Study Finds Most Texans are not Financially Literate

Written by Cory Chandler

Only one in four respondents was deemed financially literate and most struggled to answer basic questions on topics ranging from investments to employee benefits and retirement in a statewide survey conducted by Texas Tech University’s Center for Financial Responsibility.

Respondents to the Financial Literacy Assessment Survey coordinated by Sandra Huston, an associate professor in Texas Tech’s Division of Personal Financial Planning, were unable to correctly answer questions about issues ranging from insurance deductibles to adjustable-rate mortgages.

“Our survey of Texas residents shows that many do not have the tools they need to make basic financial decisions,” Huston said. “Those who are least able to understand how to use financial products effectively are, unfortunately, often those who are most vulnerable.”

In Need of Basic Training

In telephone interviews conducted in fall 2008 by Texas Tech’s Earl Survey Research Lab, 502 residents from across Texas responded to 26 questions formulated to measure knowledge in areas such as investments, employee benefits, insurance and retirement.

Researchers found that many were unable to answer questions about investments – a quarter of respondents believed that either the FDIC or the SEC provides insurance against losses in the stock market and less than half understood the difference between traditional and Roth IRAs.

Around 36 percent correctly selected a balanced stock fund over money market funds and treasury bills as an ideal choice for a young investor willing to accept moderate risk for above average returns, and two out of three respondents recognized that a 401(k) was a tax-sheltering device and not a type of investment.

“The results indicate that the majority of respondents don’t have the ability to choose appropriate investments within a retirement account,” Huston said. “We need to be aware that increasing responsibility for funding our retirement may harm those who aren’t able to make basic investment choices. Existing studies suggest that individuals often make poor choices when saving for retirement. These new results indicate that financial literacy can help explain why.”

Not Getting Enough Credit

Survey results also suggest that many Texans have a limited understanding of credit and insurance, researchers believe. For example, less than half of respondents understood that an adjustable-rate mortgage allows borrowers to qualify for higher loan amounts. More than one-fourth did not realize that higher deductibles result in lower insurance premiums and only 39 percent were aware that term insurance provided greater life insurance coverage per dollar of premium than cash value policies.

Respondents from the Dallas and Houston regions were among the most financially literate, the study found, while Texans in eastern and northwest regions had the lowest average scores.

Financial literacy scores of respondents with incomes above $100,000 or with college educations were 50 percent higher than those with incomes below $25,000 or with less than a high school education, Huston said. Nearly one in three Hispanic respondents fell within what Huston referred to as the financial literacy danger zone, meaning they exhibited the lowest levels of financial literacy.

Financial literacy appeared to increase with age up to 65 years old, but was lowest among the youngest and the oldest Texans.

“This is consistent with evidence that financial decision making is affected positively by experience, but negatively by advanced age” Huston said. “The elderly and the young are the most vulnerable to making poor choices due to a lack of financial literacy.”

The project team consists of faculty and doctoral students within the Personal Financial Planning Division: Huston, Michael Finke, Dorothy Durband, Vickie Hampton, and two graduate research assistants.