While most Millennials use smartphones to manage their personal finances, their use of financial technology does not necessarily improve their financial management practices, according to a new report.
Using survey data from their 2018 Personal Finance Index (P-Fin Index), the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business examined how Millennials use technology to manage their personal finances and what effect it may have on financial outcomes.
With the number of Millennials projected to reach 73 million in 2019 and already comprising the largest share of the U.S. labor force at 35%, the authors underscore how it’s important to understand the generation’s financial literacy level, as it matters for the overall state of the economy and could accelerate initiatives to improve their well-being.
The resulting study, “Millennial Financial Literacy and Fin-Tech Use: Who Knows What in the Digital Era,” found that there is a financial literacy gap among this age cohort and that those who use financial technology do not always make sound financial decisions.
Financial Literacy Gap?
In examining financial literacy across the P-Fin Index’s eight areas of personal finance in which individuals routinely function, the study found that Millennials answered 44% of the index’s questions correctly, compared to 50% of the U.S. adult population. Younger Millennials (ages 18-27) answered only 41% of the P-Fin Index questions correctly, compared with 47% of their older peers (ages 28-37).
Financial literacy among the generation is lowest in the areas of comprehending risk and insuring. Understanding insurance, in particular, saw the greatest gap between younger and older Millennials, according to the report. Meanwhile, financial literacy was found to be highest in the area of borrowing and debt management for both younger and older Millennials.
Overlaying their personal finances is the reality that the generation lives a technology-enabled existence, the report notes. Nearly 80% of Millennials use their smartphone for transactional purposes like paying bills and depositing checks, while 90% use their phones for informational activities like tracking their spending.
And while fintech offers a convenient way to manage finances, nearly 30% of Millennials who use their smartphone to make mobile payments report overdrawing their checking accounts — compared with 20% who do not make mobile payments. Moreover, 25% of those who track spending with their smartphone report overdrawing their accounts, compared with 20% of those who do not do so.
“The low level of financial literacy among Millennials speaks of the importance of equipping this large generation with the knowledge and skills that are needed to make financial decisions in the digital era,” explains Annamaria Lusardi, Academic Director at GFLEC. “This study shows that fin-tech users have different needs and characteristics, providing many opportunities for innovation for fin-tech developers.”
The 2018 wave of the P-Fin Index survey was fielded online in January 2018 with a nationally representative sample of adults, ages 18 and older; Millennials were oversampled during survey fielding, with 1,007 participating in the survey.