research topic about financial literacy

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• Published: 24 January 2019

Financial literacy and the need for financial education: evidence and implications

• Annamaria Lusardi 1  

Swiss Journal of Economics and Statistics volume  155 , Article number:  1 ( 2019 ) Cite this article

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1 Introduction

Throughout their lifetime, individuals today are more responsible for their personal finances than ever before. With life expectancies rising, pension and social welfare systems are being strained. In many countries, employer-sponsored defined benefit (DB) pension plans are swiftly giving way to private defined contribution (DC) plans, shifting the responsibility for retirement saving and investing from employers to employees. Individuals have also experienced changes in labor markets. Skills are becoming more critical, leading to divergence in wages between those with a college education, or higher, and those with lower levels of education. Simultaneously, financial markets are rapidly changing, with developments in technology and new and more complex financial products. From student loans to mortgages, credit cards, mutual funds, and annuities, the range of financial products people have to choose from is very different from what it was in the past, and decisions relating to these financial products have implications for individual well-being. Moreover, the exponential growth in financial technology (fintech) is revolutionizing the way people make payments, decide about their financial investments, and seek financial advice. In this context, it is important to understand how financially knowledgeable people are and to what extent their knowledge of finance affects their financial decision-making.

An essential indicator of people’s ability to make financial decisions is their level of financial literacy. The Organisation for Economic Co-operation and Development (OECD) aptly defines financial literacy as not only the knowledge and understanding of financial concepts and risks but also the skills, motivation, and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life. Thus, financial literacy refers to both knowledge and financial behavior, and this paper will analyze research on both topics.

As I describe in more detail below, findings around the world are sobering. Financial literacy is low even in advanced economies with well-developed financial markets. On average, about one third of the global population has familiarity with the basic concepts that underlie everyday financial decisions (Lusardi and Mitchell, 2011c ). The average hides gaping vulnerabilities of certain population subgroups and even lower knowledge of specific financial topics. Furthermore, there is evidence of a lack of confidence, particularly among women, and this has implications for how people approach and make financial decisions. In the following sections, I describe how we measure financial literacy, the levels of literacy we find around the world, the implications of those findings for financial decision-making, and how we can improve financial literacy.

2 How financially literate are people?

2.1 measuring financial literacy: the big three.

In the context of rapid changes and constant developments in the financial sector and the broader economy, it is important to understand whether people are equipped to effectively navigate the maze of financial decisions that they face every day. To provide the tools for better financial decision-making, one must assess not only what people know but also what they need to know, and then evaluate the gap between those things. There are a few fundamental concepts at the basis of most financial decision-making. These concepts are universal, applying to every context and economic environment. Three such concepts are (1) numeracy as it relates to the capacity to do interest rate calculations and understand interest compounding; (2) understanding of inflation; and (3) understanding of risk diversification. Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell ( 2008 , 2011b , 2011c ) have designed a standard set of questions around these concepts and implemented them in numerous surveys in the USA and around the world.

Four principles informed the design of these questions, as described in detail by Lusardi and Mitchell ( 2014 ). The first is simplicity : the questions should measure knowledge of the building blocks fundamental to decision-making in an intertemporal setting. The second is relevance : the questions should relate to concepts pertinent to peoples’ day-to-day financial decisions over the life cycle; moreover, they must capture general rather than context-specific ideas. Third is brevity : the number of questions must be few enough to secure widespread adoption; and fourth is capacity to differentiate , meaning that questions should differentiate financial knowledge in such a way as to permit comparisons across people. Each of these principles is important in the context of face-to-face, telephone, and online surveys.

Three basic questions (since dubbed the “Big Three”) to measure financial literacy have been fielded in many surveys in the USA, including the National Financial Capability Study (NFCS) and, more recently, the Survey of Consumer Finances (SCF), and in many national surveys around the world. They have also become the standard way to measure financial literacy in surveys used by the private sector. For example, the Aegon Center for Longevity and Retirement included the Big Three questions in the 2018 Aegon Retirement Readiness Survey, covering around 16,000 people in 15 countries. Both ING and Allianz, but also investment funds, and pension funds have used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table  1 .

