As a group, Americans fail to make the grade when their financial knowledge is tested beyond the ABC's of financial literacy, according to a new comprehensive study commissioned by Northwestern Mutual. In fact, of the questions asked in the study, the vast majority of the more than 1,000 study participants, representing a cross section of Americans, failed to get 60 percent correct.
"Report cards are in and while they get the basics -- Americans fall short when it comes to their larger grasp of some of the more important -- and relevant -- financial matters that can affect their future," said Meridee Maynard, senior vice president of Northwestern Mutual.
The Northwestern Mutual study examined how much the general population knows about a variety of subjects that compose a financial strategy -- matters of saving and investing, risk and protection, and retirement. Elements of the overall study are being used by the company to develop an online interactive test, so the general public can grade their own financial knowledge.
"Our study showed that, yes, Americans get what some might call the ABC's of financial literacy," Maynard said. "That is, when presented with a list of answers to questions, they're able to identify correctly financial terms like asset allocation, diversified portfolio and IRA. But, we would argue that in today's complex world it's simply not enough to know the basics."
For example, according to the Northwestern Mutual study, Americans as a group score the equivalent of failing grades when it comes to their grasp of important financial matters like:
The best long-term protection against inflation and other adverse market conditions (surprisingly, more Americans erroneously pick bonds over stocks).
- The insurance impact of leaving a job (most wrongly believe they will be able to take their group life or disability policies with them).The real costs of nursing-home care (most underestimate and fail to protect against these costs).
- The purpose of 529 plans (less than half know these are for Education funding).
- The concept of index funds (less than 1 in 4 understand the concept of mutual funds that mirror market indexes).
"Financial literacy is indispensable to the long-term well-being of all Americans," Maynard said. "But it requires much more than just knowing the fundamentals. It's the ability to make informed and effective decisions about the use and management of money. Unfortunately, beyond the basics, Americans are coming up short."
A Closer Look: The Report Card
Among the findings of the Northwestern Mutual study:
While most Americans can correctly identify a description of asset allocation, they fall short in knowing how to allocate their assets to achieve their financial goals. For example, only 1 in 3 correctly identifies stocks as the best long-term protection against inflation.
Only 4 in 10 understand there is a significant insurance impact of leaving their job if they have group life or disability coverage.
Less than half understand the benefits of whole life insurance. For example:
- Less than half were aware that a whole life policy can pay dividends
- Only 1 in 4 knows that the cash value these policies earn is tax free.
- Only 1 in 4 have a realistic idea of the cost of a year-long stay in a nursing home; the current average is approximately $75,000, when most estimate the cost to be less than $60,000.
"Clearly, in any teacher's grade book, these kinds of overall scores would indicate a need for improvement," Maynard said.
Ways to Improve
Fortunately, there are steps Americans can take immediately to begin mproving their knowledge.
One easy step is to organize financial strategy into three buckets:* Those matters related to risk and protection* Those regarding savings and investing* And matters regarding retirement and wealth distribution.
Another point to keep in mind is that it's never too early to start building a base of knowledge. Young kids, their parents and teachers will find an introduction to matters of financial literacy at http://www.themint.org .
There also are public libraries and websites where reliable information is available. Northwestern Mutual offers a variety of information at its Learning Center, where people will find the following:* An Articles Library covering topics from business and money practices to insurance and investment strategies * A Glossary of Financial Terms, which is an informal aid to understanding some terms common in dealing with financial matters* A variety of free interactive calculators to help people estimate or compare many aspects of financial well-being
SOURCE Northwestern Mutual