Being financially capable is normally not the stuff of bragging rights. But in this severe downturn, perhaps, a solid grasp of finance is unusually valuable. So, hats off to residents of New York, New Jersey, and New Hampshire. According to a major study of Americans' financial knowledge, planning, and coping skills, you are at the top of the class in terms of your financial savvy.
The FINRA Investor Education Foundation surveyed more than 28,000 Americans last year, or about 500 per state. It gathered information in major categories designed to measure consumers' financial capabilities: making ends meet, planning ahead, managing financial products, financial knowledge, and financial decision-making. It then compared how residents in different states fared in these capabilities. FINRA is the Financial Industry Regulatory Authority—the major industry overseer of securities firms.
Here are specific things the survey looked at within each category, and the five best and five worst performing states:
Making ends meet. It's hardly surprising that many households are finding it hard to meet their current spending needs with their current earnings. Nationally, according to the survey, only 41.6 percent of Americans were spending less than their income. The five most prudent states in this measure were New Jersey (where 48.7 percent of consumers spent less than they made), New York (46.2 percent), Washington (44.9 percent), Maryland (44.8 percent), and California (44.6 percent). States where residents had the worst time making ends meet were Montana (only 30.1 percent of its citizens spent less than their incomes), Idaho (34.6 percent), Vermont (35.5 percent), South Dakota (35.8 percent), and Oklahoma (36.1 percent).
Planning ahead. Rainy-day funds were used as the measure of consumer planning habits. Throughout the country, only 35.3 percent of people had set aside such emergency funds. The best planners were in New Jersey (47.8 percent), New York (45.1 percent), Washington (43.1 percent), New Hampshire (41.7 percent), and Massachusetts (41.1 percent). Households that were not able to set aside such funds were most likely found in Oklahoma (where 71.5 percent of people did not have emergency funds), Kentucky (67.2 percent), Montana (67.2 percent), Arkansas (66.9 percent), and Maine (66.6 percent).
Managing financial products. Consumers who borrow money from non-bank sources (pawn shops, payday loans, and the like) usually pay high interest rates and do little to help their credit ratings. The U.S. average in using such non-bank lending sources was 24.3 percent. In New Jersey, only 13.8 percent of residents borrowed from such sources, followed by New Hampshire (15.4 percent), Massachusetts (15.6 percent), New York (17.7 percent), and California (17.8 percent). In Montana, by contrast, 36.6 percent of the people used non-bank loans, followed by Oklahoma (36 percent), Wyoming (34.6 percent), Mississippi (33.8 percent), and South Carolina (32.9 percent).
Financial knowledge. Financial literacy was measured by asking consumers five basic questions (these questions and the correct answers are at the bottom of this story). On average, consumers answered fewer than three of them correctly. The best scores were turned in by citizens of New Hampshire (3.304 correct answers), Minnesota (3.276), South Dakota (3.267), Idaho (3.188), and Vermont (3.172). The lowest marks were posted in Louisiana (2.750), West Virginia (2.835), Kentucky (2.843), Arkansas (2.852), and Tennessee (2.858).
Financial decision-making. Consumer decision-making was evaluated by asking people if they comparison shopped when selecting credit cards. Nationally, fewer than a third did so (the actual score was 32.3 percent). The best shopping practices were recorded in Rhode Island (41.3 percent of its residents compared terms on multiple credit cards), trailed by the District of Columbia (37.7 percent), Idaho (37 percent), New Hampshire (36.7 percent), and Wisconsin (36.5 percent). The worst shopping skills were in Missouri, where 67.4 percent of the people did not compare credit cards, followed by North Carolina (also at 67.4 percent), Arizona (66.2 percent), Kentucky (also at 66.2 percent), and Texas (65.9 percent).
Here are the five financial literacy questions. See how you do:
1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, would you have more than $102, exactly $102, or less than $102?
a) More than $102
b) Less than $102
c) Exactly $102
d) I don't know
2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
a) More than it does today
b) Exactly the same
c) Less than today
d) I don't know
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
c) Stay the same
d) No relationship
e) I don't know
4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
5. True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.
(Correct answers: 1a; 2c; 3b; 4a; 5b.)