2.2 Cross-country comparison

The first examination of financial literacy using the Big Three was possible due to a special module on financial literacy and retirement planning that Lusardi and Mitchell designed for the 2004 Health and Retirement Study (HRS), which is a survey of Americans over age 50. Astonishingly, the data showed that only half of older Americans—who presumably had made many financial decisions in their lives—could answer the two basic questions measuring understanding of interest rates and inflation (Lusardi and Mitchell, 2011b ). And just one third demonstrated understanding of these two concepts and answered the third question, measuring understanding of risk diversification, correctly. It is sobering that recent US surveys, such as the 2015 NFCS, the 2016 SCF, and the 2017 Survey of Household Economics and Financial Decisionmaking (SHED), show that financial knowledge has remained stubbornly low over time.

Over time, the Big Three have been added to other national surveys across countries and Lusardi and Mitchell have coordinated a project called Financial Literacy around the World (FLat World), which is an international comparison of financial literacy (Lusardi and Mitchell, 2011c ).

Findings from the FLat World project, which so far includes data from 15 countries, including Switzerland, highlight the urgent need to improve financial literacy (see Table  2 ). Across countries, financial literacy is at a crisis level, with the average rate of financial literacy, as measured by those answering correctly all three questions, at around 30%. Moreover, only around 50% of respondents in most countries are able to correctly answer the two financial literacy questions on interest rates and inflation correctly. A noteworthy point is that most countries included in the FLat World project have well-developed financial markets, which further highlights the cause for alarm over the demonstrated lack of the financial literacy. The fact that levels of financial literacy are so similar across countries with varying levels of economic development—indicating that in terms of financial knowledge, the world is indeed flat —shows that income levels or ubiquity of complex financial products do not by themselves equate to a more financially literate population.

Other noteworthy findings emerge in Table  2 . For instance, as expected, understanding of the effects of inflation (i.e., of real versus nominal values) among survey respondents is low in countries that have experienced deflation rather than inflation: in Japan, understanding of inflation is at 59%; in other countries, such as Germany, it is at 78% and, in the Netherlands, it is at 77%. Across countries, individuals have the lowest level of knowledge around the concept of risk, and the percentage of correct answers is particularly low when looking at knowledge of risk diversification. Here, we note the prevalence of “do not know” answers. While “do not know” responses hover around 15% on the topic of interest rates and 18% for inflation, about 30% of respondents—in some countries even more—are likely to respond “do not know” to the risk diversification question. In Switzerland, 74% answered the risk diversification question correctly and 13% reported not knowing the answer (compared to 3% and 4% responding “do not know” for the interest rates and inflation questions, respectively).

These findings are supported by many other surveys. For example, the 2014 Standard & Poor’s Global Financial Literacy Survey shows that, around the world, people know the least about risk and risk diversification (Klapper, Lusardi, and Van Oudheusden, 2015 ). Similarly, results from the 2016 Allianz survey, which collected evidence from ten European countries on money, financial literacy, and risk in the digital age, show very low-risk literacy in all countries covered by the survey. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial knowledge, less than 20% of respondents can answer three questions related to knowledge of risk and risk diversification (Allianz, 2017 ).

Other surveys show that the findings about financial literacy correlate in an expected way with other data. For example, performance on the mathematics and science sections of the OECD Program for International Student Assessment (PISA) correlates with performance on the Big Three and, specifically, on the question relating to interest rates. Similarly, respondents in Sweden, which has experienced pension privatization, performed better on the risk diversification question (at 68%), than did respondents in Russia and East Germany, where people have had less exposure to the stock market. For researchers studying financial knowledge and its effects, these findings hint to the fact that financial literacy could be the result of choice and not an exogenous variable.

To summarize, financial literacy is low across the world and higher national income levels do not equate to a more financially literate population. The design of the Big Three questions enables a global comparison and allows for a deeper understanding of financial literacy. This enhances the measure’s utility because it helps to identify general and specific vulnerabilities across countries and within population subgroups, as will be explained in the next section.

