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Americans' Financial Capability

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  • Annamaria Lusardi
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    Abstract

    This paper examines Americans’ financial capability, using data from a new survey. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions. The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt. In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

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    File URL: http://www.nber.org/papers/w17103.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17103.

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    Date of creation: Jun 2011
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    Handle: RePEc:nbr:nberwo:17103

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    References

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    1. John Ameriks & Andrew Caplin & John Leahy, 2002. "Wealth Accumulation and the Propensity to Plan," NBER Working Papers 8920, National Bureau of Economic Research, Inc.
    2. M.C.J. van Rooij & Annamaria Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers, Utrecht School of Economics 07-23, Utrecht School of Economics.
    3. Annamaria Lusardi & Pierre-Carl Michaud & Olivia S. Mitchell, 2011. "Optimal Financial Literacy and Saving for Retirement," Working Papers, RAND Corporation Publications Department 905, RAND Corporation Publications Department.
    4. Dimitris Christelis & Tullio Jappelli & Mario Padula, 2008. "Cognitive Abilities and Portfolio Choice," Working Papers 2008_19, Department of Economics, University of Venice "Ca' Foscari".
    5. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 64(6), pages 2807-2849, December.
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    Cited by:
    1. Annamaria Lusardi & Olivia S. Mitchell & Vilsa Curto, 2012. "Financial Sophistication in the Older Population," NBER Working Papers 17863, National Bureau of Economic Research, Inc.
    2. Annamaria Lusardi & Olivia S. Mitchell, 2013. "The Economic Importance of Financial Literacy: Theory and Evidence," CeRP Working Papers 134, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    3. Estaban Gómez González & Nancy Zamudio Gómez, 2012. "Las capacidades financieras de la población colombiana," Borradores de Economia 725, Banco de la Republica de Colombia.
    4. Robert L. Clark & Annamaria Lusardi & Olivia S. Mitchell, 2014. "Financial Knowledge and 401(k) Investment Performance," NBER Working Papers 20137, National Bureau of Economic Research, Inc.
    5. Esteban Gómez González & Nancy Zamudio Gómez, 2012. "Las capacidades financieras de la población colombiana," BORRADORES DE ECONOMIA 009828, BANCO DE LA REPÚBLICA.
    6. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.

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