In these turbulent economic times, more bad news about household finances may be the last thing you're prepared to hear. But don't tune out just yet: The findings from a new Financial Capability Survey paint a troubling picture of the current state of financial capability in the U.S. adult population. And while lack of financial knowledge and ability may seem like the least of our current problems, they are actually crucial markers of how well Americans can cope with financial adversity and prepare for their own futures.

This new data (released at a press conference in December with Treasury Secretary Tim Geithner) provides the first real insight into how Americans deal with financial matters ranging from decision-making to planning. Specifically, the survey focused on four key components of financial capability: making ends meet, planning ahead, choosing financial products, and financial knowledge and decision-making.

The findings? Not good. Across the board, Americans showed limited financial capability. Low-income and minority groups and those with less education scored significantly lower in many areas, highlighting disparities that put them at an increased risk of financial uncertainty and struggle. Key findings from the four sections of the survey are detailed below:

1. Making ends meet. A key element of financial capability is being able to make ends meet: balancing monthly income and expenses to avoid over-spending and dealing competently with everyday financial matters. Given the current economic climate, it's no surprise that the survey found many signs of financial strain among American adults: Almost half of respondents reported having trouble keeping up with monthly bills and expenses, and about 16 percent of mortgage borrowers reported at least one late payment in the last two years. Some of these were ongoing struggles that have only been exacerbated by the economic crisis: One-third of respondents stated that they had experienced a large and unexpected drop in income during the past year. And some groups have been more deeply affected by the crisis than others-workers earning less than $25,000 a year and Hispanics appear to have been especially hard hit.

2. Planning Ahead. Certain life events obviously require advance financial planning: retirement and college tuitions are the biggest-tickets items for most families. But while the shift from defined-benefit pension plans to defined-contribution plans (401(K)s and the like) has left individuals increasingly responsible for their own financial security after retirement, the majority of Americans appear not to have done any planning. Only 42 percent of respondents who have not yet retired said they had ever tried to figure out how much they need to save for retirement. While the proportion of planners increases with age, even among respondents between the ages of 45 to 59, only about half have attempted to calculate how much they need to save, much less put a plan in place. And while tuition and fees growth has steadily outpaced inflation (and continue to rise) at four-year public colleges and universities, lack of planning for children's education is also widespread. Only 41 percent of those with financially dependent children have set money aside for college, leaving a clear gap between what they will need to pay and what they will actually be able to afford. This lack of planning only sets up the next generation for continued struggles with excessive student debt and a difficult foray into adulthood and financial independence.

Finally, the financial meltdown of the last year and a half has highlighted how crucial it is for individuals and families to buffer themselves against financial emergencies, or shocks. The ability to weather economic shocks not only contributes to financial stability at the individual and family level but also increases the stability of the economy as a whole. Unfortunately, most Americans lack the proverbial rainy day fund. Just under half of respondents said they had set aside enough money to cover expenses for three months in case of sickness, job loss, or other emergency. The other half, if faced with an unexpected shock, would quickly find themselves in dire financial straits.

3. Managing Financial Products. How people manage cash, how they borrow, the assets they own, and their exposure to financial market risks is another key component of financial capability. 12 percent of the U.S. population appears to be unbanked, meaning they do not have a checking, savings, or other type of bank account. Being unbanked is more prevalent among certain demographic groups, including those without a high school diploma, Hispanics, African-Americans, and young adults, and the unbanked were found to be more likely to engage in alternative forms of borrowing (payday loans, tax refund advances, and the like) that are likely to charge a much higher interest rate than a bank or credit card.

America is a country that loves its credit cards, but doesn't pay close attention to the pitfalls-68 percent reported having them, and the majority of cardholders were guilty of at least one behavior that results in interest charges or fees. The borrowing habits of more than 40 percent of credit card holders (paying the minimum only, paying late fees, paying over the limit fees, or using the card for cash advances) resulted in substantial interest payments, fees, or both. Young people and those earning less than $75,000 per year were more likely to end up with interest and fees, further weakening their financial standing.

Among homeowners surveyed, 61 percent had a mortgage, but one in five of them did not know the characteristics of their mortgage. Similar lack of information is true for retirement savings, an increasingly important asset for many families. A positive note was the statement from almost four out of five respondents with defined contribution or individual retirement account plans that they contribute regularly to their accounts. Unfortunately, many of them could not describe how their retirement assets were invested: 17 percent did not know whether they were invested in stocks or stock mutual funds, and 37 percent did not know if they were invested primarily in a life-cycle or target-date fund. Not understanding their portfolio investments means those respondents may not be making educated plans for their futures, and many of them are likely risking too much or missing out on better returns.

4. Financial Knowledge and Decision-Making. To make sound financial decisions, one must be equipped with at least a rudimentary level of financial knowledge, plus the skills to apply what one knows to actual financial decision-making situations. The survey showed that there is all too often a gap between self-reported knowledge and real-world behavior. When asked to assess their financial knowledge, 37 percent of respondents rated their financial knowledge at the high end of the scale. But, in fact, fewer than 10 percent were able to correctly answer all of a battery of questions covering the fundamentals of economics and finance. There is also a disconnect between perceptions and actions in day-to-day financial matters. Half of respondents with credit cards and checking accounts gave themselves the top score of 7 when asked how good they are at tasks like managing checking accounts and credit cards and tracking expenses. However, one-quarter of these respondents also indicated that they have incurred high fees (using credit cards for cash advances, making late payments, running over a credit limit or overdrawing their checking accounts). The incidence of these behaviors was even higher among those who had scored themselves a 6.

Shopping around for the best rates and conditions from different providers of financial services is a key way to maintain a strong financial status. The survey asked respondents about this habit, and it turns out that most Americans either do not comparison shop at all or conduct a very limited search, setting themselves up for higher fees or mediocre performance. And although credit scores are a critical determinant of the interest rates one will be charged, only a minority of survey respondents have ever obtained a copy of their credit report, and even fewer have checked their credit score in the past twelve months. Even once a loan has been taken out, many respondents don't know what rate they are paying: About one in five of those with auto loans did not know their interest rate, while about 12 percent of credit card holders who do not pay off their balances in full don't know the interest rate on their credit card with the largest balance. All of these facts combine to paint a picture of an under-informed population that can end up paying more than it can afford on potentially avoidable costs.

Overall, the survey showed distressingly low levels of financial capability among many Americans. The results are important not only for those individuals who demonstrate low levels of financial capability, but also for the United States as a whole, particularly in this tough economy. When people make poor financial decisions, the cost of those decisions is passed on to all Americans through higher prices for financial products, the diversion of economic resources, and greater strains on existing social safety nets.

The good news is that the findings indicate that increasing financial capability can have profound implications on the financial security, well-being and prosperity of individuals and families. The specific findings for certain groups of respondents also point out areas where targeted education programs could have an enormous impact. A more financially capable population can result in a larger and more efficient market for financial products, greater participation in asset building and greater financial stability. It is therefore in everyone's interest that action be taken to improve the financial capability of all Americans-the sooner the better.

For a summary of the research or the complete report, please visit

Chris Bumcrot is a Partner of Applied Research & Consulting LLC, John Gannon is the President of the FINRA Investor Education Foundation, and Annamaria Lusardi is the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. They all contributed to the design of the Financial Capability Survey.