FINANCIAL SERVICES REVIEW, 7(2): 107-128 ISSN:

Copyright 0 1998 by JAI Press Inc.

1057-0810
All rights of reproduction in any form reserved.

An Analysis of Personal Financial Literacy Among

College Students

Haiyang Chen and Ronald P.

This study surveys 924 college students to examine their

personalfinancial literacy; the relationship between the literacy and
students' characteristics; and impact of the literacy on students' opinions and decisions.
Results show that participants answer about 53% of questions correctly. Non-business
majors, women, students in the lower class ranks, under age 30, and with little work
experience have lower levels of knowledge. Less knowledgeable students tend to hold
wrong opinions and make incorrect decisions. It is concluded that college students are
not knowledgeable about personal finance. The low level of knowledge will limit their
ability to make informed decisions.

1. INTRODUCTION

The ability to manage personal finances has become increasingly important in today's world.
People must plan for long-term investments for their retirement and children's education.
They must also decide on short-term savings and borrowing for a vacation, a down payment
for a house, a car loan, and other big-ticket items. Additionally, they must manage their own
medical and life insurance needs.
Unfortunately, studies have shown that Americans have inadequate knowledge of
personal finances (EBRI, 1995; KPMG, 1995; PSRA, 1996, 1997; Oppenheimer
Funds/Girls Inc., 1997; Vanguard GroupMoney Magazine, 1997). They fail to make correct
decisions because they have not received a sound personal finance education (HSR, 1993;
Hira, 1993; O'Neill, 1993).
This study has three purposes. First, it provides evidence of personal finance literacy
among college students. Second, it examines why some college students are relatively more
knowledgeable than others. The analysis may help us identify factors that determine the
level of competency possessed by college students. The third purpose is to examine how a
student's knowledge influences his/her opinions and decisions on personal financial issues.

Haiyang Chen • Professor of Finance, The Williamson College of Business Administration,

Youngstown State University, Youngstown, Ohio 44555; Phone: (330) 742-1883; Fax: (330)
7421459; E-mail: hychen@cc.ysu.edu. Ronald P. Volpe • Professor of Finance, The Williamson
College of Business Administration, Youngstown State University, Youngstown, Ohio 44555.

The paper is organized as follows. Section Il reviews previous studies on financial

literacy. Section Ill discusses methodology. Section IV presents results. Section V
concludes the paper.
108 FINANCIAL SERVICES REVIEW 7(2) 1998
11. LITERATURE REVIEW

Most of the previous studies are conducted by practitioners in the financial service industry.
They focus on money management and investment-related issues. This emphasis is
consistent with findings of the Certified Financial Planners, indicating these issues are
important areas of personal financial planning (NEFE, 1993—1996). The results of these
studies show that the participants generally answered fewer than 60% of survey questions
correctly.
Prior studies of high school students consistently find that they are not receiving a good
education in financial fundamentals and have poor knowledge (Bakken, 1967;
CFA/AMEX, 1991; HSR, 1993; Langrehr, 1979; NAEP, 1979). In a recent study of I ,509
high school seniors from 63 schools, Mandell (1997) reports an average correct score of
57% in the areas of income, money management, savings and investment, and spending.
His conclusion is that students are leaving schools without the ability to make critical
decisions affecting their lives.
Do adults have a good command of personal finance and investments? Results of
several studies suggest that they do not. Princeton Survey Research Associates (1997)
surveys 1,770 households nationwide on their financial knowledge and find an average
correct score of 42%. This result shows that household financial decision makers do not
have a good grasp of basic finance concepts. In another study of 522 adult women, 56% are
found not very knowledgeable about investing (Oppenheimer Funds/Girls Inc., 1997).
Workers do not save adequately for retirement and make investment decisions that are
too conservative. A KPMG (1995) survey of 1,183 employers finds employees contribute
only about 5% of their income to 401K plans, although the typical plan allows a 14%
contribution. The evidence indicates that employees are not maximizing their benefits.
Additionally, the low savings rate and the low return from conservative investments may
not provide enough income for a financially secure retirement. Employee Benefit Research
Institute (1995) provides further evidence that most Americans do not save sufficient
retirement funds and may have a false sense of financial confidence and security. The study
surveys current workers and retirees on financial knowledge issues. About 71% of all
workers and 81 % of retirees score 60% or less. The Institute of Certified Financial Planners
(1993) surveys 123 Certified Financial Planner licensees and finds that financial illiteracy
is a major problem when it comes to making individual financial decisions. Poor knowledge
of investment fundamentals is the most common problem encountered by their clients.
The results of two national surveys suggest that investors do not have a solid knowledge
of investment issues. Princeton Survey Research Associates (1996) interviews 1,001
investors and finds that only 18% of them are financially literate. Vanguard Group/Money
Magazine (1997) survey 1,467 mutual fund investors at 59 shopping malls across the
country. The average correct score on a 20-question quiz is approximately 45%.
109

