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Financial literacy and financial well-being: Evidence from the US Annamaria Lusardi et al. · Journal of Financial Literacy and Wellbeing 1, 169–198 · 2023 · ≈97 cites
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Financial literacy and financial well-being: Evidence from the US

Lusardi · Streeter — Journal of Financial Literacy and Wellbeing 1, 2023

Thesis

Financial literacy in the US remains as low as when it was first measured in 2004 — and it is unevenly distributed in ways that compound inequality. Using the freshest national data (post-COVID, high-inflation), literacy strongly tracks the things that matter: retirement planning, resilience to shocks, and staying out of bad debt. People also don't know what they don't know: the least literate are the most overconfident.

Method

  • 2021 National Financial Capability Study (NFCS), FINRA Foundation — large, nationally representative, state-representative sample (age 25–65 focus).
  • The Big Three literacy questions (numeracy/compounding, inflation, risk diversification) plus inflation-specific follow-ups.
  • OLS regressions of three well-being outcomes on literacy + demographics: retirement planning, financial fragility, too-much-debt — with full demographic controls (age, sex, education, income, employment, race/ethnicity).

Key findings

  • Interest question: 69.4% correct, 14.2% wrong, 15.4% "don't know".
  • Inflation question: only ~54% correct — 22.7% wrong plus 23.1% "don't know". Striking in the middle of a 2021 inflation spike.
  • Risk diversification: worst topic — over 45% "don't know".
  • Fewer than 30% answered all Big Three correctly; ~20% got none right. Younger cohorts worst: only 14% of the youngest answered all three right; women 38%→ (men ~38% vs women far lower; the "don't know" rate among women is roughly double).
  • Literacy payoff (Big Three all correct vs not): −6.3 pp likelihood of being financially fragile, −3.8 pp likelihood of too much debt, and the strongest single association with planning for retirement.
  • Overconfidence gap: those who think they know but score poorly are a large group — self-assessed knowledge exceeds actual knowledge most at the bottom.

Limitations

  • Cross-sectional survey: literacy and good outcomes are correlated, not proven causal (though the broader literature incl. meta-analyses supports the direction).
  • Self-reported behaviors and outcomes.
  • Big Three is a coarse 0–3 scale; misses nuance (no questions on mortgages, insurance, tax).
  • "Don't know" responses may mix ignorance with test aversion — the paper argues the pattern is real, but it complicates cross-group comparisons.

So what for Nick

  • The highest-ROI financial learning is still the boring triad: compound interest, inflation, diversification — most adults fail all three, and the 2021 data shows people specifically blind on inflation while living through it.
  • For anyone he mentors (kids, family): check the Big Three explicitly before teaching anything advanced; the data says the foundation is usually missing.
  • Calibration tool: the paper's sharpest personal lesson is the overconfidence asymmetry — if a topic feels obvious (inflation!), that's exactly where untested knowledge tends to be wrong. Test yourself, don't trust the feeling.