With more baby boomers retiring by the month and triple-digit gains and losses in the market becoming the new normal, knowing about finances and how they work has become increasingly important to setting up retirement funds.
Most research shows that Americans don't know much about basic financial concepts like inflation, diversifying risk and compounded interest, so Sudipto Banerjee, a research associate at the Employee Benefit Research Institute, did a state-by-state analysis to see whether it was possible to pinpoint financially savvy states.
The study by the Washington, D.C.-based research group, analyzed data from the Financial Industry Regulatory Authority's National Financial Capability Study, and ranked states in two categories: financial literacy and financial behavior. Financial literacy questions focused on calculating interest rates and other market behavior issues, while behavioral questions asked things like whether respondents had rainy-day funds, knew their credit score, or whether they got certain types of professional financial advice.
New Hampshire and Louisiana residents ranked the highest and lowest in financial literacy while Alaska and West Virginia were the highest and lowest in financial behavior, Banerjee found.
Nine states—New Hampshire, Minnesota, Idaho, Washington, Colorado, Wisconsin, Utah, Alaska and Maryland—appear in the top 15 states for both categories. Meanwhile, 10 states—Louisiana, Mississippi, Arkansas, Tennessee, West Virginia, Alabama, Ohio, Kentucky, Texas and Indiana—rank in the bottom of both groups.
"This suggests that there might be something going on at the state level whereby individual financial literacy and financial behavior are being shaped not only by individual demographic characteristics but also by the state in which people live," Banerjee says.
"But why these differences exist, we can't really say," adds EBRI spokesman Stephen Blakely, noting that there might be something causing 20 percent of states to perform poorly, and nearly as much to perform well.