Academic journal article Business Economics

Gauging the Financial Capability of Americans

Academic journal article Business Economics

Gauging the Financial Capability of Americans

Article excerpt

There is an increasing interest in the economic and financial knowledge of the public. Former Federal Reserve Chairmen Greenspan and Bernanke often stressed the importance of improved economic and financial knowledge of the general public. Recent survey results from the 2012 National Financial Capability Study provide a rich source of information on the state of financial capability of Americans. In this paper we examine the actual knowledge of individuals, investigate how they self-assess their financial capability and knowledge, and analyze the way these relate to financial outcomes. We also examine the way these measures relate to demographic variables. We find that there is room for improvement in financial knowledge, decisions, and capability, which varies among demographic groups and suggest measures for such improvement.

doi: 10.1057/be.2015.24

Keywords: financial knowledge, National Financial Capability Study, financial education, demographics


The financial skill of the American public has been a focus of attention in the media and among policymakers in the wake of the financial crisis and the recession that followed. Numerous interacting groups have a stake in the issue at hand, and all can benefit from knowing more about the state of financial capability of individuals and households. The rise in foreclosures as housing prices fell was one of many indicators of financial distress that, in part, were blamed on poor financial decisions by individuals and households. It is not a surprise that financial capability has become a timely issue.

The primary group of stakeholders, of course, is individuals or households who make decisions about spending, savings, borrowing, investing, and insuring. The fact that the financial marketplace is becoming more complicated heightens concerns over people's ability to make financial decisions. For example, the growth of defined contribution rather than defined benefit pension plans requires more employees to be more actively engaged in their retirement planning. A far wider range of mortgage products exists compared with the limited range of choices available a few decades ago. Increased financial complexity suggests that not only some minimal level of financial capability is needed to navigate the financial marketplace, but also that the level should be rising over time, given the increase in the range and complexity of financial products and decisions that individuals and households encounter.

Stakeholders on the other side of the spending, savings, borrowing, investing, and insuring transactions are financial institutions, such as banks, credit unions, insurance companies, and mutual fund companies. Improved knowledge of the clients' and customers' financial capabilities can lead to improved products and business strategies.

Policymakers and regulators are a third group with a stake in this matter. In many ways they set the rules of engagement for households and businesses when they interact in the financial marketplace. Setting the appropriate policies and regulatory environment requires an understanding of what people know or do not know and the decisions that they make. Major federal legislation in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (known more simply as "Dodd-Frank") was enacted in July 2010. Dodd-Frank also created the Consumer Financial Protection Bureau (CFPB). As stated on the CFPB website: "Our mission is to make markets for consumer financial products and services work for Americans--whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products." (1)

Stakeholders also include the not-for-profit organizations that have either a direct or indirect interest in financial capability. These would include, for example, the American Savings Education Council, the American Bankers Association, and the Consumer Federation of America, among many. …

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