Lorem ipsum dolor sit amet, consectetur Financial Capability among - - PowerPoint PPT Presentation

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aliquam tincidunt dui nec aliquet porttitor.

Lorem ipsum dolor sit amet, consectetur adipiscing elit, aliquam tincidunt dui.

Month Year

Annamaria Lusardi The George Washington University School of Business Academic Director, Global Financial Literacy Excellence Center (GFLEC)

Financial Capability among Young Adults

September 27, 2017

Thanks to NEFE This project would not have been possible without NEFE’s generous support. We are very grateful for this collaboration.

Overview of Millennials

• 70 to 80 million individuals born between the late 1970s and mid-1990s
• This analysis is focused on 23 – 35 year old individuals (in 2015)
• Most diverse generation
• Minorities are broadly represented (38%)
• 11% of all Millennials have at least one immigrant parent
• 57% are female
• Half (51%) are married
• Millennials are highly educated
• 44% have at least a bachelor’s degree
• Will soon makeup the largest share of the labor market
• By 2025, 3 out of 4 workers globally will be Millennials

What Makes Millennials Unique?

Millennials are often referred to as the “instant-gratification generation”

• High expectations in their personal life
• Reliance on technology
• Maintain high confidence despite experiencing or entering the job market during

a recession

* Reference taken from Bishop (2006)

2015 National Financial Capability Study

State by State Survey:

• Supported by FINRA Investor Education Foundation
• Online survey of over 27,000 respondents
• 2015 is the third wave (we also did an analysis on 2012 data)
• Survey includes several indicators of financial capability

Millennials Analysis:

• Analysis focuses on the financial capability of Millennials
• 6,608 total observations

11% 11% 13% 17% 23% 13% 9% 3% 5% 5% 9% 15% 26% 19% 15% 6%

0% 5% 10% 15% 20% 25% 30% Less than $15,000 $15,000-$25,000 $25,000-$35,000 $35,000-$50,000 $50,000-$75,000 $75,000-$100,000 $100K-$150K $150K + Total With college degree or more

Some Initial Statistics: Income Distribution of Millennials

Those with at least a college degree are more likely to have an income over $50,0000 and hold a full time job.

Assets and Investments

Millennials overwhelming are banked and many have retirement accounts.

93% 58% 28% 45% 44%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Banked Any Retirement Account Financial Investments Own Their Home At least A College Degree

Assets and Investments (cont.)

• Many Millennials are financially active.
• This is an important life stage since many have made significant financial

decisions.

• Getting a college degree
• Buying a home
• Contributing to a retirement account
• The assets and investments only show one side of the balance sheet and

provides only a partial representation of Millennials’ finances.

Borrowing on their Assets and Investments

(conditional on having the assets & investments) Have a checking account 90% Overdrew from their checking account 25% Own a home 45% Have a mortgage on their home 70% Have a self-directed retirement account 44% Took a loan from their retirement account (in the 12 months prior to the survey) 19% Made a hardship withdrawal from their retirement account (in the 12 months prior to the survey) 16% Either took a loan or made a hardship withdrawal 23% Have a college degree 44% Have an outstanding student loan 59%

Long Term Liabilities

• Over 70% of Millennials have at least one source of long-term debt (student

loan, home mortgage, car loan)

• 34% have more than one source of outstanding long-term debt.
• Among Millennials with at least a college degree
• 80% have more than one long term debt

Long Term Liabilities: Student Debt

Among Millennials

• 51% of Millennials ages 23-29 have student debt
• 46% of Millennials ages 30-35 still have student debt

Student debt is more prevalent among younger respondents but continues long after

45% 27% 9%

0% 10% 20% 30% 40% 50%

18-34 35-54 55+

Student loan debt by age * Data is taken from total 2015 NFCS data with over 27,000 respondents

Short Term Liabilities: Credit Card Use

43% 20% 13% 15% 51%

0% 10% 20% 30% 40% 50% 60%

Paid the minimum only Was charged a late fee for a late payment Was charged an over the limit fee for exceeding credit line Used credit cards for a cash advance Engaged in any form of expensive credit card behavior (in the last 12 months prior to the survey)

Short Term Liabilities: Use of Alternative Financial Services Millennials show high usage of Alternative Financial Services (AFS) such as payday loans, pawnshops, auto title loans, and rent-to-own products.

34%

% of Millennials who used an AFS product in the last five years prior to the survey

Use of Alternative Financial Services Across Education Level

There is a strong educational divide in AFS usage 41%

No Undergraduate Degree

25%

Have an Undergraduate Degree

Summary Indicators

NFCS has several important indicators to assess financial distress

• Difficulties with keeping up with payments
• Having too much debt
• Concern over ability to repay student loans
• Financial fragility

Financial Distress

Many Millennials report difficulty in keeping up with payments.

23% 23% 26%

20% 23% 25% 28% 30%

Owe more on their home than home's value Have been late with mortgage payments Have unpaid medical bills

Too Much Debt

34% 14% 51%

0% 10% 20% 30% 40% 50% 60%

Disagree 1-3 Neutral 4 Agree 5-7

How strongly do you agree or disagree with the following statement? "I have too much debt right now."

Note: Percentages do not add up to 100% because “don’t know” and “prefer not to say” answers are excluded.

Concerns for Student Debt Repayment

About half of Millennials have a student loan.

48%

Among those, many are concerned about repayment

% of Millennials with a student loan and concerned about repayment

Financial Fragility

33%

I am certain I could come up with $2,000

28%

I could probably come up with $2,000

20%

I am certain I could not come up with $2,000

3% Don’t Know 16%

I could probably not come up with $2,000

“How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?”