Most published studies focus on financial literacy among high school students and
adults. Few of them have examined college students except for Danes and Hira ( 1987) and
Volpe, Chen, and Pavlicko (1996). Danes and Hira (1987) survey 323 college students from
Iowa State University using a questionnaire covering knowledge of credit card, insurance,
personal loans, record keeping, and overall financial management. They find that the
participants have a low level of knowledge regarding overall money management, credit
Financial Literacy
cards, and insurance. They also find that males know more about insurance and personal
loans, but females know more atmlt issues covered in the section of overall financial
management knowledge. Married students generally are more knowledgeable about
personal finance. Volpe, Chen, and Pavlicko (1996) focus on knowledge of investment.
They survey 454 students from a state university in the Midwest and find that the average
correct score of the participants is 44%, suggesting that they have inadequate knowledge.
They also find that male students are more knowledgeable than female students, and
business majors are more knowledgeable than non-business majors.
While the prior research has provided evidence of people's personal finance knowledge
and improved our understanding of the issue, it suffers from several weaknesses. For
example, both studies on college students use samples from a single university. Many
studies cover selected areas in personal finances, neglecting others. Furthermore, the
validity of the survey instruments is questionable because of the limited number of items
included in the questionnaires. These limitations are compounded by the fact that many
prior studies only report the levels of financial literacy without analyzing the factors that
influence people's knowledge. None of the previous studies have examined how an
individual's knowledge impacts their opinions regarding personal finance issues and
financial decision making.

111. METHODOLOGY

This study uses a comprehensive questionnaire designed to cover major aspects of personal
finance. It includes financial literacy on general knowledge, savings and borrowing,
insurance, and investments. The survey participants are asked to answer 52 questions
including 36 multiple-choice questions of their knowledge on personal finance, eight
questions of their opinions and decisions, and eight questions on demographic data. The
survey is used in a pilot study to refine the instrument. The validity and clarity of the survey
are further evaluated by two individuals who are knowledgeable in personal finance. The
quality and consistency of the survey are further assessed using Cronbach's alpha. A copy
of the questionnaire can be found in the Appendix.
The responses from each participant are used to calculate the mean percentage of
correct scores for each question, section, and the entire survey. Consistent with the existing
literature (Danes & Hira, 1987; Volpe, Chen, & Pavlicko, 1996), the mean percentage of
correct scores is grouped into (l) more than 80%, (2) 60% to 79%, and (3) below 60%. The
first category represents a relatively high level of knowledge. The second category
represents a medium level of knowledge. The third category represents a relatively low level
of knowledge.
Previous research suggests that levels of financial literacy vary among subgroups of
students (Volpe, Chen, & Pavlicko, 1996). This study provides further evidence of the
differences using analysis of variance (ANOVA). The differences are further analyzed using
logistic regression models. The participants are classified into two subgroups using the
median percentage of correct answers of the sample. Students with scores higher than the
sample median are classified as those with relatively more knowledge. Students with scores
equal to or below the median are classified as students with relatively less knowledge. This
110 FINANCIAL SERVICES REVIEW 7(2) 1998
dichotomous variable is then used in the logistic regression as the dependent variable, which
is explained simultaneously by all of the independent variables.
The independent variables used in the logistic regression are variables such as
academic discipline, class rank, gender, race, nationality, work experience, age, and income.
The coefficients represent the effect of each subgroup compared with a reference group,
which is arbitrarily selected. For example, MAJOR is coded as I if a participant is a
nonbusiness major, 0 otherwise. The reference category is a business major. If the logistic
coefficient of the variable is negative, then it means that compared with business majors,
the non-business majors are associated with decreased log odds ratio of being more
knowledgeable about personal finance.
The logistic model takes on the following form:

