Residents of New Hampshire and Alaska rank at the top in financial literacy (such as understanding the effect of interest rates on savings) and savvy financial behavior (such as setting aside sufficient emergency funds), while residents of Louisiana and West Virginia rank at the bottom, according to research by the nonprofit Employee Benefit Research Institute (EBRI).

The complete ranked listing of the states is included in the report How Do Financial Literacy and Financial Behavior Vary by State? published in the November 2011 EBRI Notes.

After controlling for the effect of individual demographics such as age, ethnicity, education, income, marital status and labor force status, the study found that residing in one of the bottom-ranked states still had a statistically significant effect on residents’ financial literacy. Moreover, almost all states had a statistically significant effect on their residents’ financial behavior, said Sudipto Banerjee, EBRI research associate and author of the study. This suggests that there might be something apart from individual demographics going on at the state level that's shaping individual financial literacy and financial behavior.

Rankings

Banerjee used data from the National Financial Capability Study, designed by the FINRA Investor Education Foundation, which uses an online state-by-state survey to measure financial literacy and financial behavior. The survey was fielded June-October 2009. Among the findings:

Top-ranked states. New Hampshire and Alaska top the financial literacy and the financial behavior rankings, respectively. Minnesota, Idaho, Washington, Colorado, Wisconsin, Utah and Maryland appear in the top 15 of both rankings.

Bottom-ranked states. Residents of Louisiana and West Virginia were found to be at the bottom of the financial literacy and the financial behavior rankings, respectively. Mississippi, Arkansas, Tennessee, Alabama, Ohio, Kentucky, Texas and Indiana appear in the bottom 15 of both rankings.

Research shows that a majority of Americans have limited knowledge about such basic financial concepts as inflation, compound interest and risk diversification as well as low numeracy skills, Banerjee noted. Not surprisingly, low financial literacy is associated with low income and education. Therefore, an important policy question is whether the lack of financial literacy can be attributed entirely to individual characteristics or if institutional factors have a role in it.

Banerjee said that the study results indicate there might be a reason to call for policy intervention at the state level to help Americans achieve a financially secure retirement. 

Related Articles:

Report: Driving Improved Savings Behaviors, SHRM Online Benefits Discipline, October 2011

Retirement Preparedness: the ‘New Normal,’ SHRM Online Benefits Discipline, September 2011

Retirement Education Isn't Enough, SHRM Online Benefits Discipline, June 2011

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