Many young adults lack financial literacy

CHICAGO - Nearly a third of young adults were found to be "financially precarious" because they had poor financial literacy and lacked money management skills and income stability, a recent study of the University of Illinois (UI) found.

The study, involving 3,050 emerging adults who participated in the National Financial Capability Study, examined the financial attributes and behavioral patterns of emerging adults. Based on these characteristics, UI researchers classified them into four groups: financially precarious, at risk, striving or stable.

Only 22 percent of the 18- to 24-year-old adults in the study sample were deemed to be financially stable. They were better at planning and managing their finances, had checking or savings accounts in mainstream banks and were less likely to use costly alternative financial services such as payday lenders.

About 36 percent of the people in the study were deemed to be "financially at risk" because they had experienced a significant, unexpected drop in income during the prior year. They reportedly had no savings with which to pay their living expenses for three months if needed and said they lacked the resources to come up with 2,000 dollars in the event of an emergency.

The financially precarious group composed 32 percent of the sample. People in the group "had the poorest actual and perceived financial literacy," said lead author Gaurav Sinha, a graduate student in social work at UI. "Because they lacked access to mainstream financial institutions, they were frequent users of alternative financial services, which tend to charge high interest rates and fees."

Young adults falling into the financially striving category composed 10 percent of the sample. They struggled with money-management behaviors such as budgeting and credit card usage. People in this group also put their health at risk by skipping doctors' visits, medical tests and prescriptions due to financial constraints.

What differentiated people in the financially precarious and at-risk groups from their peers was that they experienced much less financial socialization, which the researchers defined as formal or informal learning about financial concepts and prudent money-management behaviors.

Even people in the financially stable group were only moderately confident about their financial literacy, Sinha said. "It is concerning that many young people are entering adulthood without adequate financial capabilities to ensure their future well-being and that of their children."

The study is scheduled to be published in the journal Children and Youth Services Review.