2.3 Who knows the least?

Low financial literacy on average is exacerbated by patterns of vulnerability among specific population subgroups. For instance, as reported in Lusardi and Mitchell ( 2014 ), even though educational attainment is positively correlated with financial literacy, it is not sufficient. Even well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. In the USA, less than 30% of respondents can correctly answer the Big Three by age 40, even though many consequential financial decisions are made well before that age (see Fig.  1 ). Similarly, in Switzerland, only 45% of those aged 35 or younger are able to correctly answer the Big Three questions. Footnote 1 And if people may learn from making financial decisions, that learning seems limited. As shown in Fig.  1 , many older individuals, who have already made decisions, cannot answer three basic financial literacy questions.

Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study

A gender gap in financial literacy is also present across countries. Women are less likely than men to answer questions correctly. The gap is present not only on the overall scale but also within each topic, across countries of different income levels, and at different ages. Women are also disproportionately more likely to indicate that they do not know the answer to specific questions (Fig.  2 ), highlighting overconfidence among men and awareness of lack of knowledge among women. Even in Finland, which is a relatively equal society in terms of gender, 44% of men compared to 27% of women answer all three questions correctly and 18% of women give at least one “do not know” response versus less than 10% of men (Kalmi and Ruuskanen, 2017 ). These figures further reflect the universality of the Big Three questions. As reported in Fig.  2 , “do not know” responses among women are prevalent not only in European countries, for example, Switzerland, but also in North America (represented in the figure by the USA, though similar findings are reported in Canada) and in Asia (represented in the figure by Japan). Those interested in learning more about the differences in financial literacy across demographics and other characteristics can consult Lusardi and Mitchell ( 2011c , 2014 ).

Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c ; Japan—Sekita, 2011 ; Switzerland—Brown and Graf, 2013

3 Does financial literacy matter?

A growing number of financial instruments have gained importance, including alternative financial services such as payday loans, pawnshops, and rent to own stores that charge very high interest rates. Simultaneously, in the changing economic landscape, people are increasingly responsible for personal financial planning and for investing and spending their resources throughout their lifetime. We have witnessed changes not only in the asset side of household balance sheets but also in the liability side. For example, in the USA, many people arrive close to retirement carrying a lot more debt than previous generations did (Lusardi, Mitchell, and Oggero, 2018 ). Overall, individuals are making substantially more financial decisions over their lifetime, living longer, and gaining access to a range of new financial products. These trends, combined with low financial literacy levels around the world and, particularly, among vulnerable population groups, indicate that elevating financial literacy must become a priority for policy makers.

There is ample evidence of the impact of financial literacy on people’s decisions and financial behavior. For example, financial literacy has been proven to affect both saving and investment behavior and debt management and borrowing practices. Empirically, financially savvy people are more likely to accumulate wealth (Lusardi and Mitchell, 2014 ). There are several explanations for why higher financial literacy translates into greater wealth. Several studies have documented that those who have higher financial literacy are more likely to plan for retirement, probably because they are more likely to appreciate the power of interest compounding and are better able to do calculations. According to the findings of the FLat World project, answering one additional financial question correctly is associated with a 3–4 percentage point greater probability of planning for retirement; this finding is seen in Germany, the USA, Japan, and Sweden. Financial literacy is found to have the strongest impact in the Netherlands, where knowing the right answer to one additional financial literacy question is associated with a 10 percentage point higher probability of planning (Mitchell and Lusardi, 2015 ). Empirically, planning is a very strong predictor of wealth; those who plan arrive close to retirement with two to three times the amount of wealth as those who do not plan (Lusardi and Mitchell, 2011b ).

Financial literacy is also associated with higher returns on investments and investment in more complex assets, such as stocks, which normally offer higher rates of return. This finding has important consequences for wealth; according to the simulation by Lusardi, Michaud, and Mitchell ( 2017 ), in the context of a life-cycle model of saving with many sources of uncertainty, from 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge. These results show that financial literacy is not a sideshow, but it plays a critical role in saving and wealth accumulation.