32% are financially fragile

Financial Fragility Among Millennials

A full-time job is an important indicator of financial stability.

• Only 41% of Millennials who have a full time job report they certainly could

come up with $2,000 in one month. Millennials at higher levels of education show much lower levels of financial fragility.

• 46% of college-educated Millennials are certain they could come up with

$2,000 in one month.

72% 44% 38% 72% 21% 13% 25% 47% 19% 41%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Numeracy Inflation Risk Diversification Mortgage Bond Prices

Answers to 5 financial literacy questions

% Correct % Don't Know

Financial Literacy Among Millennials

Only 23% answered the Big Three questions correctly (Numeracy, Inflation and Risk Diversification)

Financial Literacy Across Age – 2015 NFCS

13% 18% 24% 27% 35% 36% 38% 37% 44% 47% 51% 42% 0% 10% 20% 30% 40% 50% 60% 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

% answering Big 3 questions correctly

Financial knowledge increases slowly with age/cohort

Perceived and Actual Financial Knowledge

1% 1% 5% 15% 36% 24% 14% 0% 5% 10% 15% 20% 25% 30% 35% 40%

1-very low 2 3 4 5 6 7-very high

How would you assess your overall financial knowledge? 23% 7% 0% 5% 10% 15% 20% 25%

Answered the first three correctly Answered 5 question correctly

Answers to 5 financial literacy questions

Perceived Financial Knowledge Actual Financial Knowledge

Note: Percentages do not add up to 100% because “don’t know” and “prefer not to say” answers are excluded.

74%

Signs of Overconfidence

“I am good at dealing with day-to-day financial matters, such as checking accounts, credit and debit cards, and tracking expenses.”

2% 1% 3% 12% 19% 28% 33%

0% 5% 10% 15% 20% 25% 30% 35% 1-strongly disagree 2 3 4 5 6 7-strongly agree

Note: Percentages do not add up to 100% because “don’t know” and “prefer not to say” answers are excluded.

Considerations on Financial Literacy

• Millennials are very confident about their financial knowledge and their financial

management skills.

• This high confidence does not match with actual financial literacy levels: Less

than a quarter of Millennials show basic financial literacy and only 7% show a high level of knowledge.

• Few Millennials have participated in some form of financial education.

Regression Results

VARIABLES Too much Debt AFS usage Financial Fragility 3 Qs correct

• 0.03*
• 0.16***
• 0.09***

(0.02) (0.02) (0.02) Some college education 0.08***

• 0.01
• 0.06***

(0.02) (0.02) (0.02) College degree 0.04**

• 0.16***
• 0.22***

(0.02) (0.02) (0.02) Female 0.08***

• 0.04***

0.06*** (0.01) (0.01) (0.01) Income shock

• 0.00***
• 0.00
• 0.00

(0.00) (0.00) (0.00) Risk preference - medium

• 0.00

0.06***

• 0.17***

(0.02) (0.02) (0.02) Risk preference - high 0.07*** 0.25***

• 0.31***

(0.02) (0.02) (0.02) Observations 6,615 6,615 6,615 R-squared 0.02 0.09 0.12

Summary: 10 Key Findings

1. Millennials are already financially active. However, looking at assets only, such as savings or investments, provides a limited view of their financial situation. 2. Debt is widespread. Most of Millennials carry short-term or long-term debt or both. 3. Student loans are a major source of debt for college-educated Millennials and most are concerned about their ability to repay student loans. 4. Millennials use expensive methods of borrowing, such as credit cards, payday loans, and pawnshops. 5. There is an educational divide when it comes to the use of Alternative Financial Services (AFS)

6. While many Millennials have retirement accounts, they have already tapped into those accounts and are borrowing from themselves. 7. Millennials feel overly indebted. 8. Millennials typically believe themselves capable of making day-to-day and long-term financial decisions, but there are signs of overconfidence. 9. There is a wide gap between the amount of financial responsibility undertaken by young Americans and their demonstrated ability to manage financial decisions and maximize financial opportunities. 10. Even though Millennials made or are making many decisions related to investments and debt, most of them lack financial literacy and are not aware of their lack of financial knowledge.

Summary: 10 Key Findings

Looking at younger generations: Evidence from PISA

The OECD Programme for International Student Assessment (PISA) in 2015 showed many 15 year old students lacked even basic financial knowledge.

• 22% of students in the US score below the baseline level
• The mean financial literacy score for the US is around the OECD average.
• The average score in the US in 2015 has not improved in the last three years.

B-S-J-G (China) Belgium (Flemish) Canadian provinces Russia Netherlands Australia United States Poland Italy Spain Lithuania Slovak Republic Chile Peru Brazil

380 400 420 440 460 480 500 520 540 560 580 Mean score

Low performance in financial literacy Strong performance in financial literacy

Average performance

• f 15-year-olds in

financial literacy in 2015 PISA

Evidence from PISA (cont.)

Recommendations

• Greater access to financial education and tools starting early could help alleviate the

wide gap between the amount of financial responsibility undertaken and their ability to manage financial decisions.

• Programs aimed at improving financial knowledge among Millennials could help

Millennials better manage debt, improve their financial safety net and increase their financial security into the future.

• Strategies for debt management may be particularly needed in order to guide heavily

indebted young adults toward good management of their financial obligations.

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aliquam tincidunt dui nec aliquet porttitor.

Lorem ipsum dolor sit amet, consectetur adipiscing elit, aliquam tincidunt dui.

Month Year

The report and paper cited in this presentation are available at www.gflec.org

Thank You!