A new study finds encouraging signs that the financial capability of the American adult population is improving, even with the pandemic and significant challenges in the job market.
In fact, by many measures of financial capability, American adults generally fared better in 2021 than in the decade before the pandemic, according to FINRA’s triennial National Financial Capability Study (NFCS). Investor Education Foundation. Research also shows, however, that Americans’ financial well-being remains uneven across different demographic groups with several troubling cross-currents.
“Our study adds to a growing body of evidence that many American adults have been able to bolster their personal finances during the COVID-19 pandemic, despite the many economic disruptions it has unleashed,” notes Gerri Walsh, president of the FINRA Investor Education Foundation. “At the same time, research shows that some segments of the population that have historically struggled financially have continued to do so.”
The 2021 NFCS consists of two linked surveys: a state-by-state online survey of 27,118 US adults and an online investor survey of 2,824 US adults who have investments outside of retirement accounts.
Impacts of COVID
Not surprisingly, respondents who experienced a job loss related to COVID were significantly more likely to report feeling financially anxious than those who did not experience such a job loss (73% vs. 51%). They were also more likely to report behavioral signs of financial stress, such as difficult withdrawals from retirement accounts, late mortgage payments and overdrawn checking accounts.
In fact, among respondents with defined contribution plans, 32% of those who experienced a COVID-related layoff or leave took a hardship withdrawal, compared to just 8% who did not experience a layoff. walk or leave.
The percentage of respondents who reported having experienced an unexpected drop in income in the past year is negatively correlated with age. Respondents aged 54 or younger were more than twice as likely as those aged 55 and older to report having experienced a drop in income.
Although not as large as differences by age, the study found notable disparities by race/ethnicity and education in the likelihood that respondents experienced a decline in income. Black and Hispanic respondents were nine percentage points more likely than white respondents to report an unexpected drop in income. A similar gap exists between college graduates and those without a college education.
The increase in unemployment benefits and stimulus payments caused by the pandemic may explain some of the financial resilience documented in the 2021 study. Stimulus funds were most often used to make purchases or pay bills ( 59%). Many Americans added this money to their savings (38%) or used it to pay off debt (33%).
For example, 53% of respondents said they had three months of emergency savings in 2021, compared to 49% in 2018 and 35% in 2009. Additionally, 54% of respondents said they had no difficulty covering their expenses and paying their bills, compared with 50% in 2018 and 36% in 2009.
The proportion of respondents with three months of emergency funds varied widely by income and education levels. Among those with household incomes of $75,000 or more, 75% reported having emergency funds, compared to just 28% among those with incomes below $25,000. Similarly, while 72% of college graduates said they had money set aside for rainy days, only 49% of those with a college education and 38% of those without a college education colleges said they do.
Retirement Account Differences
Differences in the prevalence of retirement accounts by income and education were even more marked. Here, the study found that 83% of non-retired respondents with an income of $75,000 or more reported having some sort of retirement account, either employer-based (like a 401(k) or a pension) or self-employed (like an IRA)—compared to just 18% of people in the lowest income group. Among college graduates, more than three-quarters (78%) reported having a retirement account, compared to only one-third of those without college.
Financial Literacy Key
And like previous years, the study highlights the importance of financial literacy in financial capability, Walsh adds. People with high financial literacy are more likely to engage in positive financial behaviors such as saving and planning for retirement, and less likely to engage in negative behaviors such as expensive methods of borrowing.
For example, respondents with higher financial literacy—scoring above the median on a seven-question financial literacy quiz—spent less than their income (53% vs. 35%) and set aside three months of emergency funds at higher levels (65% vs. 42%). They were also more likely to calculate their retirement savings needs (52% vs. 29% among those with low financial literacy) and to have some type of retirement account (70% vs. 43%) .
In a closing observation, the organization notes that while the 2021 NFCS “portrays a rising tide of financial capability, the pandemic and its potential consequences could prevent many American adults from experiencing smooth financial navigation for some time to come.” Additionally, rising inflation and rising interest rates may create uncertainties that this country has not experienced in the five waves of the SNCA to date.