Can you pass a financial literacy test almost half of adults fail?

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By Creative Media News

  • Half of Americans fail financial literacy test
  • Women, young people have highest failure rates
  • High scorers have more pensions, investments

According to a new study, over half of all Americans fail a financial literacy test that includes three essential questions about interest rates, inflation, and risk.

A test of 3,000 participants, weighted to be nationally representative, revealed that 20% got no answers correct, while another 24% only received one correct response.

According to research conducted by investment firm Abrdn, 30% passed by correctly answering two questions, while 26% aced the test.

According to the firm, young individuals and women had the highest failure rates, with 44% demonstrating low financial literacy, which translates to 23.3 million adults in the UK.

Abrdn examined the accounts of thousands of people who took the test and discovered that those with strong financial literacy, who answered at least two questions correctly, have an average of £20,000 more in their pension and are more likely to get one in the first place.

Furthermore, people with high scores were nearly twice as likely to hold investments as those with low levels, at 39% versus 21%.

Those who answered no questions correctly were nearly twice as likely to have a poor risk tolerance as those with the highest score, 62% versus 34%.

Better-off people, which is skewed towards men and older people, are more likely to have the opportunity to gain financial literacy.

Meanwhile, individuals who amassed riches will have sufficient financial security to invest and take on more significant risks.

The general rule of thumb for whether you can afford to start investing outside of a pension is that you must be debt-free (except for a mortgage) and have an emergency savings fund equal to three to six months of earnings.

Abrdn acknowledged this in the study, stating that other associated factors are likely to influence its findings, such as low salary and socioeconomic background, which affect whether persons with low or high financial literacy have a pension and its amount.

Who tends to have excellent financial literacy scores?

According to Abrdn, men had higher levels of financial literacy than women, with 69% having two or more right answers to the questions above compared to 44% for women.

Thirty-one per cent of males and fifty-six per cent of women had inadequate financial literacy, which meant getting one or no correct answers.

Of those who got nothing right, 13% were men, and 26% were women.

Regarding age, individuals with solid financial literacy were divided as follows: 44 per cent were 18-34, 54 per cent were 35-54, and 67 per cent were 55 and older.

Poor financial literacy was seen among people aged 18 to 34 (56%), 35 to 54 (46%), and 55 and older (33%).

The age groups with no accurate responses were 18-34 (26%), 35-54 (22%), and 55+ (14%).

Meanwhile, Abrdn polled 3,000 persons, who were considered nationally representative, about their savings and investments and their perspectives on the economy and stock market.

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It evaluated them based on product knowledge, likelihood of increasing holdings, capacity to manage savings and investments, risk tolerance, and confidence in their financial condition.

Overall, the scores were 53/100 for the tendency to save, 37/100 for the propensity to invest, 46/100 for the economic outlook, and 45/100 for the tendency to save and invest (a mix of the three).

According to Abrdn, men scored much higher than women, with an average tendency to save and invest of 51/100 compared to 41/100.

Age had no influence, but young people are more likely to invest. Londoners scored the highest, at 51 100, while Scots earned 45 100.

People in Wales scored 43/100, Northern Ireland scored 44/100, Yorkshire and Humberside scored 43/100, and the southwest scored 44/100.

How to Improve Financial Literacy

To combat low financial literacy, Abrdn has urged the government to expand required money education to primary and secondary schools in England and consider developing a new GCSE and sixth form certification focusing on financial skills.

It also advises incorporating personal finance into relevant topics such as arithmetic, economics, citizenship, and food technology, noting that Scotland currently does so in its school curriculum.

The project is part of the campaign ‘The Savings Ladder: A Manifesto to Get Britain Investing’, which previously examined people’s preference for property over pensions as a long-term investment.

Its ideas include:

  • Simplifying Isas.
  • Eliminating stamp duty on UK shares and investment trusts.
  • Triple the minimum pension contribution.
  • Enhancing financial education.

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