Financial Capability is Multi-Dimensional; so is Financial Advice

A just-released synopsis of the FINRA National Financial Capabilities survey of close to 30,000 Americans from June to October 2015 showed a stunning lack of financial understanding there; at a time when wealth and income inequality is at an extreme not seen since World War II. But Canadians did not do much better.

Despite impressive economic gains since the survey was first conducted in the US in 2009, only 14% of respondents to 5 financial literacy questions answered all correctly; only 37% could answer four.

By contrast in Canada, the Financial Capability Survey, 2014 asked a longer series of 14 questions on topics such as inflation, debt repayment, banking fees and credit reports.

On average, Canadian adults 62% of the questions correctly, while 31.4% correctly answered 50% of the questions. Only 2.7% provided a correct answer to all 14 questions.

Here are additional highlights of the key financial issues for Americans today, according to their 2016 survey:

• Spending vs. Saving.  Profiles of people more likely to save for the future include those with higher education and income levels.  40% of respondents spend less than their income, 38% spend amounts equal to their income, and 18% spend more than their income. Just under half of the respondents (46%) have set aside three months’ worth of living expenses for emergencies;
• Health Matters.  Over 25% of Americans have avoided some kind of medical service in the past year due to cost concerns. Further, those with unpaid medical bills are more likely to report spending more than their income than those without medical bills (30% vs. 15%, respectively),
• Debt and Homebuyers.  One third of homebuyers have made a down payment of over 20% of the purchase price of the home in the past 5 years; that’s up from 24% in 2009 and 29% in 2012. About 16% percent of mortgage holders have been late at least once with mortgage payments in the last year.
• Consumer Debt.  More than one half of credit card users report paying balances off monthly.
• Student Loan Debt.  Students with loans are having difficulty – 37% have been late with payments at least once in the past year and 25% have been late more than once.
• Many Millennials are not Financially Independent. 36% of those in the age group 18-34 receive financial help from family members who don’t reside with them; this is up from 32% in 2012.
• Retirement Readiness.  Only 39% have tried to figure out what they need to save for retirement; over 55% worry about running out of money in retirement, according to The National Institute on Retirement Security.  This is not surprising as 62% of workers between the ages of 55 and 64 have reported their retirement savings are less than one times their annual income. 
• Gender Differences. Overall, women are more worried about their finances than men:  those aged 35-54 are the most likely to be worried, followed by those 18-34. More than half of those women with incomes of $75,000 or more – the highest income group - are worried about retirement. 
• Multiple Income Sources Matter.  Surprisingly those who are receiving retirement income were most likely not to have difficulty making ends meet; but 95% of these folks have another source of income; while only 55% of employees have another source of income. 
• Planning Matters. People who have long-term goals are more satisfied with their personal finance, less likely to spend more than their income and more likely not to have difficulty making ends meet. Most important, 61% of planners have set aside emergency funds compared to 17% without a plan.  Further, 73% of planners who have planned for time horizons of more than 10 years have tried to calculate their retirement savings needs have a retirement savings account.

One of the cautious conclusions the survey authors came to linked financial literacy to income inequality:  “While speculative, the trends in financial literacy scores suggest a shrinking class of moderately financially literate citizens, just as growing income inequality has led to a shrinking middle class.”

The American report also suggested a more far-sighted approach was required to help: “Both policy and education are needed to broaden access to financial products, protect consumers from predatory practices, and foster greater participation in healthy, life-long financial practices.”

Forward-looking financial advisors will focus their attention to the significant opportunities to add value to families as educators and advocates in helping them understand financial options and apply their knowledge to sound decision-making about their financial futures.

A sweet spot is retirement planning here in Canada.  According to our 2014 survey, almost 60% of Canadian adults do not know how much money they need to save to maintain their desired standard of living during retirement.  Just under 30% are "not very confident" or "not at all confident" that their household income at the time of retirement will be enough.

The American survey defines “financial capability” as “a multi-dimensional concept that encompasses a combination of knowledge, resources, access, and habits.”  Clearly the issues of concern on both sides of the border require multi-dimensional financial advice.

Additional educational resources include MFA – Retirement and Estate Services Specialist^TM Program.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

Refer a Friend	Research	Calculators	Course Trials