While 75% of Americans consider themselves financially savvy, 36% don’t know how, or prefer not, to answer basic financial literacy questions, according to KeyBank’s 2020 Financial Wellness Survey. This Financial Capability Month, Americans are facing new and unprecedented wellness challenges—both financial and health related—due to the spread of COVID-19. With temporary businesses closures and the loss of cash flow for many workers, households are feeling the economic effects.
In light of economic uncertainty, Americans can use some of this time to hone their financial instincts that build on their money smarts, help them prepare for any financial unknown and weather the storm.
“There is a positive correlation between having basic financial literacy skills and making fewer financial missteps in life,” said Chenna Cotla KeyBank Behavioral Economist in KeyBank’s Financial Wellness strategy group. “This points to a clear need for people to seek opportunities to continuously improve their financial literacy skills to avoid financial traps that can jeopardize their overall wellness—particularly in an environment where cash flow could be a concern for many families.”
By asking Americans to answer the big three financial literacy questions1, KeyBank was able to cross-compare people’s financial instincts with their likelihood to commit a financial “faux pas” and their ability to recover quickly from money missteps.
Respondents who answered all financial literacy questions correctly were 29 percentage points less likely to say they had committed a “financial faux pas” at some point compared to those who didn’t answer all of the questions correctly (56% vs. 85%). Respondents who failed to answer all financial literacy questions correctly were also three times more likely commit a financial misstep compared to the respondents who answered all the questions correctly (7 vs. 2). Additionally, of those who were able to answer all financial literacy questions correctly and also reported making a financial misstep, 69% were able to recover within a year, compared to just 42% of those who did not know how to answer the financial literacy questions.
“Strong financial literacy is not only associated with fewer financial missteps, but also with a person’s increased confidence and ability to tackle financial challenges head on,” continued Cotla. “Specifically, 67% of those who correctly answered the financial literacy reported dealing with financial missteps by immediately taking actions to course correct, but only 38% of those who got the questions wrong did the same.”
On the other hand, those who incorrectly answered the financial literacy questions were:
- 3x more likely to not save enough to receive the full employer match in their company’s 401(k) or similar employer retirement program (38% vs 11%);
- 3x less likely to know their credit score or check their credit score often enough (11% vs. 32%);
- 4x more likely to be afraid to check their account balance (42% vs. 9%);
- 5x more likely to draw from investments without realizing the negative tax impact (22% vs. 4%);
- 5x more likely to opt out of insurance coverage, such as self/health insurance, renter’s insurance or pet insurance (38% vs 7%);
- 20x more likely to rely on non-experts to make financial decisions for them, such as parents, children, spouse, etc. (40% vs. 2%); and
- 40x more likely to rush to pay off student loan debt (40% vs. 1%).
“As households try to understand the impacts of COVID-19 on their personal finances and brace for any potential further economic downturn in the months to come, it is important that they sharpen their financial knowledge to enhance their short-term and long-term decision-making,” said Cotla. “Whether you are looking to educate yourself on your own time, access tools that will give you a leg up, or connect with an expert, resources are available to you.”