One Word To Describe U.S. National Financial Capability Study: "Unsettling"

"This study has given us a wealth of important—and in some cases, unsettling—data that we can use to help Americans better manage their finances and plan for their futures."

Rick Ketchum, Chairman and CEO, FINRA prepared remarks delivered on December 15, 2009

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Skimming through the National Financial Capability Study released today by FINRA Investor Education Foundation.  I like the fact that it is taking a more expansive view on the issue which shows in the title of the study.  Those who created this survey see financial literacy as only one component of financial capability.  I like the multi-dimensional approach they seem to be taking to this issue, rather than just focusing on specific knowledge:

"Financial capability cannot be measured simply by looking at one indicator, such as demonstrated knowledge of specific terms or concepts. Instead, financial capability encompasses multiple aspects of behavior relating to how individuals manage their resources and how they make financial decisions (including the factors they consider and the skill sets they use). It is a multi-dimensional concept that requires looking at individual behavior from various angles."

Within the report,  financial capability is broken down into its four component parts: 

• Making ends meet
• Planning ahead (rainy day funds, retirement, education)
• Managing financial products (banked and unbanked, non-bank borrowing, credit cards, mortgages and retirement accounts)
• Financial knowledge and decision-making (measuring financial literacy, comparison shopping, obtaining credit reports and checking credit scores, understanding contracts)

Here is the executive summary of the report, which given the economic backdrop of the Great Recession, will not lead you to attempt backflips or exult with shrieks of joy (the "new" reality has that impact sometimes):

This report distills the rich and complex data resulting from the National Survey, a nation-wide telephone survey of nearly 1,500 American adults, focusing on the following four key components of financial capability:

1. Making Ends Meet. Nearly half of survey respondents reported facing difficulties in covering monthly expenses and paying bills.

2. Planning Ahead. The majority of Americans do not have “rainy day” funds set aside for unanticipated financial emergencies and similarly do not plan for predictable life events, such as their children’s college education or their own retirement.

3. Managing Financial Products. More than one in five Americans reported engaging in non-bank, alternative borrowing methods (such as payday loans, advances on tax refunds or pawn shops). And few appear to be knowledgeable about the financial products they own.

4. Financial Knowledge and Decision-Making. While many American adults believed they were adept at dealing with day-to-day financial matters, they nevertheless engaged in financial behaviors that generated expenses and fees and exhibited a marked inability to do basic interest calculations and other math-oriented tasks.  In addition, few compared the terms of financial products or shopped around before making financial decisions.

In general, measures of financial capability are much lower among adults with no post-secondary educational experience and those with household incomes below $25,000 per year, indicating that those populations are most vulnerable. Hispanics and African-Americans, who are disproportionately represented in these education and income segments, also face higher levels of exposure. When available, data from the larger State-by-State Survey will allow for a more in-depth analysis of the statistical relationships between ethnicity, income, education and financial capability.

Six other survey results that you might be interested in:

• Wondering why overdraft and bounced check fees strike such a nerve with consumers? 
  
  • Nearly one-quarter (23 percent) of individuals with checking accounts reported overdrawing those accounts on occasion. Significantly, of those who overdrew
    their accounts, 73 percent reported finding it very or somewhat difficult to cover
    their monthly expenses and pay their bills.

• Wondering what percentage of workers have seen a sharp drop in their income in the past year (and why professional judgment requests have risen so quickly)?
  • "One-third of respondents stated they had experienced a large and unexpected drop in income during the past year.  Workers earning less than $25,000 a year and Hispanics appear to have been especially hard hit, with 41 percent and 43 percent, respectively, reporting a drop in income."

• Wondering how much families are saving for their children's education?
  • "It is widely reported that, over the past decade, tuition and fees at four-year public
    colleges and universities have increased more rapidly than they did during the 1980s
    or 1990s, rising by an average of nearly 5 percent each year (adjusted for inflation).
    With this trend unlikely to abate, an average American family with children can
    expect to dedicate a sizable share of their resources to paying college tuition.
    However, well below half (41 percent) of those who have financially dependent
    children have set money aside for college education."

• What percentage of 18-29 year olds pay off their credit cards in full each month?
  • 51% (see chart on page 15 of the report), also one in four (24%) indicated that they had paid a fee for late payment.

• Wondering if there is a disconnect between what people's perceptions and actions when it comes to financial matters?
  • "When asked how good they are at dealing with day-to-day financial matters (such as managing checking accounts and credit cards and tracking expenses), half of respondents with credit cards and checking accounts (50 percent) gave themselves the top score of 7. However, one-quarter of these respondents separately indicated they engaged in behaviors that generate fees or high costs (such as using credit cards for cash advances, paying late payment or over-the-limit fees or overdrawing their checking accounts)."

• Does financial literacy matter when it comes to measuring financial capability?
  
  • "Financial literacy is found to be strongly correlated with behavior that is indicative of financial capability. Specifically, those with higher literacy were more likely to plan for retirement and to have an emergency fund, and they were less likely to engage in credit card behavior that generates high interest payments and fees..."

Comments

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