Financial Literacy Reduces Money Stress, Finra Study Finds

A new report from Finra and George Washington University reveals most Americans were anxious about their finances — even before the pandemic.

By Dorothy Hinchcliff

Advisors who increase the financial literacy of their clients may help them feel less anxious and stressed about money.

A new study from the Finra Investor Education Foundation and the Global Financial Literacy Excellence Center (GFLEC) at George Washington University found a 12 percentage-point difference in financial anxiety between those who were deemed financially literate and those who were not.

Among those who could answer all the “Big 3” financial literacy questions correctly, 51% felt anxious when thinking about personal finances versus 63% who didn’t answer them right. The “Big 3” questions are widely used and assess respondents’ basic understanding of interest rates, inflation and risk diversification.

The researchers based their empirical analysis on the Finra Foundation’s 2018 National Financial Capability Study and complemented it with findings from focus groups done in 2020. The report’s authors included Andrea Hasler, assistant research professor in financial literacy, and Annamaria Lusardi, professor or economics and accountancy, both at GWU, and Olivia Valdres, associate principal research analyst at the Finra foundation.

“We also find that financial anxiety and stress can have long-term consequences: those who are financially anxious and stressed are less likely to plan for retirement,” the report said.

“We also find that financial anxiety and stress can have long-term consequences: those who are financially anxious and stressed are less likely to plan for retirement.”

The research observed that even before the Covid-19 pandemic, a substantial share of all households were anxious and stressed about their personal finances. About 31% said they probably or certainly could not come up with $2,000 if an emergency rose during the next month, and almost half did not have an emergency fund for three months’ of expenses.

‘These findings are sobering when considering that they reflect household circumstances before the COVID-19 pandemic hit. Over the past year, American’s financial struggles have likely been further exacerbated and their anxiety and stress levels worsened,” the report said.

Not surprisingly, the study found that lack of assets, high debt and money management challenges are major contributing factors to high levels of financial anxiety and stress.

While older people, aged 50 to 62 in the study, tend to worry less about their finances than those who are younger, more than half (51%) still worry about money.

The study included Americans age 21 to 62, since people under 21 are likely to be students relying on their parents and those over 62 may be getting Social Security. The age limits resulted in the researchers including 19,108 respondents from the Finra study. Of that total, 60% were classified as financially anxious and 50% were financially stressed.

The research also found that greatest levels of anxiety and stress were expressed by women, young adults, those with lower income, those with more financially dependent children, those who are not married and those who are unemployed.

The report noted that most focus group participants reported that they are monitoring and limiting their spending and expenses on daily basis. Younger respondents mentioned that financial anxiety has affected their career or educational choices.

“Building financial resilience can lessen the experiences of financial anxiety that affect so many Americans,” the report concluded. “Increased resilience as part of the recovery path out of the pandemic will increase the likelihood that American households will be able to weather future financial shocks and could increase the financial well-being and, by extension, the overall well-being of Americans.”



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