Majority of young adults lack financial literacy

Washington: Did you know many young adults lack financial literacy and money management skills? This indicates an urgent need for educational programs to help them enter adulthood so that they are better equipped to handle their financial affairs, a new study reveals.

Nearly a third of young adults were found to be financially unstable because they had poor financial understanding and literacy. They also lacked money management skills and income stability.

The study sample included 3,050 emerging adults who participated in the National Financial Capability Study, a survey that assesses the financial knowledge and practices of US adults aged 18 and over.

Only 22% of the 18 to 24-year-olds were deemed to be financially stable in the study sample, according to the lead author Gaurav Sinha, a graduate in social work from the University of Illinois.

These individuals were better at planning and managing their finances, had checking or savings accounts in mainstream banks and were less likely to use costly alternative financial services such as payday lenders. They also were more likely to be white males who were employed and college educated.

Sinha and co-authors Kevin Tan and Min Zhan, examined the financial attributes and behavioral patterns of emerging adults. Based on these characteristics, the researchers classified them into four groups including, financially unstable, at risk, striving or stable.

About 36% of the people in the study were found to be financially at risk because they had experienced a significant, unexpected drop in income during the prior year. They reportedly had no savings to pay their living expenses for three months if needed and said they lacked the resources to come up with USD 2,000 in the event of an emergency.

The financially precarious group, which composed 32 percent of the sample had the poorest actual and perceived financial literacy, Sinha said.

"Because they lacked access to mainstream financial institutions, they were frequent users of alternative financial services, which tend to charge high interest rates and fees," added Sinha.

Similarly, their counterparts in the financially striving category, which composed 10 percent of the sample, struggled with money-management behaviors such as budgeting and credit card usage. People in this group also put their health at risk by skipping doctors' visits, medical tests, and prescriptions due to financial constraints.

What differentiated people in the financially precarious and at-risk groups from their peers was that they experienced much less financial socialization, which the researchers defined as formal or informal learning about financial concepts and prudent money-management behaviors.

However, even people in the financially stable group were only moderately confident about their financial literacy, which clearly showed a need to invest more in strengthening the financial capabilities of children and youths.

"It is concerning that many young people are entering adulthood without adequate financial capabilities to ensure their future well-being and that of their children," said study author Sinha.

The study appeared in the journal of Children and Youth Services Review.