The Geography of Financial Literacy

Abstract

This paper explores how well equipped today's households are to make complex financial decisions in the face of often high-cost and high-risk financial instruments. Specifically we focus on financial literacy. Most importantly, we describe the geography of financial literacy, i.e., how financial literacy is distributed across the fifty US states. We describe the correlation of financial literacy and some important aggregate variables, such as state-level poverty rates. Finally, we examine the extent to which differences in financial literacy can be explained by states' demographic and economic characteristics. To assess financial literacy, five questions were added to the 2009 National Financial Capability Study, covering fundamental concepts of economics and finance encountered in everyday life: simple calculations about interest rates and inflation, the workings of risk diversification, the relationship between bond prices and interest rates, and the relationship between interest payments and maturity in mortgages. We constructed an index of financial literacy based on the number of correct answers provided by each respondent to the five financial literacy questions. The financial literacy index reveals wide variation in financial literacy across states. Much of the variation is attributable to differences in the demographic makeup of the states; however, a handful of states have either higher or lower levels of financial literacy than is explained by demographics alone. Also, there is a significant correlation between the financial literacy of a state and that state's poverty level. The findings indicate directions for policy makers and practitioners interested in targeting areas where financial literacy is low.

Financial Literacy: The Role of the Local Context

“…However, recent studies have considered macro‐ecological variables characterizing the context where consumers live as factors influencing the degree of financial literacy. Indeed, in the literature, some contributions exist and underline that the area of residence may provide opportunities for obtaining financial information, learning about financial matters, interacting with peers on financial issues, and comparing financial choices (Bumcrot, Lin, and Lusardi ; Guiso, Sapienza, and Zingales , ; Haliassos, Jansson, and Karabulut ; Lachance ).…”

“…Concerning the influence of the economic conditions of households, a strong negative correlation was found in the United States between the mean financial literacy index score for a state and that state's poverty level. States with higher financial literacy scores tend to have lower poverty levels and vice versa (Bumcrot, Lin, and Lusardi ).…”

“…The role of the environment in which people live has been investigated by a few researchers. The findings of such studies have shown that financial literacy is associated with specific features of regions of residence such as traits of urban settings (Haliassos, Jansson, and Karabulut ; Lachance ), the presence of economic distress (Bumcrot, Lin, and Lusardi ), the distribution of social capital (Guiso, Sapienza, and Zingales , ), the degree of trust in financial institutions, proxying the social capital index at a regional level (Ricci and Caratelli ), human capital (Jappelli ), and the generosity of the social security system (Jappelli ).…”

The Sources of Raising Money as the Factor Influencing the Level of Financial Literacy and Degree of the Financial Inclusion

“…And although the level of financial literacy is different in particular countries, it is always unsatisfactory, especially in the times of very rapid development of the financial market [13]. This statement refers to people in developing as well as developed countries [6], to poor and rich, to less and more educated [3] [18], to women and men, to all age groups of societies in particular nations and regions [2] [14] [3].…”

“Pissing in the wind”: racially discriminatory economic policies’ impact on today’s banking status, use of alternative financial services and health outcomes.

“…Awareness of the impact of AFS use. Many studies and interventions suggest that disparities in use of AFS between various populations are due to differences in knowledge of how AFS products work, and the implications of their use (Bumcrot, 2011). In some instances, this may be true.…”