How Financially Lit(erate) Is Your State?

What causes some of us to make good financial decisions while others make poor ones? In many cases, it’s the level of financial literacy we have.

But what is financial literacy? There's no single, agreed-upon definition. But it essentially refers to the knowledge of and familiarity with the key categories related to personal finance. That includes things like:

• budgeting,
• investing,
• insurance,
• college funding,
• saving for retirement, and
• tax planning.

Financially literate people make better choices in all these areas.

While it’s easy to understand the concept of financial literacy, attaining it is another story. In fact, about two-thirds of American adults can’t pass a basic financial literacy test. And the U.S. is tied for 14th in the world in the percentage of adults who are financially literate.

We only have to look back to the subprime mortgage disaster -- which helped usher in the Great Recession -- to see the results of financial illiteracy. Unscrupulous lenders offering “teaser” rates certainly contributed to the problem. But ill-informed borrowers failed to grasp the terms of their loans and their own capacity to repay those loans.

Beyond the mortgage crisis, the consequences of low financial literacy are numerous and worrisome:

• Spending more than household income.
• Accumulating high household debt.
• Taking out payday loans at exorbitant interest rates.
• Not building an emergency fund.
• Paying only the minimum on credit card balances.
• Not comparison shopping when getting a credit card.
• Making ill-advised investment decisions.
• Not taking advantage of a 401(k) or similar retirement plan.
• Not being properly insured.

These problems don't stem exclusively from financial illiteracy. Sometimes our circumstances force us to make moves that are less than desirable. But lack of financial knowledge can certainly play a big role in many situations.

Some states are more financially literate than others

As we’ve seen, our national picture of financial literacy isn't very positive. But on a state-by-state level, the situation is mixed. Some states do a better job of educating young people on financial matters. And those states produce adults who demonstrate wise financial behavior.

There are two factors that contribute to a state's financial literacy score. We'll look at them separately.

Financial education for young people

In our country’s high schools, financial education is, to use a non-technical term, all over the place. Currently, 17 states require a personal finance course to graduate high school.

While this number seems low, it does represent some progress -- in 1998, only one state required such a course. Today, this requirement is on the books in Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Michigan, Missouri, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Tennessee, Texas, Utah, and Virginia.

Still, this doesn’t tell the whole story about financial education across the country. While only those 17 states require a personal finance class for graduation, most others offer some type of financial course in their curriculum. For example, some states require that personal finance topics be taught in other classes, such as economics, civics, family and consumer sciences, business, life skills, career readiness -- even math.

Overall, 45 states require some type of personal finance instruction in the K-12 standards.

But does that instruction make a difference later in life?

Adult financial literacy

Though financial education in schools is important, it doesn't always predict financial literacy among adults. Four states with the “gold standard” of financial education -- completion of a personal finance course as a requirement for graduation -- are in the bottom 10 states in financial literacy. (Those states are Alabama, Arkansas, Georgia, and Texas.)

So why is there a weak connection between classroom education and real-life mastery of financial skills?

For one thing, repetition -- or lack of it -- may be an issue.

Counting high school and college, you might take six years of Spanish -- but if you never use it afterwards, how fluent will you be? In some ways, studying personal finance is similar to learning a new language. Without repetition, fluency drops.

Demographic, social, familial, and personal factors all play a role in one’s development of strong financial literacy skills. But geography may also be relevant. Consider the list below. If you live in one of these states, you and your co-residents are leading the country in financial smarts.

Ultimately, you live where you live for any number of reasons -- roots, family, employment, weather, and so on. If you’re fortunate enough to live in a state that stresses financial literacy in schools and whose residents are well-informed about financial and investment matters, you have an advantage when it comes to finance smarts.

How to boost your financial literacy

Whether your state has a high or low degree of financial literacy, you can boost your own. Here are a few resources you may want to check out:

• MyMoney.gov has useful tips on borrowing, saving, spending, and investing. You can also find suggestions on helping your elderly family members avoid financial abuse.
• FederalReserveEducation.org offers a variety of educational materials on financial and economic issues.
• CashCourse.org, from the National Endowment for Financial Education, provides free online education courses, customizable financial tools, and more.
• Khanacademy.org provides free financial education with the goal of helping regular people make sense of complex concepts.

And of course, don’t forget about us. All of the content on The Ascent is made available for free. This includes hundreds of financial product reviews as well as jargon-free advice on how to navigate getting out of debt, amp up your savings, find an online stock broker, and more.

There’s no shortage of assistance available when you want to upgrade your financial literacy. But it’s up to you to get started.