Financial literacy is also strongly correlated with a greater ability to cope with emergency expenses and weather income shocks. Those who are financially literate are more likely to report that they can come up with $2000 in 30 days or that they are able to cover an emergency expense of $400 with cash or savings (Hasler, Lusardi, and Oggero, 2018 ).

With regard to debt behavior, those who are more financially literate are less likely to have credit card debt and more likely to pay the full balance of their credit card each month rather than just paying the minimum due (Lusardi and Tufano, 2009 , 2015 ). Individuals with higher financial literacy levels also are more likely to refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods, e.g., payday loans, pawn shops, auto title loans, and refund anticipation loans (Lusardi and de Bassa Scheresberg, 2013 ).

Several studies have documented poor debt behavior and its link to financial literacy. Moore ( 2003 ) reported that the least financially literate are also more likely to have costly mortgages. Lusardi and Tufano ( 2015 ) showed that the least financially savvy incurred high transaction costs, paying higher fees and using high-cost borrowing methods. In their study, the less knowledgeable also reported excessive debt loads and an inability to judge their debt positions. Similarly, Mottola ( 2013 ) found that those with low financial literacy were more likely to engage in costly credit card behavior, and Utkus and Young ( 2011 ) concluded that the least literate were more likely to borrow against their 401(k) and pension accounts.

Young people also struggle with debt, in particular with student loans. According to Lusardi, de Bassa Scheresberg, and Oggero ( 2016 ), Millennials know little about their student loans and many do not attempt to calculate the payment amounts that will later be associated with the loans they take. When asked what they would do, if given the chance to revisit their student loan borrowing decisions, about half of Millennials indicate that they would make a different decision.

Finally, a recent report on Millennials in the USA (18- to 34-year-olds) noted the impact of financial technology (fintech) on the financial behavior of young individuals. New and rapidly expanding mobile payment options have made transactions easier, quicker, and more convenient. The average user of mobile payments apps and technology in the USA is a high-income, well-educated male who works full time and is likely to belong to an ethnic minority group. Overall, users of mobile payments are busy individuals who are financially active (holding more assets and incurring more debt). However, mobile payment users display expensive financial behaviors, such as spending more than they earn, using alternative financial services, and occasionally overdrawing their checking accounts. Additionally, mobile payment users display lower levels of financial literacy (Lusardi, de Bassa Scheresberg, and Avery, 2018 ). The rapid growth in fintech around the world juxtaposed with expensive financial behavior means that more attention must be paid to the impact of mobile payment use on financial behavior. Fintech is not a substitute for financial literacy.

4 The way forward for financial literacy and what works

Overall, financial literacy affects everything from day-to-day to long-term financial decisions, and this has implications for both individuals and society. Low levels of financial literacy across countries are correlated with ineffective spending and financial planning, and expensive borrowing and debt management. These low levels of financial literacy worldwide and their widespread implications necessitate urgent efforts. Results from various surveys and research show that the Big Three questions are useful not only in assessing aggregate financial literacy but also in identifying vulnerable population subgroups and areas of financial decision-making that need improvement. Thus, these findings are relevant for policy makers and practitioners. Financial illiteracy has implications not only for the decisions that people make for themselves but also for society. The rapid spread of mobile payment technology and alternative financial services combined with lack of financial literacy can exacerbate wealth inequality.

To be effective, financial literacy initiatives need to be large and scalable. Schools, workplaces, and community platforms provide unique opportunities to deliver financial education to large and often diverse segments of the population. Furthermore, stark vulnerabilities across countries make it clear that specific subgroups, such as women and young people, are ideal targets for financial literacy programs. Given women’s awareness of their lack of financial knowledge, as indicated via their “do not know” responses to the Big Three questions, they are likely to be more receptive to financial education.

