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.

The Economic Importance of Financial Literacy: Theory and Evidence

“…These findings might suggest that financial literacy is more easily acquired via interactions with others, in the workplace or in the community. 27 Relatedly, there are also important geographic differences in financial literacy; for example, Fornero and Monticone (2011) report substantial financial literacy dispersion across regions in Italy and so does Beckmann (2013) for Romania Bumcrot, Lin, and Lusardi (2013) report similar differences across U.S. states.…”

Financial Literacy: The Role of the Local Context

“…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 ).…”

An Analysis of Financial Literacy and Household Saving among Fishermen in Indonesia

“…While Bumcrot, Lin, and Lusardi (2013) measured the financial literacy index by using five questions about interest rates, inflation, risk diversification, the bond's price, and mortgages.…”