New report finds only 16% of millennials qualify as ‘financially literate’

For a new report on financial literacy, Americans were asked three “very fundamental questions” to test financial literacy.

Among millennials, only 16% correctly answered all three.

Dr. Andrea Hasler, one of the authors of the report, appeared on Yahoo Finance’s “On the Move” to discuss the findings. "The problem here is that financial literacy is highly linked to money management behavior and saving and planning for retirement," she says.

The multiple choice questions covered broad concepts of numeracy, inflation, and diversification:

1) Suppose you had $100 in a savings account, and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? Answers: a) More than $102; b) Exactly $102; c) Less than $102; d) Do not know; e) Refuse to answer.

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? Answers: a) More than today; b) Exactly the same; c) Less than today; d) Do not know; e) Refuse to answer.

3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” Answers: a) True; b) False; c) Do not know; d) Refuse to answer.

Even the millennials who self-identified as financially literate struggled. Only 19% of that group were able to answer the three questions correctly. (The answers were “a”; “c”; and “b.”) 

RELATED: Take a look at these seven things people think are bad for your finances but actually aren't:

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7 things people think are terrible for their finances that actually aren't

1. Conquering smaller debts first

Despite the conventional wisdom that paying down high-interest debt should always be prioritized, research from the Harvard Business Review suggests otherwise.

Strictly looking at the numbers, it's smartest to pay down the accounts that carry the highest interest rates first. That way, you're staving off as much interest as possible and don't end up owing even more. But HBR researchers concluded after a series of experiments that it was more motivating for participants to see small balances disappear.

"Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress — and therefore their motivation to continue paying down their debts," writes Remi Trudel, one of the HBR researchers.

Personal finance blogger Derek Sall is a fan of the so-called snowball method, which he used to pay off roughly $100,000 worth of debt (including his mortgage).

"I suggest that people pay off their debts from smallest to largest and ignore the interest rates entirely," he writes on his blog. "Sure, that 18% credit card debt might freak you out like crazy. But if you tackle the smaller debts with intensity like I know you want to, you'll get to it sooner than you think — and then bust it out sooner than you ever thought possible!"

2. Keeping finances separate from your partner

One of the most important conversations to have before marriage is the money talk. What's the status of your partner's financial life? Are they overcome with debt? How much do they have saved? Are they investing? For some couples, these questions are the preamble to merging finances, but that's not the case for everyone.

A conscious decision not to share a bank account is perfectly fine, as long as you're not hiding anything from your partner. As Business Insider's Shana Lebowitz reports, there are many cases where it could be smarter to keep finances separate in a relationship, like if one partner is much better with money than the other or if you're blending families. But regardless of whether you share an account or not, it's crucial to have an ongoing open and honest discussion about your money habits and goals.

Another option, suggests Sophia Bera, CFP and founder of Gen Y Planning, is setting up a "yours, mine, and ours" system. That is, a joint account for household expenses and separate accounts to maintain some individual freedom.

3. Renting rather than buying

Although many financial experts laud the long-term benefits that come with homeownership, don't think you're wasting money if you're renting.

"I think for young people, renting is underrated," wealth manager and blogger Ben Carlson told Business Insider. "When you're young, renting gives you more options. People say they don't want to pay someone else's mortgage, but I think especially when you're young and not tied down, it gives you the ability to pick up and move to another city for a job — a little leeway. A house is much more expensive than people think. It's more than just a mortgage."

Indeed, unlike homeowners, renters don't pay real estate taxes, HOA fees, mortgage interest, or maintenance costs. But keep in mind that real estate markets vary greatly from city to city, so it could be cheaper to buy than rent in some cities, and vice versa. Ultimately, whether you buy or rent, you'll want to aim for a total monthly payment that's less than 30% of your income.

If you're grappling with the decision to rent or buy, check out this flowchart to help you figure out what makes the most financial sense for you.

4. Accruing debt

The notion of being in debt isn't inherently attractive. No one likes to owe someone money, or anything for that matter.

But being debt-free isn't all it's cracked up to be. In fact, consider two cases where going into debt could actually help you get ahead: Financing an education and buying a home.

"The income advantage provided by post-secondary education makes student loans one of the few forms of debt that can pay off for the borrower over time," reports The Motley Fool's Todd Campbell. "Additionally, interest on Federal student loans is relatively low, and often, that interest can be deducted on your taxes." Payments for this debt can also be paused if you're in a financial emergency, or forgiven completely in some cases, like if you're a public-service worker.

