How the U.S. Stacks Up on Basic Money Smarts

The U.S. lags more than a dozen developed nations in terms of basic personal financial know-how, new research shows. The findings pile on to results of a study last year showing ho-hum money smarts among U.S. teens, and they further highlight the need for financial education in schools and the workplace.

In a study of adults in 143 nations, the U.S ranks 14^th, according to the Standard & Poor's Global Financial Literacy Survey, conducted with the Global Financial Literacy Excellence Center at George Washington University and World Bank Development Research Group. The vast majority of these are underdeveloped economies. Among developed nations, the U.S. ranks behind countries including Denmark, Canada, Germany, the U.K., Australia, and New Zealand.

This research echoes findings last year from the Program for International Student Assessment, which showed the average 15-year-old in the U.S. ranks in the middle of the pack among 18 developed nations. Many of the countries with more financially adept teens, as measured by the PISA study, also had more financially adept adults, as measured by the S&P study.

Developed countries generally score best. But personal financial know-how is in short supply virtually everywhere. Only one in three adults worldwide could correctly answer at least three of four basic questions about interest rates, compound growth, inflation, and risk diversification. For example, respondents were asked if their buying power was greater, less, or the same after a period when both inflation and their income doubled. About half gave the correct answer: the same.

“Even in countries with developed financial markets, people did not score well,” says Annamaria Lusardi, academic director at GFLEC. Globally, those with the poorest awareness are young adults, the elderly, women, and low-income households. “These are the most vulnerable groups,” Lusardi says.

In the U.S., even though credit card use and student debt is among the highest in the world, 40% incorrectly answered the question on interest rates. Nearly a third of Americans who finance their homes through a bank incorrectly answered a question on compound interest.

Nordic countries including Sweden, Denmark, and Norway score relatively well—a result of strong education systems, Lusardi says. Asian nations that put an emphasis on teaching math, including China, South Korea, and Vietnam, also do relatively well.

Strikingly, the segments with the poorest personal money management skills are largely the same across borders. The one exception appears to be young adults in emerging economies, a group that scored relatively well. “There is evidence that the emerging economies are investing in education, and it is paying off,” Lusardi says.

Financial education in the U.S. is a spotty proposition. Fewer than half of states require a personal finance class in high school, and a report from the Council on Economic Education early next year is expected to show almost no progress in that area. Some employers create learning experiences through their benefits departments by offering access to third-party advice. But new employees often default into a target-date fund in their 401(k) plan. That’s not a bad thing, but it means they aren’t learning much about how to actively engage in their long-term financial security.

Advocates of school-based financial education argue that basic lessons in money management could lessen the impact of future recessions by minimizing debt loads and leading people to sound practices like maintaining an emergency fund. Some even believe more financial education could mitigate income inequality. Low-income households struggle most with college loans and high-rate borrowing. Mismanaging personal financial resources accounts for as much as 40% of the income inequality in the U.S., Lusardi says, adding, "You cannot live in today’s society without being financially literate—not if you want a chance to live a decent life.”

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