Today you may hear a number of terms being used in discussions about people and money management: financial literacy, financial responsibility, and financial capability.

What exactly do these terms mean? Jump$tart Coalition for Personal Financial Literacy defines financial literacy as the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime security.¹

Students
The 2008 national Jump$tart survey of high school seniors was the sixth such biennial survey and completed the first 10 years of measuring financial literacy in the United States. In 2008, the Jump$tart Coalition also conducted its first national survey designed to measure the financial literacy of college students. The two surveys present contrasting results.

The financial literacy of high school students has fallen to its lowest level ever, with a score of just 48.3 percent. However, the average score for college students on the same 31-question exam was 62.2 percent, nearly 15 percentage points above that of high school seniors. In fact, if measured on the high school senior base of 48.3 percent, college students did nearly 29 percent better. In addition, scores improved for every year of college, with seniors averaging 64.8 percent.

The good news is that American college graduates are close to being financially literate and probably will be so with more life experience. The bad news is that just 25 percent of our young adults are graduating from college and this number appears to have stabilized. This means that 75 percent of young American adults are likely to lack the skills needed to make beneficial financial decisions.

There are still many important concepts that are not getting through to the next generation.

• Only 16.8 percent of high school seniors and 19.2 percent of college students feel that stocks are likely to have higher average returns than savings bonds, savings accounts and checking accounts over an 18-year period.
• Just 27.3 percent of high school seniors and 39 percent of college students realize that interest on a savings account is taxable if one’s income is high enough.
• Only about 40 percent of high school seniors realize that their own health insurance could stop if their parents become unemployed. Nearly 70 percent of college students answered this question correctly.²

Jeffrey Arnett, PhD., the originator of the theory of emerging adulthood, defines financial responsibility “as a final measure of life skills important for adult functioning. These skills include being able to manage finances, make essential purchases (e.g., food, clothes, health insurance), pay bills, and assure safe and healthy living conditions (e.g., having a place to live, being able to pay for heat).”³

FINRA Investor Education Foundation identifies four components of financial capability: making ends meet, planning ahead, managing financial products, and financial knowledge and decision-making.

Adults
The 2009 National Survey, a nationwide telephone survey of nearly 1,500 American adults conducted by the FINRA Investor Education Foundation, gathered the following data regarding financial capability:

1. Making ends meet: Nearly half of the survey respondents reported facing difficulties in covering monthly expenses and paying bills.
2. Planning ahead: The majority of Americans do not have “rainy day funds” set aside for unanticipated financial emergencies and similarly do not plan for predictable life events, such as their children’s college education or their own retirement.
3. Managing financial products. More than one in five Americans reported engaging in non-bank, alternative borrowing methods (such as payday loans, advances on tax refunds, or pawn shops). And few appear to be knowledgeable about the financial products they own.
4. Financial knowledge and decision-making. While many American adults believed they were adept at dealing with day-to-day financial matters, they nevertheless engaged in financial behaviors that generated expenses and fees and exhibited a marked inability to do basic interest calculations and math-oriented tasks.⁴

¹(2007) National Standards in K-12 Personal Finance Education, 1, www.jumpstart.org/assets/files/standard_book-ALL.pdf.
²Mandell (2008) The Financial Literacy of Young Adults, 5, www.jumpstart.org/assets/files/2008SurveyBook.pdf.
³Arnett (2000) Emerging adulthood: A theory of development from the late teens through the twenties. American Psychologist, 55, 469-480.
⁴(2009) Financial Capability in the United States, 5, www.finrafoundation.org/resources/research/p120478.