Likewise, if you can get a good interest rate on your mortgage that'll keep your monthly payments at or below 30% of your income, you're in good shape to build some equity over the long-term. You can also deduct mortgage interest on your taxes.

The bottom line: Going into debt isn't bad if it can unlock a clear financial gain.

5. Having multiple credit cards

It may seem financially reckless to have a wallet full of credit cards, but it's actually smart — so long as you're paying your balances off in full every month.

According to John Ulzheimer, credit expert at, having a single credit card can damage your credit score, thanks to something called your credit utilization ratio — that is, how much of your available credit you're actually using.

"That percentage is very, very influential in your credit score," explains Ulzheimer. "People say that you're in good shape if you keep your utilization within 50% of your available credit, or 30%, but really, it should be below 10%."

Available credit counts all the cards you have: If you have one card with an $8,000 limit and one with a $6,000 limit, your total available credit is $14,000, even if you only spend $1,000 a month. With a single card, you have no unused credit cushioning the impact of your spending. The closer you get to your limit, the harder the hit on your credit score.

6. Spending without a budget

Budgeting can be an incredibly useful tool for some people, especially reckless spenders. But that doesn't mean it works for everyone. It's still possible to be financially responsible without a hardline budget.

"People will try and go on a budget and then after two or three months, they lose their mind, they hate it," bestselling author and self-made millionaire David Bach told Business Insider.

Bach likens budgeting to dieting or exercising: If it's not enjoyable, the chances that you'll stick with it are pretty slim. But if you're not a fan of budgeting, you should at least be tracking your spending through sites like Mint or Learnvest, or create a customized spreadsheet. This frees you from any guilt that might bubble up should you fail to follow a budget, and instead allows you to spend as you normally would and make adjustments where appropriate.

You should also get on board with the pay yourself first plan, he says. Anytime you get paid, put money into your investments, retirement savings, and emergency fund before anything else. Even better, make this transaction automatic so you don't even have to think about it. Then you're free to use the rest of your paycheck for bills, groceries, and other expenses after you already have at least 20% put away for yourself.

7. Investing when you're not an 'investor'

Though it may seem intimidating, investing is anyone's game. You don't have to be a stock-picking genius or a earn a massive paycheck to make great returns over the long term.

In fact, according to John C. Bogle, the legendary founder and former CEO of the Vanguard Mutual Fund Group, the best way for the average person to make money in the market is to invest in index funds.

The "classic index fund," which he defines as holding many, many stocks, and operating with minimal expenses and high tax efficiency, works for two main reasons: They're broadly diversified, which eliminates individual stock risk, and they're low cost.

"It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose," Bogle writes in his book "The Little Book of Common Sense Investing."

You can start by opening an account online with Bogle's company, Vanguard, and invest in their index mutual funds, which charge relatively low fees for investing directly (an average of 0.13%).

Always remember that in the long-term, you're better off being in the market, even a volatile one, than staying out of it.


As the report notes, the millennials (defined as individuals 18-37 in 2018) “demonstrate lower basic financial literacy levels while at the same time being more likely to overestimate their own financial knowledge.”

Americans across all age ranges struggled with the questions, but the knowledge holes were most glaring among young people. For example, 49% of respondents aged 70-74 correctly answered the big three questions correctly. No age group scored above 50%.

But financial literacy is arguably more important for the young. “Students have very difficult questions very early in their lifetime,” says Hasler. “For example, right after high school, how to fund their college.”

The study, titled “Millennials and Money: The State of Their Financial Management and How Workplaces Can Help Them,” was from the Global Financial Literacy Excellence Center at the George Washington University, supported by the TIAA Institute.

It was based on analysis of data from the 2018 National Financial Capability Study

Hasler, a professor of financial literacy, appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans. 

[Read more: Retirement planning 101]

Gaps in knowledge alongside $1.6 trillion in student debt

The lack of financial literacy intersects directly with the student loan crisis; statistics show Americans have $1.6 trillion in outstanding debt, working out to $29,200 per borrower.

According to the TIAA report, 43% of millennials have a loan. And of those that are currently working off their loan, 47% of respondents reported that they did not look into what their monthly loan repayment bill would be at the time they decided to accept a loan.

The challenge is getting young people educated and then out of debt and on the path to savings while they still have time for the money to grow. As Hasler says, she often tell her students "compound interest even works when we’re asleep."

Ben Werschkul is a producer for Yahoo Finance in Washington, DC.

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