log [p / (1 - p)] = Bo + BI(MAJOR) + B2(CLASSRANK1) + B3(CLASSRANK2) +

B4(CLASSRANK3) + B5(CLASSRANK4) + B6(GENDER) + B7(RACE1) +
B8(RACE2) + B9(RACE3) + B10(RACE4) + Bl I (NATIONALITY) +
B12(EXPERIENCE1) + B13(EXPERIENCE2) + B14(EXPERIENCE3) +
B15(EXPERIENCE4) + B16(AGE1) + B17(AGE2) + B18(AGE3) + B19(1NCOME1) +
B20(1NCOME2) + B21(1NCOME3) + q. (1)
where
the probability of a student who is more knowledgeable about
personal finance.
MAJOR — I if a participant is a non-business major, O otherwise.
CLASSRANKI — I if a participant is a freshman, 0 otherwise.
CLASSRANK2 — 1 if a participant is a sophomore, 0 otherwise.
CLASSRANK3 — I if a participant is a junior, 0 otherwise.
CLASSRANK4 — 1 if a participant is a senior, 0 otherwise.
GENDER — I if the participant is a male, O otherwise.
RACEI — I if a participant is White, O otherwise.
RACE2 I if a participant is African American, 0 otherwise.
RACE3 = I if a participant is Hispanic, O otherwise.
RACE4 — I if a participant is American Indian, 0 otherwise.
NATIONALITY = 1 if the participant is a foreign student, 0 otherwise.
EXPERIENCE 1 — I if a participant has no experience, 0 otherwise.

EXPERIENCE2 — - I if a participant has more than 0 to less than 2 years of experience,

O otherwise.
EXPERIENCE3 I if a participant has 2 to less than 4 years of experience, 0
otherwise.

EXPERIENCE4 - I if a participant has 4 to less than 6 years of experience, 0 otherwise.

AGEI = I if a participant is in the age group of 18-22, O otherwise. AGE2 — I if a
participant is in the age group of 23-29, 0 otherwise.
Ill
AGE3 = I if a participant is in the age group of 30-39, 0 otherwise.
Financial Literacy
INCOME 1 — I if the participant is in the income group of less than 0
otherwise.
INCOME2 — I if the participant is in the income group of O

otherwise.
INCOME3 — I if the participant is in the income group of 0
otherwise.
TABLE 1
Characteristics of the Sample

Number of Participants Percentage

A. Education d) S50.(XX) or
more
l. Academic Disciplines 431 52.6
a) Business Majors 389 47.4
b) Non-Business Majors
2. Class Rank 156 17.
a) Freshman 2
b) Sophomore 157 17.
c) Junior 3
d) Senior 160 17.7
e) Graduate 326 36.0
B. Characteristis 106 1 1.7
l. Gender
a) Male
b) Female 2. Race 395 44.4
a) White 495 55.6
b) African-American
c) Asian 763 85.0
d) Hispanic 59 6.6
e) Native American 47 5.2
3. Nationality 14 1.
a) USA 6
b) Foreign (other than USA) 15 1.
7
C.
Years of Work
740 93.4
a) None
52 6.6
b) Less Than Two Years
c) Two to Less Than Four Years
d) Four to Less Than Six Years
32 3.9
e) Six Years or More
2. Years of Age 78 9.5
134 16.3
a) 18 to 22
194 23.6
b) 23 to 29
384 46.7
c) 30 to 39
d) 40 and over
395 43.7
D. Incoak
289 32.0
I. Last Year's Income
151 16.7
a) Under SIO,cm 69 7.6
b) $10,cm to $29,999
c) $30,cm to $49,999
 112 FINANCIAL SERVICES REVIEW 7(2) 1998

184 21.7 192 22.6

224 26.4 248 29.2
To determine the impact of financial literacy possessed by the participants on their
opinions, students are asked to rank personal finance issues using five categories: very
important, somewhat important, not sure, somewhat unimportant, and very unimportant.
They are also asked to make decisions on the related financial issues. As in the logistic
regression analysis, the sample is partitioned into two groups of students with relatively
more knowledge and those with relatively less knowledge. Since the issues are related to
each section in the survey, the section median percentage of correct answers is used to
classify the sample. Cross-tabulations and Chi-square tests are used to determine if the
difference of the two groups' opinions and decisions are statistically significant.

IV. RESULTS AND ANALYSIS

The questionnaires are sent to 1,8m students from 14 college campuses. They include both
public and private schools, main and branch campuses of large universities, and small
community colleges in California, Florida, Kentucky, Massachusetts, Ohio, and
Pennsylvania. Nine hundred twenty-four students from 13 campuses participated in the
survey, representing a response rate of51.33%. Detailed characteristics of the sample are
presented in Table I .
In terms of education, about 52.6% of the participants are business majors. Thirty-six
percent of the participants are seniors with the rest evenly distributed among freshman,
sophomore, junior, and graduate students. In terms of demographic background, most of
the participants are white and U.S. citizens. Female participants represent about 55.6% of
the sample. Most participants have more than two years of work experience. About 75.7%
of the students are from 18 to 29 years of age. Missing responses cause the sample size to
vary from 792 to 905; therefore, various sample sizes have been used to calculate valid
percentages in Table l .

