Survey Reveals Lack of Financial Capability by U.S. Adults

The first of three linked surveys assessing the financial capability of U.S. adults was released in December and paints a troubling picture of financial capacity of US adults while indicating the importance of increasing the ability of US adults to make informed decisions. According to the report, more than half of those surveyed reported difficulty covering monthly expenses; do not have a “rainy day” fund; more than one in five were engaged in alternative financing mechanisms; and, demonstrated an “inability to do basic interest calculations and other math-oriented tasks.”

The survey, Financial Capability in the United States, is based on the responses of 1,500 American adults in a nation-wide telephone survey. (The results of two other surveys will be released in 2010 which will provide information on a State-by-State survey and Military Survey.) The survey was released by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

The mission of the FINRA Investor Education Foundation is to provide under served Americans with the knowledge, skills and tools necessary for financial success throughout life. The FINRA Foundation envisions a society characterized by universal financial literacy. FINRA is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,800 brokerage firms, about 170,400 branch offices and approximately 643,000 registered securities representatives.

The survey focused on four components of financial capability – making ends meet, planning ahead, managing financial products, and financial knowledge and decision-making. The survey found:

1. Almost half of the responders stated they had troubled making ends meet;
2. A quarter reported having overdrawn checking accounts;
3. Approximately 16 of mortgage borrowers were late with their payment at least once in the preceding 12 months;
4. A significant number withdrew funds from their retirement accounts;
5. Only 49 percent of the respondents stated they had a three-month rainy day fund. The percentage decreased as the age and income of the respondents decreased;
6. The majority of Americans do not have any retirement plans;
7. Less than half of the respondents with financially dependent children have not set aside money for a college education;
8. Twelve percent of all respondents are “unbanked: while 15 percent do not have a checking account and 28 percent do not have a savings account, money market fund or time-deposit account;
9. Nearly one-quarter of respondents utilized alternative forms of banking in the last five years;
10. Sixty-eight percent of the respondents said they had a credit card and 27 percent said they had at least four;
11. Three in five respondents owned a home. This includes 41 percent of African-Americans, 42 percent of Hispanics and 69 percent of Caucasians own homes;
12. More than half of the respondents had retirement accounts yet the responses varied by income and education group; and,
13. Most respondents were not as financially literate and they thought.

FINRA will continue to analyze the survey results as it tabulates and prepares to release the Military and State-by-State Surveys. The survey is available online. FINRA plans to repeat the survey in three to five years to measure the progress of efforts to increase the financial capabilities of US adults.

SBA Releases New Report on Business Owners

The Small Business Administration (SBA) released a working paper which seeks to provide a better understanding of the starts and stops of nonemployer businesses. Nonemployer businesses are those with no employees other than the owner and include part-time, home-based businesses where the owners work less than 40 hours per week.

According to the paper, The Nonemployer Start-up Puzzle, points out that these firms make up three-quarters of the firms in our economy. These firms are more likely to start as an occupational decision as oppose to a response to an opportunity in the marketplace.

The paper is authored by Zoltan Acs, Brian Headd, and Hezekiah Agwara, and uses special tabulations produced by the U.S. Census Bureau’s Nonemployer Statistics and funded by the U.S. Small Business Administration, Office of Advocacy. The findings include:

1. Nonemployer firms have entry rates about three times those of employer firms. Of existing companies in 2004, 34.3 percent of nonemployers were new and 12.6 percent of employers were new.
2. Exit rates in the time period studied were lower but similar to entry rate levels for both nonemployers and employers.
3. Entry and exit rates, collectively referred to as turnover, seem to be associated with an industry’s economies of scale, or the amount of capital needed for entry. For example, mining, with high economies of scale, had low turnover rates, while services, with low economies of scale, had high turnover rates.
4. The econometric model found, after controlling for population growth, that states’ unemployment rates were positively correlated with nonemployer entry.

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