remain low,” says Paul Yakoboski, senior economist at the TIAA Institute. . “In addition, financial well-being across generations tends to be more compromised among people with lower levels of financial literacy. “

Researchers suggest this is a problem at all stages of life, as important financial decision-making occurs at all stages of life, with retirement savings being just one example. . “New entrants to the workforce must decide if, when and how much to save for retirement in the face of competing needs, while retirees must decide on a strategy for spending their retirement savings when they cannot know how long or what they will live. future spending will emerge, ”the report observes.

That said, the economic uncertainty created by the COVID-19 pandemic has apparently underscored the need for Americans to improve their personal financial literacy, as 39% of survey respondents say they are now motivated to focus on their business. financial literacy. The study notes that this feeling is more common among younger generations, with Gen Z, Gen Y, and Gen X respondents reporting feeling the most focused, at 52%, 48% and 44%, respectively.

The 2021 wave of the P-Fin index went live in January 2021 with a nationally representative sample of over 3,000 adults, aged 18 and over; Gen Z respondents were oversampled when the survey was set up.