How Does Your State Rank When It Comes to Financial Literacy?
How confident are you when it comes to making key financial decisions like saving and investing, buying a home, and planning for retirement?
For many Americans, goals like these may be out of reach due to a lack of understanding of the fundamentals of personal finance. Too many Americans live paycheck to paycheck, failing to grasp the basics of financial management and finding themselves trapped in a cycle of debt and overspending. Financial professionals, investment advisors, educators and policymakers recognize that breaking that cycle requires setting improved financial literacy education as a critical national priority.
But addressing the challenge begins with accurately diagnosing the problem. The “National Report Card on Adult Financial Literacy,” published at the end of 2016, expands our understanding of the extent of the financial literacy challenge across all 50 states.
Prepared by the Center for Financial Literacy at Champlain College in Burlington, Vermont, the 2016 national report card compiles data from public, private and non-profit sources to paint a holistic portrait of how individual states stack up when it comes to their residents’ financial knowledge and behavior.
The report makes it clear that boosting financial literacy among Americans is a matter of vital importance:
Employee pension plans are disappearing and being replaced by defined contribution retirement programs, which impose greater responsibilities on adults to save and invest. Should a significant number of retirees fail to do so, they could become a significant economic burden on our society….
And the report points out that those with greater financial literacy make better financial choices, such as putting aside savings for a rainy day or retirement, and avoid costly choices such as using payday loans, or having high-cost and higher levels of debt and delinquency rates.
Checking in at a hefty 250+ pages, the report assigns letter grades to each state based on 59 separate data points from 18 sources, including the Federal Reserve, U.S. Census Bureau, Pew Charitable Trusts, Financial Industry Regulatory Authority (FINRA) Investor Education Foundation and others, organized into five key categories:
· Financial knowledge, measuring understanding of basic financial concepts like interest, diversification and inflation
· Total credit, breaking down the type and amount of debt held by individuals and households
· Savings and spending, examining how consumers handle a budget, use bank accounts, and save for emergencies and education
· Retirement readiness and other investing, tracking Americans’ progress at saving for their future, confidence in their retirement outlook and investing outside of retirement.
· Protection and insurance, detailing how Americans prepare for financial shocks and health care needs through insurance.
The following chart provided in the Champlain report lists the top 10 and bottom 10 performing states when it comes to financial literacy:
Top 10 States
Minnesota
Utah
Hawaii
Wyoming
New Hampshire
Iowa
Vermont
Alaska
Massachusetts
Wisconsin
Bottom 10 States
New Mexico
West Virginia
Texas
Georgia
Florida
Alabama
Oklahoma
Arkansas
Louisiana
Mississippi
It’s important to note, however, that while some states may be doing better than others, even those with relatively higher grades have substantial room for improvement. Indeed, the four highest ranked states on that list achieved only “A minus” grades, with no state receiving an “A.”
Which is to say that those states with high grades aren’t necessarily perfect it comes to financial literacy — they’re just doing less poorly. As the report notes: “We want to remind every state that grading on a curve will result in some grade inflation…. Looking better than your peers should not be an excuse for maintaining things as they are today.”
Lagging financial literacy isn’t just a problem for individuals and households — it also could have implications for the broader economy, experts suggest. A lack of knowledge about credit, investing and financial planning were contributing factors in the most recent economic downturn, says John Pelletier, director of the Champlain Center for Financial Literacy and a former financial industry leader.
“The Great Recession demonstrated that our citizens struggle when making complex financial decisions that are critical to their well being,” Pelletier says. “Some of our economic problems were created by bad actors, focused on personal gain, but so many others were created by good people making poorly informed personal financial decisions.”
Finally, the National Report Card on Adult Financial Literacy is useful not only for policymakers and educators, but may also be a helpful resource for individuals and families who would like to learn more about how they can boost their own financial capability.
One way to improve financial literacy among adults is to improve financial literacy among younger individuals. The SIFMA Foundation is a leader in providing financial education to families across the US. SIFMA Foundation programs such as The Stock Market Game start early in life to lay the groundwork for individuals’ long-term financial independence. Parents can use the program with their children or urge their child’s teachers and principal to take advantage of The Stock Market Game at stockmarketgame.org. The SMG is the nation’s most effective in-school financial education program, reaching 600,000 students each year, and it’s also available to parents for at-home use.
Importantly, the report emphasizes that it’s not enough to simply develop knowledge about financial literacy and capability — the critical step is learning how to apply that knowledge through behavioral change and sound decision-making.
Check out the full report for more information on how your state ranks, and use the findings to start thinking about how you can improve your own financial situation.
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