AnAnalysisofPersonalFinancialLiteracyAmongCollegeStudentsChenH,VolpeRP.Ananalysisofpersonalfinancialliteracyamongcollegestudents[J].FinancialServicesReview,1998,7(2):107–128.Thisstudysurveys924collegestudentstoexaminetheirpersonalfinancialliteracy;therelationshipbetweentheliteracyandstudents'characteristics;andimpactoftheliteracyonstudents'opinionsanddecisions.Resultsshowthatparticipantsanswerabout53%ofquestionscorrectly.Non-businessmajors,women,studentsinthelowerclassranks,underage30,andwithlittleworkexperiencehavelowerlevelsofknowledge.LessknowledgeablestudentstendtohoMwrongopinionsandmakeincorrectdecisions.Itisconcludedthatcollegestudentsarenotknowledgeableaboutpersonalfinance.Thelowlevelofknowledgewilllimittheirabilitytomakeinformeddecisions.I.TRODUCTIONTheabilitytomanagepersonalfinanceshasbecomeincreasinglyimportantintoday'sworld.Peoplemustplanforlong-terminvestmentsfortheirretirementandchildren'seducation.Theymustalsodecideonshort-termsavingsandborrowingforavacation,adownpaymentforahouse,acarloan,andotherbig-ticketitems.Additionally,theymustmanagetheirownmedicalandlifeinsuranceneeds.Unfortunately,studieshaveshownthatAmericanshaveinadequateknowledgeofpersonalfinances.Theyfailtomakecorrectdecisionsbecausetheyhavenotreceivedasoundpersonalfinanceeducation(HSR,1993;Hira,1993;O'Neill,1993).Thisstudyhasthreepurposes.First,itprovidesevidenceofpersonalfinanceliteracyamongcollegestudents.Second,itexamineswhysomecollegestudentsarerelativelymoreknowledgeablethanothers.Theanalysismayhelpusidentifyfactorsthatdeterminethelevelofcompetencypossessedbycollegestudents.Thethirdpurposeistoexaminehowastudent'sknowledgeinfluenceshis/heropinionsanddecisionsonpersonalfinancialissues.Thepaperisorganizedasfollows.SectionIIreviewspreviousstudiesonfinancialliteracy.SectionIIIdiscussesmethodology.SectionIVpresentsresults.SectionVconcludesthepaper.II.LITERATUREREVIEWMostofthepreviousstudiesareconductedbypractitionersinthefinancialserviceindustry.Theyfocusonmoneymanagementandinvestment-relatedissues.ThisemphasisisconsistentwithfindingsoftheCertifiedFinancialPlanners,indicatingtheseissuesareimportantareasofpersonalfinancialplanning(NEFE,1993-1996).Theresultsofthesestudiesshowthattheparticipantsgenerallyansweredfewerthan60%ofsurveyquestionscorrectly.Priorstudiesofhighschoolstudentsconsistentlyfindthattheyarenotreceivingagoodeducationinpersonalfinancialfundamentalsandhavepoorknowledge(Bakken,1967;CFAJAMEX,1991;HSR,1993;Langrehr,1979;NAEP,1979).Inarecentstudyof1,509highschoolseniorsfrom63schools,Mandell(1997)reportsanaveragecorrectscoreof57%intheareasofincome,moneymanagement,savingsandinvestment,andspending.Hisconclusionisthatstudentsareleavingschoolswithouttheabilitytomakecriticaldecisionsaffectingtheirlives.Doadultshaveagoodcommandofpersonalfinanceandinvestments?Resultsofseveralstudiessuggestthattheydonot.PrincetonSurveyResearchAssociates(1997)surveys1,770householdsnationwideontheirfinancialknowledgeandfindanaveragecorrectscoreof42%.Thisresultshowsthathouseholdfinancialdecisionmakersdonothaveagoodgraspofbasicfinanceconcepts.Inanotherstudyof522adultwomen,56%arefoundnotveryknowledgeableaboutinvesting(OppenheimerFunds/GirlsInc.,1997).Workersdonotsaveadequatelyforretirementandmakeinvestmentdecisionsthataretooconservative.AKPMG(1995)surveyof1,183employersfindsemployeescontributeonlyabout5%oftheirincometo401Kplans,althoughthetypicalplanallowsa14%contribution.Theevidenceindicatesthatemployeesarenotmaximizingtheirbenefits.Additionally,thelowsavingsrateandthelowreturnfromconservativeinvestmentsmaynotprovideenoughincomeforafinanciallysecureretirement.EmployeeBenefitResearchInstitute(1995)providesfurtherevidencethatmostAmericansdonotsavesufficientretirementfundsandmayhaveafalsesenseoffinancialconfidenceandsecurity.Thestudysurveys1,000currentworkersandretireesonfinancialknowledgeissues.About71%ofallworkersand81%ofretireesscore60%orless.TheInstituteofCertifiedFinancialPlanners(1993)surveys123CertifiedFinancialPlannerlicenseesandfindsthatfinancialilliteracyisamajorproblemwhenitcomestomakingindividualfinancialdecisions.Poorknowledgeofinvestmentfundamentalsisthemostcommonproblemencounteredbytheirclients.Theresultsoftwonationalsurveyssuggestthatinvestorsdonothaveasolidknowledgeofinvestmentissues.PrincetonSurveyResearchAssociates(1996)interviews1,001investorsandfindsthatonly18%ofthemarefinanciallyliterate.VanguardGroup/MoneyMagazine(1997)survey1,467mutualfundinvestorsat59shoppingmallsacrossthecountry.Theaveragecorrectscoreona20-questionquizisapproximately45%.Mostpublishedstudiesfocusonfinancialliteracyamonghighschoolstudentsandadults.FewofthemhaveexaminedcollegestudentsexceptforDanesandHira(1987)andVolpe,Chen,andPavlicko(1996).DanesandHira(1987)survey323collegestudentsfromIowaStateUniversityusingaquestionnairecoveringknowledgeofcreditcard,insurance,personalloans,recordkeeping,andoverallfinancialmanagement.Theyfindthattheparticipantshavealowlevelofknowledgeregardingoverallmoneymanagement,creditcards,andinsurance.Theyalsofindthatmalesknowmoreaboutinsuranceandpersonalloans,butfemalesknowmoreaboutissuescoveredinthesectionofoverallfinancialmanagementknowledge.Marriedstudentsgenerallyaremoreknowledgeableaboutpersonalfinance.Volpe,Chen,andPavlicko(1996)focusonknowledgeofinvestment.Theysurvey454studentsfromastateuniversityintheMidwestandfindthattheaveragecorrectscoreoftheparticipantsis44%,suggestingthattheyhaveinadequateknowledge.Theyalsofindthatmalestudentsaremoreknowledgeablethanfemalestudents,andbusinessmajorsaremoreknowledgeablethannon-businessmajors.Whilethepriorresearchhasprovidedevidenceofpeople'spersonalfinanceknowledgeandimprovedourunderstandingoftheissue,itsuffersfromseveralweaknesses.Forexample,bothstudiesoncollegestudentsusesamplesfromasingleuniversity.Manystudiescoverselectedareasinpersonalfinances,neglectingothers.Furthermore,thevalidityofthesurveyinstrumentsisquestionablebecauseofthelimitednumberofitemsincludedinthequestionnaires.Theselimitationsarecompoundedbythefactthatmanypriorstudiesonlyreportthelevelsoffinancialliteracywithoutanalyzingthefactorsthatinfluencepeople'sknowledge.Noneofthepreviousstudieshaveexaminedhowanindividual'sknowledgeimpactstheiropinionsregardingpersonalfinanceissuesandfinancialdecisionmaking.III.METHODOLOGYThisstudyusesacomprehensivequestionnairedesignedtocovermajoraspectsofpersonalfinance.Itincludesfinancialliteracyongeneralknowledge,savingsandborrowing,insurance,andinvestments.Thesurveyparticipantsareaskedtoanswer52questionsincluding36multiple-choicequestionsoftheirknowledgeonpersonalfinance,eightquestionsoftheiropinionsanddecisions,andeightquestionsondemographicdata.Thesurveyisusedinapilotstudytorefinetheinstrument.Thevalidityandclarityofthesurveyarefurtherevaluatedbytwoindividualswhoareknowledgeableinpersonalfinance.ThequalityandconsistencyofthesurveyarefurtherassessedusingCronbach'salpha.AcopyofthequestionnairecanbefoundintheAppendix.Theresponsesfromeachparticipantareusedtocalculatethemeanpercentageofcorrectscoresforeachquestion,section,andtheentiresurvey.Consistentwiththeexistingliterature(Danes&Hira,1987;Volpe,Chen,&Pavlicko,1996),themeanpercentageofcorrectscoresisgroupedinto(1)morethan80%,(2)60%to79%,and(3)below60%.Thefirstcategoryrepresentsarelativelyhighlevelofknowledge.Thesecondcategoryrepresentsamediumlevelofknowledge.Thethirdcategoryrepresentsarelativelylowlevelofknowledge.Previousresearchsuggeststhatlevelsoffinancialliteracyvaryamongsubgroupsofstudents(Volpe,Chen,&Pavlicko,1996).Thisstudyprovidesfurtherevidenceofthedifferencesusinganalysisofvariance(ANOVA).Thedifferencesarefurtheranalyzedusinglogisticregressionmodels.Theparticipantsareclassifiedintotwosubgroupsusingthemedianpercentageofcorrectanswersofthesample.Studentswithscoreshigherthanthesamplemedianareclassifiedasthosewithrelativelymoreknowledge.Studentswithscoresequaltoorbelowthemedianareclassifiedasstudentswithrelativelylessknowledge.Thisdichotomousvariableisthenusedinthelogisticregressionasthedependentvariable,whichisexplainedsimultaneouslybyalloftheindependentvariables.Theindependentvariablesusedinthelogisticregressionarevariablessuchasacademicdiscipline,classrank,gender,race,nationality,workexperience,age,andincome.Thecoefficientsrepresenttheeffectofeachsubgroupcomparedwithareferencegroup,whichisarbitrarilyselected.Forexample,MAJORiscodedas1ifaparticipantisanon-businessmajor,0otherwise.Thereferencecategoryisabusinessmajor.Ifthelogisticcoefficientofthevariableisnegative,thenitmeansthatcomparedwithbusinessmajors,thenon-businessmajorsareassociatedwithdecreasedlogoddsratioofbeingmoreknowledgeableaboutpersonalfinance.Todeterminetheimpactoffinancialliteracypossessedbytheparticipantsontheiropinions,studentsareaskedtorankpersonalfinanceissuesusingfivecategories:veryimportant,somewhatimportant,notsure,somewhatunimportant,andveryunimportant.Theyarealsoaskedtomakedecisionsontherelatedfinancialissues.Asinthelogisticregressionanalysis,thesampleispartitionedintotwogroupsofstudentswithrelativelymoreknowledgeandthosewithrelativelylessknowledge.Sincetheissuesarerelatedtoeachsectioninthesurvey,thesectionmedianpercentageofcorrectanswersisusedtoclassifythesample.Cross-tabulationsandChi-squaretestsareusedtodetermineifthedifferenceofthetwogroups'opinionsanddecisionsarestatisticallysignificant.IV.RESULTSANDANALYSISThequestionnairesaresentto1,800studentsfrom14collegecampuses.Theyincludebothpublicandprivateschools,mainandbranchcampusesoflargeuniversities,andsmallcommunitycollegesinCalifornia,Florida,Kentucky,Massachusetts,Ohio,andPennsylvania.Ninehundredtwenty-fourstudentsfrom13campusesparticipatedinthesurvey,representingaresponserateof51.33%.DetailedcharacteristicsofthesamplearepresentedinTable1.Intermsofeducation,about52.6%oftheparticipantsarebusinessmajors.Thirty-sixpercentoftheparticipantsareseniorswiththerestevenlydistributedamongfreshman,sophomore,junior,andgraduatestudents.Intermsofdemographicbackground,mostoftheparticipantsarewhiteandU.S.citizens.Femaleparticipantsrepresentabout55.6%ofthesample.Mostparticipantshavemorethantwoyearsofworkexperience.About75.7%ofthestudentsarefrom18to29yearsofage.Missingresponsescausethesamplesizetovaryfrom792to905;therefore,varioussamplesizeshavebeenusedtocalculatevalidpercentagesinTable1.OverallResultsoftheSurveyTheoverallresultsarepresentedinTable2.Themeanpercentageofcorrectscoresisgroupedintothreecategories:over80,60-79,andbelow60.Thehighestscoreispresentedfirst,whichisfollowedbylowerscoreswithineachsection.Theoverallmeanpercentageofcorrectscoresis52.87%,indicatingonaveragetheparticipantsansweredonlyabouthalfofthesurveyquestionscorrectly.Themedianpercentageofcorrectscoresis55.56%.Thereliabilityofthe36-questionsurveyis0.85.ThelargeCronbachalphaindicatesthatthequestionnaireisreliable,whichfurtherincreasesitsvalidity.Thefindingssuggestthatcollegestudents'knowledgeonpersonalfinanceisinadequate.Onereasonforthelowlevelofknowledgeisthesystematiclackofasoundpersonalfinanceeducationincollegecurricula.Mostofthehighereducationinstitutionsputlittleemphasisonstudents