Editor's Note: This story originally appeared on SmartAsset.com.
Individuals with higher levels of financial literacy tend to adhere to better financial practices — such as having an emergency fund and planning for retirement — and are also more likely to build wealth further by investing in the stock market.
Many Americans, however, lack financial knowledge and do not follow financial best practices. Less than 50% of American adults have set aside three months’ worth of emergency funds, only 41% have tried to figure out retirement savings needs and just 32% have investments apart from retirement accounts.
In light of Financial Literacy Month this April, SmartAsset took a closer look at financial literacy in the U.S.
In this study, we discuss the growing number of states with financial education standards along with how adults fare when asked a series of economics and personal finance quiz questions. Using data from the Financial Industry Regulatory Authority (FINRA) Foundation, the Council for Economic Education and Experian, we then identify the states where residents are most and least financially literate.
For details on our data sources and how we put all the information together to create our findings, check out the Data and Methodology section below.
Financial Education and Literacy in the U.S.
The number of states requiring that personal finance be included in their education standards has grown substantially over the past two decades. According to data from the Council for Economic Education, only 21 states included personal finances in their K-12 standards in 1998, relative to 45 states in 2020.
Though the prevalence of financial education in the U.S. is growing, many adults struggle when asked to respond to questions covering fundamental concepts of economics and personal finance. The FINRA Foundation’s National Financial Capability Study asks respondents a series of six quiz questions, shown below. Multiple choice answers are shown below the questions.
Correct answers are listed at the end of the study in the Data and Methodology section.
- Mortgage Question: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
- Interest Rate Question: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) More than $102
b) Exactly $102
c) Less than $102
- Inflation Question: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a) More than today
b) Exactly the same
c) Less than today
- Risk Question: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
- Compound Interest in Debt Question: Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?
a) Less than two years
b) At least two years but less than five years
c) At least five years but less than 10 years
d) At least 10 years
- Bond Price Question: If interest rates rise, what will typically happen to bond prices?
a) They will rise
b) They will fall
c) They will stay the same
d) There is no relationship between bond prices and the interest rate
On average, adults surveyed were able to answer only half (i.e., three) of the above questions correctly. In fact, only 7% of adults were able to correctly answer all six questions.
The compound interest in debt and bond price questions were the most difficult for respondents. Less than 1 in 3 respondents were able to correctly answer either question. Meanwhile, more than 70% of adults correctly answered both the mortgage and interest rate questions.
Here are the states where Americans are most financially literate.
1. North Dakota
Financial Knowledge & Education Score: 100.00
Financial Practices Score: 90.79
Ranking Index: 95.39
Financial Knowledge & Education Score: 84.78
Financial Practices Score: 100.00
Ranking Index: 92.39
3. New Hampshire
Financial Knowledge & Education Score: 96.74
Financial Practices Score: 69.08
Ranking Index: 82.91
Financial Knowledge & Education Score: 73.91
Financial Practices Score: 88.82
Ranking Index: 81.36
5. South Dakota
Financial Knowledge & Education Score: 93.48
Financial Practices Score: 62.50
Ranking Index: 77.99
Financial Knowledge & Education Score: 91.30
Financial Practices Score: 59.87
Ranking Index: 75.59
Financial Knowledge & Education Score: 81.52
Financial Practices Score: 67.11
Ranking Index: 74.31
Financial Knowledge & Education Score: 68.48
Financial Practices Score: 74.34
Ranking Index: 71.41
Financial Knowledge & Education Score: 52.17
Financial Practices Score: 90.13
Ranking Index: 71.15
Financial Knowledge & Education Score: 65.22
Financial Practices Score: 76.97
Ranking Index: 71.10
Next, we’ll skip down the list to the least financially literate states.
Financial Knowledge & Education Score: 32.61
Financial Practices Score: 28.95
Ranking Index: 30.78
Financial Knowledge & Education Score: 60.87
Financial Practices Score: 0
Ranking Index: 30.43
Financial Knowledge & Education Score: 20.65
Financial Practices Score: 34.87
Ranking Index: 27.76
Financial Knowledge & Education Score: 22.83
Financial Practices Score: 22.37
Ranking Index: 22.60
Financial Knowledge & Education Score: 13.04
Financial Practices Score: 26.32
Ranking Index: 19.68
Financial Knowledge & Education Score: 35.87
Financial Practices Score: 3.29
Ranking Index: 19.58
Financial Knowledge & Education Score: 9.78
Financial Practices Score: 25.66
Ranking Index: 17.72
Financial Knowledge & Education Score: 6.52
Financial Practices Score: 22.37
Ranking Index: 14.45
Financial Knowledge & Education Score: 9.78
Financial Practices Score: 17.11
Ranking Index: 13.44
50. West Virginia
Financial Knowledge & Education Score: 0.00
Financial Practices Score: 7.89
Ranking Index: 3.9
Data and Methodology
To find the states where Americans are most and least financially literate, we examined data for all 50 states and the District of Columbia across two categories that include seven individual metrics:
- Financial knowledge and education. For our financial knowledge and education index, we analyzed the state’s financial education score, percentage of adults that believe they have a high level of financial knowledge and percentage of correctly answered personal finance quiz questions. The state’s financial education score comes from the Council for Economic Education. Data for the other two metrics comes from the Financial Industry Regulatory Authority (FINRA) Foundation’s 2018 National Financial Capability Study.
- Financial practices. For our financial practices index, we analyzed average credit score, percentage of adults with a three-month emergency fund, percentage of adults paying their credit card bill in full monthly and percentage of adults regularly contributing to an IRA or 401(k). Average credit score figures come from Experian. Data for the other three metrics comes from the Financial Industry Regulatory Authority (FINRA) Foundation’s 2018 National Financial Capability Study.
We created our final rankings by first ranking each state for each individual metric. Then we averaged the rankings across the two categories listed above. For each category, the state with the highest average ranking got a score of 100. The state with the lowest average got a score of 0. Finally, we created our final ranking by finding each state’s average score across the two categories.
The answers to the FINRA Foundation NFCS quiz questions are as follows:
- Mortgage Question – a) True
- Interest Rate Question – a) More than $102
- Inflation Question – c) Less than today
- Risk Question – b) False
- Compound Interest in Debt Question – b) At least two years but less than five years
- Bond Price Question – b) They will fall
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