Nudging Gen Z To Make Sound Financial Decisions

The majority of members belonging to Generation Z are financially illiterate. A majority are in financial trouble because of their spending and borrowing behavior. The combination of financial illiteracy and problematic money management leads many to be unaware of the ticking time bombs which underlie their financial circumstances.

At the same time, there is hope for Gen Z. This is because behavioral economics-based nudging techniques are helping some members of Gen Z to make wise decisions about saving for retirement and using Buy Now Pay Later plans.

Low Financial Literacy And Problematic Behaviors

The concept of financial literacy refers to consumers’ understanding of basic financial principles. In this regard, economists Annamaria Lusardi and Olivia Mitchell study financial literacy by focusing on three specific dimensions:

1. compound interest;

2. inflation; and

3. stock market risk.

Lusardi and Mitchell assess people’s degree of financial literacy using multiple choice survey questions, such as the following:

1. If you invest $10 in an asset which pays 1% per day of interest for 72 days, how much will your investment be worth in 72 days?

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

3. Does buying a single company’s stock usually provide a safer return than buying a stock mutual fund?

The answers to the three questions are, respectively,

1. $20;

2. less than today; and

3. No.

Lusardi and Mitchell report that the percentages of those deemed to be financially literate on the three dimensions are respectively 67%, 75%, and 52%.

The 2025 TIAA Institute-GFLEC Personal Finance Index consists of 28 survey questions on financial literacy. The findings from this survey indicate that members of Gen Z, who were born between 1997 and 2012, have an average financial literacy score of 38%, the lowest of any generation. In this regard, Gen Z scored lowest on every dimension, and scored especially poorly on issues related to insurance.

Relative to others, Lusardi and Mitchell point out that people with lower scores on financial literacy engage less in retirement planning and accumulate less wealth to finance retirement. The two economists also note that those with lower scores do a worse job of managing debt and establishing “rainy day funds” to deal with emergencies.

Notably, a report appearing in Newsweek pointed out that Gen Z holds more personal debt than other generations. As a point of contrast, consider that the average financial literacy score for prior generation millennials is 46%, considerably higher than Gen Z’s 38%. Newsweek reported that the average amount of debt for Gen Z is $94,101, while for millennials, it is considerably lower at $59,181. Significantly Gen Z carries more debt than millennials did when the latter were at Gen Z’s stage of life. In addition, 41% of Gen Z report that they do not have a rainy day fund that would cover a $2,000 emergency. For millennials, the corresponding figure is 30%.

Helpful Nudging Techniques

Gen Z is the first generation of “digital natives” in respect to the Internet, smartphones, and social media. The issue of whether technology is contributing to Gen Z’s low financial literacy scores is unclear and in need of systematic study. What does seem clear is that behavioral economics and technology, together, provide Gen Z with options to make sound financial decisions.

According to the New York Times, Gen Z is contributing more to 401(k) plans than millennials did at the same stage of life. The Times suggests a key reason why Gen Z is doing a better job at saving for retirement is an automatic enrollment provision in the Secure 2.0 Act that took effect in 2022. The default position is that potential participants are enrolled in the plan, but can opt out. Because of a psychological phenomenon known as “status quo bias,” the setting of the default increases participation rates in 401(k) plans more than the alternative in which potential participants must choose to opt in.

Economics Nobel laureate Richard Thaler and economist Shlomo Benartzi developed the automatic enrollment approach, which they called “Save More Tomorrow.” SMT builds on a framework known as the “Behavioral Life Cycle Hypothesis” which I developed with Thaler to explain why people have difficulty saving for retirement. SMT was the first example of an approach called “nudging” which uses psychological insights in an effort to help people make better decisions than they otherwise might.

The takeaway from this discussion is that in some circumstances, nudging techniques can overcome low financial literacy, a point that comes out of my research. That said, it is important to be aware that nudging techniques are no panacea. In this regard, SMT applies to choices in 401(k) plans, which are only available to some employees. In addition, nudging techniques need to be selected prudently, and tested empirically to ascertain what works in practice, and what does not.

A second example of how nudging techniques can help Gen Z and others make better financial decisions involves the use of Buy Now, Pay Later plans. These plans offer consumers installment debt-based alternatives to obtain credit to pay for purchases. Companies such as Walmart, mentioned above, partner with BNPL firms to offer these alternatives.

One option features a series of equal installments, to be paid within a matter of weeks, with the first installment due at the time of purchase. Typically, this option does not feature an interest charge to the consumer. Other options also involve equal installments over longer horizons such as six months and twelve months. These longer-term do levy interest charges, with BNPL interfaces making the amount of interest transparent to consumers.

Typically, the default option for BNPL is the interest-free option. Consumers who choose to borrow for longer periods than a few weeks, will see exactly how much interest they will have to pay if they opt out of the default.

Fair Isaac Corp. is the company that manages and communicates the widely used FICO credit score. FICO recently announced that it planned to add BNPL data to its credit score analysis.

Notably, FICO conducted a study jointly with the BNPL firm Affirm. The study found that on average, consumers benefitted by using BNPL instead of, or in addition to regular credit cards. I say on average, as BNPL is no panacea, and can create serious problems for consumers who are not careful using it.

To conclude: Gen Z is registering the lowest financial literacy scores than any other generation, and experiencing higher levels of debt and lower levels of financial preparedness. At the same time, programs with nudging features, such as SMT and BNPL are helping members of Gen Z make better decisions about retirement saving and short-term credit. The last point is encouraging, and provides a rationale for developing new nudging techniques to help Gen Z and others make sound decisions across the financial spectrum.