An Analysis of the Importance of Personal Finance Topics and the Level of Knowledge Possessed by Working Adults
Volpe, Ronald P., Chen, Haiyang, Liu, Sheen, Financial Services Review
This study attempts to identify the important questions in personal financial literacy and the deficiencies in employees' knowledge in those areas. Surveying benefit administrators at 212 U.S. companies, we found that the participants rate retirement planning and personal finance basics as two important topics where there are deficiencies in employees' knowledge. We also observed deficiencies in other areas such as investments and estate planning. In contrast, employees are relatively well informed about company benefits. The results suggest that educational programs should focus on improving employees' knowledge in areas where deficiencies exist.
© 2006 Academy of Financial Services. All rights reserved.
Jel classification: D14
Keywords: Importance of personal finance topics; Financial literacy among working adults
Prior studies on financial literacy have focused on how knowledgeable Americans are about personal finance. Their findings have shown that Americans possess inadequate knowledge about personal finance issues (see Chen & Volpe, 1998 for a review). However, the results of these studies are weakened because of several limitations. First, many of the past studies used surveys with only a limited number of 5 to 10 questions. Readers must question the reliability of the results. Second, there is little research and agreement among researchers on what important questions should be included in a financial literacy survey. Last, many previous studies have been conducted by financial service companies. These surveys focus on areas related to their business and fail to cover other areas in personal finance. These limitations have made the validity and reliability of past survey instruments questionable. If a person fails a five-question survey on mutual funds, the individual is not necessarily illiterate about mutual funds, let alone about the entire field of personal finance. There exists an urgent need to make improvements on these issues.
This study attempts to improve the validity and reliability of future surveys by identifying important questions that should be utilized in testing literacy in personal finance. The first purpose of this study is to identify important topics in personal finance. Benefit administrators are an excellent source of information to answer these questions in the workplace. The second purpose is to identify the current level of knowledge possessed by employees. Such information helps identify knowledge deficiencies in the workplace and, in turn, helps develop effective educational programs to correct those deficiencies.
Research conducted in the past 40 years indicates that high school and college graduates have inadequate knowledge about personal finance because this group does not have a sound personal finance education (Chen & Volpe, 1998; Vitt, Anderson, Kent, Lyter, Siegenthaler & Ward, 2000). Providing people with remedial training to improve their knowledge in personal finance is an urgent issue in the workplace, as well as in other areas of society. Some organizations recognize that financial literacy is important for one's quality of life and are willing to help educate workers. Other organizations worry that financial illiteracy would negatively impact workers' productivity (Carman, Leech & Grable, 1996), and they provide training on personal finance to improve employees' knowledge (Joo & Garman, 1998a, 1998b; Joo & Grable, 2000). Unlike high schools or colleges, these organizations' primary businesses are not to train people about personal finance but to produce and sell products or services. They can allocate only limited resources to personal finance education. These organizations need to know (1) the most important topics in personal finance and (2) the level of knowledge their employees have. To maximize the effectiveness of personal finance education programs, they should focus only on the important personal finance topics where knowledge levels are relatively low. …