A new study finds encouraging signs of improvement in the U.S. adult population’s financial capability even with the pandemic and substantial challenges in the labor market.
In fact, on many measures of financial capability, U.S. adults generally fared better in 2021 than in the decade leading up to the pandemic, according to the FINRA Investor Education Foundation’s triennial National Financial Capability Study (NFCS). The research also shows, however, that Americans’ financial wellbeing remains uneven across different demographic groups with several troubling crosscurrents.
“Our study adds to a growing body of evidence that many U.S. adults were able to fortify their personal finances during the COVID-19 pandemic, despite the many economic disruptions it has triggered,” notes Gerri Walsh, President of the FINRA Investor Education Foundation. “At the same time, the research shows that some segments of the population that have historically struggled financially continued to do so.”
The 2021 NFCS consists of two linked surveys—a state-by-state online survey of 27,118 U.S. adults and an online investor survey of 2,824 U.S. adults who have investments outside of retirement accounts.
COVID Impacts
Not surprisingly, respondents who experienced COVID-related job loss were much more likely to report feeling financially anxious than those who did not experience such job loss (73% versus 51%). They were also more likely to report behavioral signs of financial stress, such as hardship withdrawals from retirement accounts, late mortgage payments and overdrawn checking accounts.
In fact, among respondents with a defined contribution plan, 32% of those who experienced a COVID-related layoff or furlough made a hardship withdrawal, compared with only 8% who did not experience a layoff or furlough.
The percentage of respondents who reported having an unexpected income drop in the past year correlates negatively with age. Respondents age 54 or younger were more than twice as likely as those age 55 and older to report having an income drop.
While they’re not as large as the differences by age, the study found notable disparities by race/ethnicity and education in the likelihood of respondents to have experienced an income drop. Black and Hispanic respondents were nine percentage points more likely than white respondents to report an unexpected income drop. A similar gap exists between college graduates and those without a college education.
Enhanced unemployment benefits and stimulus payments prompted by the pandemic may account for a portion of the financial resilience documented in the 2021 study. Stimulus funds were most frequently used to make purchases or pay bills (59%). Many Americans added the money to savings (38%) or used it to pay down debt (33%).
For instance, 53% of respondents reported having three months of emergency savings in 2021, compared with 49% in 2018 and 35% in 2009. Further, 54% of respondents said they did not find it difficult to cover expenses and pay bills, compared with 50% in 2018 and 36% in 2009.
The proportion of respondents with three months of emergency funds varies greatly by income and education levels. Among those with household incomes of $75,000 or more, 75% reported having emergency funds, compared with only 28% among those with incomes below $25,000. Similarly, while 72% of college graduates reported setting aside rainy-day funds, only 49% of those with some college and 38% of those with no college reported doing so.
Retirement Account Differences
Differences in the prevalence of retirement accounts by income and education were even starker. Here, the study found that 83% of non-retired respondents with incomes of $75,000 or more reported having some kind of retirement account—either employer-based (such as a 401(k) or pension) or independent (such as an IRA)—compared with just 18% of those in the lowest income group. Among college graduates, more than three-quarters (78%) reported having a retirement account, compared with only a third of those with no college.
Financial Literacy Key
And as in previous years, the study underscores the importance of financial knowledge in financial capability, Walsh adds. Individuals with high financial literacy are more likely to demonstrate positive financial behaviors such as saving and planning for retirement, and less likely to engage in negative behaviors such as expensive borrowing methods.
For instance, those respondents with higher financial literacy—scoring above the median on a seven-question financial literacy quiz—spent less than their income (53% versus 35%) and set aside three months’ worth of emergency funds at higher levels (65% versus 42%). They were also more likely to calculate retirement savings needs (52% compared with 29% among those with lower financial literacy) and to have some type of retirement account (70% versus 43%).
In a concluding observation, the organization notes that while the 2021 NFCS “portrays a rising tide in financial capability, the pandemic and its eventual aftermath may prevent many U.S. adults from experiencing smooth financial sailing for some time to come.” Moreover, rising inflation and interest rates may create uncertainties not experienced in this country during the five waves of the NFCS to date.
- Log in to post comments