The Importance of Financial and Risk Literacy: Lessons from Many Years of Data

Financial literacy has been measured systematically in the USA for more than two decades, beginning with the development of the Big Three financial literacy questions on compound interest, inflation, and risk diversification. This article reviews what this long-standing body of research has established about financial and risk literacy and presents updated evidence from the 2024 National Financial Capability Study. Across surveys, countries, and time, one finding has remained especially persistent: Risk diversification is the concept respondents understand least well. Risk knowledge also varies substantially by age, gender, education, race and ethnicity, and household income. We further examine its relationship with financial fragility, a measure developed following the 2008 financial crisis to assess households’ ability to withstand an unexpected expense. Respondents who understand risk diversification are substantially less likely to be financially fragile, and this finding remains significant after accounting for demographic and financial characteristics. These latest results reinforce a broad body of evidence showing that financial knowledge, and risk comprehension in particular, is closely related to household financial resilience. We conclude by discussing the implications of this research for financial education, teaching, and policy.