'personalfinanceeducation(Danes&Hira,1987).EvenbusinessschoolsdonotrequirestudentstotakeaPersonalFinanceManagementcourse(Bialaszewski,Pencek,&Zietlow,1993).AccordingtoasurveybyGitmanandBacon(1985),only5%ofbusinessschooloffersanundergraduatemajorinfinanceservices.Giventhelackofpersonalfinanceeducation,itisnotsurprisingtheresultsshowthatcollegestudentshaveinadequateknowledgeonpersonalfinance.Anotherreasonforthelowlevelofknowledgecanbeattributedtotheyoungagesoftheparticipants.AsshowninTable1,about44%oftheparticipantsare18to22yearsofage,andabout76%areunder30.Themajorityofthemareinaveryearlystageoftheirfinanciallifecycle.Atthisstageofthecycle,theyareexposedtoalimitednumberoffinancialissuesrelatedtogeneralknowledge,savingsandborrowing,andinsurance.Duringthisperiod,mostoftheirincomesarespentonconsumptionratherthaninvestment.ThesefactorsmayexplainthedifferencesinthemeanpercentagesofcorrectanswersforthesectionsofGeneralKnowledge(63.70%),SavingsandBorrowing(54.47%),Insurance(59.24%),andInvestment(40.37%).Afurtherlookintothescoresonindividualquestionsshowsthatstudentsscorehigheronissueswithwhichtheyarefamiliar.Forexample,thehighestscoreisrelatedtoautoinsurance.Studentsarefamiliarwiththeissuebecausemanyofthemowncarsandhavetopayahigherautoinsurancepremium.Studentsalsoscorerelativelyhighonapartmentleases.Theyknowmoreabouttheseissuesbecausetheyneedtorentapartmentsduringtheircollegeyears.Incontrast,studentshavelittleexperiencewithtax,termlifeinsurance,andmostofinvestmenttopics.Subsequently,theyearnlowscoresintheseareas.B.AnalysisofResultsbySubgroupsoftheSampleInthissection,therelationshipbetweenpersonalfinancialliteracyandparticipants'education,workexperience,incomeandotherdemographicbackgroundareexamined.Table3showsthemeanpercentageofcorrectresponsesforSectionI(GeneralKnowledge),SectionII(SavingsandBorrowing),SectionIII(Insurance),SectionIV(Investment),andtheentiresurveybydifferentsubgroups.ANOVAhasbeenusedtodetectifparticipantsfromvarioussubgroupshavedifferentlevelsofknowledge.Participants'educationalbackgroundhasasignificantimpactontheirknowledge.Theresultsfortheentiresurveyclearlyshowthatbusinessmajorsaremoreknowledgeablethannon-businessmajors.Onaverage,thebusinessmajorsanswered60.72%ofthesurveyquestionscorrectly;thenon-businessmajors,49.94%.Thispatternofbusinessmajorsansweringabout8%to12%morequestionscorrectlythannon-businessmajorsispersistentthroughouttheindividualsections.ThetestingresultsofANOVAindicatethatthedifferencesarestatisticallysignificantatthe0.01level.Thefindingsalsosuggestthatparticipantsfromdifferentclassrankshavedifferentlevelsoffinancialknowledge.Generally,graduatestudentsknowmorethantheundergraduatestudents,andjuniorandseniorstudentsaremoreknowledgeablethanthosefromthelowerranks.Again,thedifferencesinthelevelofliteracyamongdifferentranksarestatisticallysignificantatthe0.01level.Table3showsparticipants'knowledgevarieswiththeirdemographiccharacteristics.Thepercentagesofcorrectanswersfromthefemaleparticipants(50.77%)arelowerthanthosefromthemaleparticipants(57.40%).Thispatternpersistsamongallsectionsincludingtheoverallresults.ThevaluesofF-statisticsuggestthatthesedifferencesarehighlysignificant.Participantsfromdissimilarethnicbackgroundshavedifferentlevelsoffinancialknowledge.Althoughthedifferentscoresarestatisticallysignificant,nosinglesubgroupcanclaimthehighestscoresthroughoutthefoursections.African-Americanparticipantsearnthelowestscoresthroughoutthevarioussections.ForeignstudentsalsoearnlowerscoresthantheirAmericancounterparts.Intermsofparticipants'workexperienceandages,participantswithmoreyearsofworkexperiencearemoreknowledgeablethanthosewithlessexperience.Participantsintheagesubgroupsof23to29and40orolderexhibitgreaterknowledgethantheotheragegroups.Finally,itseemsthatparticipantswithhigherpersonalincomeansweredmorequestionscorrectlythanthosewithlowerincome.Thesurveyhasanagecategoryof"60orolder"andanincomecategoryof"Noincome."However,thenumberofparticipantsinthesecategoriesareverysmall.Theyareregroupedintotheadjacentgroupsof"40andover"and"Under$10,000."ResultsofthelogisticregressionareshowninTable4.AssuggestedbythehighChi-squarevalues,themodelshavehighexplanatorypower.Anotherwidelyusedmeasureoftheoverallfitofthemodelistoexamineitsabilitytocorrectlyclassifyobservations.Fortheentiresample,71.47%oftheobservationsarecorrectlyclassifiedascomparedwith50.03%chanceclassification.Similarpatternscanbefoundintheindividualsections.Inadditiontotheoverallfitofthemodel,thecoefficientofMAJORfortheentiresampleisnegativeandsignificantatthe0.01level.ConsistentwithfindingsofANOVA,theresultsuggeststhatnon-businessmajorsaremorelikelytobelessknowledgeableaboutpersonalfinancethanbusinessmajors.ThesignificantnegativecoefficientsforCLASSRANKvariablesindicatethatparticipantsfromlowerclassranksaremorelikelytobelessknowledgeablethanthosefromgraduateclasses.Womenparticipantsaremorelikelytobelessknowledgeablethanmen.Participantswithlessworkexperiencehavehighprobabilityofbeinglessknowledgeablethanthosewithmoreexperience.Thedifferencesbetweenthosewithsixormoreyearsofexperienceandthosewithnoexperienceandthosewithlessthantwoyearsofexperiencearesignificantatthe0.07and0.06levelsrespectively.Participantsunderage30aremorelikelytobelessknowledgeableascomparedwiththose40orolder.AlthoughthecoefficientofAGE3stillexhibitsanegativesign,thedifferencebetweenthosewhoareintheirthirtiesandfortiesorolderisstatisticallyinsignificant.WhileRACE,NATIONALITY,andINCOMEvariablesaffectlevelofknowledgeinonewayANOVA,theynolongerhaveanysignificantimpactinthelogisticregressionwhereallthevariablesareusedsimultaneouslytoexplainthelevelofknowledge.Withfewexceptions,theresultsfromlogisticregressionsfortheindividualsectionsareconsistentwiththatoftheentiresample.Forexample,thebusinessmajorsperformconsistentlybetterthanthenon-businessmajorsineverysectionofthesurvey.Similarly,manycoefficientsforCLASSRANK,GENDER,andAGEvariablesintheindividualsectionscarrythesamesignsandaresignificantasshownfortheentiresample.FewcoefficientsofRACE,NATIONALITY,andINCOMEaresignificantintheindividualsections.Theresultthatbusinessmajorsaremoreknowledgeableisconsistentwithfindingsofpreviousresearch.Thefindingisnotsurprisingbecausecurriculumrequirementsofbusinessmajorsgivethemmoreopportunitytotakefinanceandrelatedcourses.Participantswhoaremoreseniorinclassrankhaveearnedhigherscoresinthesurvey.Oneexplanationisthatbystayinginuniversitieslonger,studentswillnaturallypickupmoreaboutpersonalfinance.Ourargumentisthatstudentsdonotgainmoreknowledgeofpersonalfinancebyjustspendingmoretimeincollegelearningotherunrelatedsubjects.Theylearnthesubjectthroughabusinesscourse,seminars,ortheirownmistakes.Ourviewisconsistentwiththefindingofthisstudythatbusinessmajorsaremoreknowledgeablethannon-businessmajors.Asimilarlineofreasoningwouldapplytowhytheparticipantswhoareolderorhavemoreworkexperienceearnedhighscoresinthesurvey.Theymusthavepriorexposuretopersonalfinance.Theyarenotmoreliteratejustbecausetheyareolder.Thefindingthatwomenscorelowerthanmenisconsistentwiththeexistingliterature(Genasci,1995;Goldsmith&Goldsmith,1997;HSR,1993;Lewin,1995;Martinez,1994;Volpe,Chen,&Pavlicko,1996;).Spacelimitationsdonotallowacomprehensiveanalysisofwhywomenarelessknowledgeablethanmen.Yetgiventhefactthatmoreandmorewomenarejoiningtheworkforceandtheyareexpectedtolivelongerthanmen,