September 13 — According to a new report by the TIAA Institute and the Global Financial Literacy Excellence Center at the George Washington University School of Business found a financial literacy gap among millennials. While most millennials use smartphones to manage personal finances, fintech does not necessarily improve personal finance management practices, the data shows.
The Millennial Financial Literacy and Fintech Use: Who Know What in the Digital Era study utilized the TIAA Institute-GFLEC 2018 Personal Finance Index to examine the personal finance knowledge of millennials. The generation answered 44 pe4rcent of P-Fin Index questions correctly, compared to 50 percent of the U.S. adult population. Moreover, younger millennials (ages 18-27) only answered 41 percent of index questions correctly, compared to 47 percent of older millennials (ages 28-37).
Financial literacy among both older and younger millennials is lowest in the areas of comprehending risk and insuring, with an understanding of insurance seeing the greatest gap between younger and older millennials. Financial literacy is highest in the area of borrowing and debt management for both millennial age groups.
The report also examined how millennials use technology to manage their personal finances and the effect of financial technology on financial outcomes. Approximately 80 percent of millennials use their smartphone for transactions such as paying bills and depositing checks, and 90 percent use their phones to gather information and track spending.
“The low level of financial literacy among millennials speaks of the importance of equipping this large generation with the knowledge and skills that are needed to make financial decisions in the digital era,” said Annamaria Lusardi, academic director at GFLEC and the Denit Trust chair of economics and accountancy at GW. “This study shows that fintech users have different needs and characteristics, providing many opportunities for innovation for fintech developers.”
While fintech offers a convenient way to manage finances, users do not always make savvy financial decisions, the report shows. Almost 30 percent of millennials who use their smartphones to make mobile payments report overdrawing their checking accounts, compared with 20 percent who do not make mobile payments. Further, one-quarter of those who track spending with their smartphones report overdrawing their accounts, compared with 20 percent of those who do not track spending via their smartphones.
“The millennials oversample in this year’s P-Fin Index sheds a light on the use of mobile technology, and the impact that it has had on an increasingly influential generation,” said Stephanie Bell-Rose, head of TIAA Institute. “As technology continues to develop ways to make our lives easier, it is clear that we cannot exclusively rely on it to guide us through our financial lives. Our research underscores the importance of financial literacy and its complementary relationship with fintech in producing good outcomes.”
The P-Fin Index examines financial literacy across eight areas of personal finance in which individuals routinely function. The survey provides an indicator of overall personal finance knowledge and understanding. The 2018 survey leveraged a special set of questions to examine millennial fintech use and its impact on personal finance. The report was authored by Paul Yakoboski, senior economist at TIAA Institute; and Lusardi. The full report is available here.