A. Overall Results of the Survey

The overall results are presented in Table 2. The mean percentage of correct scores is
grouped into three categories: over 80, 60-79, and below 60. The highest score is presented
first, which is followed by lower scores within each section. The overall mean percentage
of correct scores is 52.87%, indicating on average the participants answered only about half
of the survey questions correctly. The median percentage of correct scores is 55.56%. The
reliability of the 36-question survey is 0.85. The large Cronbach alpha indicates that the
questionnaire is reliable, which further increases its validity. The findings suggest that
college students' knowledge on personal finance is inadequate.
Financial Literacy
One reason for the low level of knowledge is the systematic lack of a sound personal
finance education in college curricula. Most of the higher education institutions put little
emphasis on students' personal finance education (Danes & Hira, 1987). Even business
schools do not require students to take a Personal Finance Management course
(Bialaszewski, Pencek, & Zietlow, 1993). According to a survey by Gitman and Bacon
(1985), only 5% of business school offers an undergraduate major in finance services.
Given the lack of personal finance education, it is not surprising the results show that
college students have inadequate knowledge on personal finance.
113

TABLE 2
Mean Percentage of Correct Responses to Each Survey Question, Each Section, and the
Entire Survey

Level of Personal Finance Knowledge

I. General Knowledge
Personal Finance Literacy
80.95

Legal Requirements for Apartment Lease

Apartment Leasing Costs
Asset Liquidity 74.03
Spending vs. Saving Pattern 73.48
Checking Account Reconciliation 70.89
Net Worth Calculation 62.55
Personal Financial Planning 56.49
Tax Credit vs. Tax Deduction 52.38
Mean Correct Responses for the Section 27.38 63.70
Median Correct Responses for the Section
Il. Savings and Borrowing
66.67

Creditworthiness 76.95
Consumer Credit Report Sources 72.08
Deposit Insurance 69.16
Checking Account Overdrafts 63.64
Compound Interest
56.39
Certificate of Deposit Terms
50.32
Loan Co-Sign Consequences
44.70
Annual Percentage Rate
33.23
Credit Card Use
23.81
111. Mean Correct ReponsB for the Secdon 54.47 86.47
Median Correct ResponsB for the Section 55S6
Insurance
Auto Insurance Rate Determination 74.35
Reason to Buy Insurance 64.94
Health Insurance Characteristics
Insurance Conflict Resolution 48.70
Homeowners' Insurance Character+ Ges
Term Insurance Characteristics 32.14
Mean Responsß for the Section 59.24
Median Responses for the 66.67
114 FINANCIAL SERVICES REVIEW 7(2) 1998
IV. Invetments

Mutual Fund Selection 64.94

Common Stock Investing for Selected Investment Goals 64.50

Retirement - Benefits of Early Investment 53.68

Mutual Fund Investment Return 47.08

High Risk - Return Investment Suitability 45.35

Interest Rate Changes and Treasury Bond Price 36.90

Municipal Bond Investment 34.31

Dollar-cost-averaging 33.23

Investment Diversification 30.09

Mutual Fund Charges 29.00

Foreign Exchange Rates 28.57

Mutual Fund Ownership Characteristics 12.45

Mean Corru•t for the Secdon 40.37

Median Correct Responses for the Section 41.67

Mean Rßponse for the Entire Survey 52.87

Median for the Entire Survey ss.S6
Another reason for the low level of knowledge can be attributed to the young ages of
the participants. As shown in Table l, about 44% of the participants are 18 to 22 years of
age, and about 76% are under 30. The majority of them are in a very early stage of their
financial life cycle. At this stage of the cycle, they are exposed to a limited number of
financial issues related to general knowledge, savings and borrowing, and insurance. During
this period, most of their incomes are spent on consumption rather than investment. These
factors may explain the differences in the mean percentages of correct answers for the
sections of General Knowledge (63.70%), Savings and Borrowing (54.47%), Insurance
(59.24%), and Investment (40.37%). A further look into the scores on individual questions
shows that students score higher on issues with which they are familiar. For example, the
highest score is related to auto insurance. Students are familiar with the issue because many
of them own cars and have to pay a higher auto insurance premium. Students also score
relatively high on apartment leases. They know more about these issues because they need
to rent apartments during their college years. In contrast, students have little experience with
tax, term life insurance, and most of investment topics. Subsequently, they earn low scores
in these areas.