The near-crisis levels of financial illiteracy, the adverse impact that it has on financial behavior, and the vulnerabilities of certain groups speak of the need for and importance of financial education. Financial education is a crucial foundation for raising financial literacy and informing the next generations of consumers, workers, and citizens. Many countries have seen efforts in recent years to implement and provide financial education in schools, colleges, and workplaces. However, the continuously low levels of financial literacy across the world indicate that a piece of the puzzle is missing. A key lesson is that when it comes to providing financial education, one size does not fit all. In addition to the potential for large-scale implementation, the main components of any financial literacy program should be tailored content, targeted at specific audiences. An effective financial education program efficiently identifies the needs of its audience, accurately targets vulnerable groups, has clear objectives, and relies on rigorous evaluation metrics.

Using measures like the Big Three questions, it is imperative to recognize vulnerable groups and their specific needs in program designs. Upon identification, the next step is to incorporate this knowledge into financial education programs and solutions.

School-based education can be transformational by preparing young people for important financial decisions. The OECD’s Programme for International Student Assessment (PISA), in both 2012 and 2015, found that, on average, only 10% of 15-year-olds achieved maximum proficiency on a five-point financial literacy scale. As of 2015, about one in five of students did not have even basic financial skills (see OECD, 2017 ). Rigorous financial education programs, coupled with teacher training and high school financial education requirements, are found to be correlated with fewer defaults and higher credit scores among young adults in the USA (Urban, Schmeiser, Collins, and Brown, 2018 ). It is important to target students and young adults in schools and colleges to provide them with the necessary tools to make sound financial decisions as they graduate and take on responsibilities, such as buying cars and houses, or starting retirement accounts. Given the rising cost of education and student loan debt and the need of young people to start contributing as early as possible to retirement accounts, the importance of financial education in school cannot be overstated.

There are three compelling reasons for having financial education in school. First, it is important to expose young people to the basic concepts underlying financial decision-making before they make important and consequential financial decisions. As noted in Fig.  1 , financial literacy is very low among the young and it does not seem to increase a lot with age/generations. Second, school provides access to financial literacy to groups who may not be exposed to it (or may not be equally exposed to it), for example, women. Third, it is important to reduce the costs of acquiring financial literacy, if we want to promote higher financial literacy both among individuals and among society.

There are compelling reasons to have personal finance courses in college as well. In the same way in which colleges and university offer courses in corporate finance to teach how to manage the finances of firms, so today individuals need the knowledge to manage their own finances over the lifetime, which in present discounted value often amount to large values and are made larger by private pension accounts.

Financial education can also be efficiently provided in workplaces. An effective financial education program targeted to adults recognizes the socioeconomic context of employees and offers interventions tailored to their specific needs. A case study conducted in 2013 with employees of the US Federal Reserve System showed that completing a financial literacy learning module led to significant changes in retirement planning behavior and better-performing investment portfolios (Clark, Lusardi, and Mitchell, 2017 ). It is also important to note the delivery method of these programs, especially when targeted to adults. For instance, video formats have a significantly higher impact on financial behavior than simple narratives, and instruction is most effective when it is kept brief and relevant (Heinberg et al., 2014 ).

The Big Three also show that it is particularly important to make people familiar with the concepts of risk and risk diversification. Programs devoted to teaching risk via, for example, visual tools have shown great promise (Lusardi et al., 2017 ). The complexity of some of these concepts and the costs of providing education in the workplace, coupled with the fact that many older individuals may not work or work in firms that do not offer such education, provide other reasons why financial education in school is so important.

Finally, it is important to provide financial education in the community, in places where people go to learn. A recent example is the International Federation of Finance Museums, an innovative global collaboration that promotes financial knowledge through museum exhibits and the exchange of resources. Museums can be places where to provide financial literacy both among the young and the old.

There are a variety of other ways in which financial education can be offered and also targeted to specific groups. However, there are few evaluations of the effectiveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported in the first part of this paper.

5 Concluding remarks

The lack of financial literacy, even in some of the world’s most well-developed financial markets, is of acute concern and needs immediate attention. The Big Three questions that were designed to measure financial literacy go a long way in identifying aggregate differences in financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby facilitating the development of tailored programs. Many such programs to provide financial education in schools and colleges, workplaces, and the larger community have taken existing evidence into account to create rigorous solutions. It is important to continue making strides in promoting financial literacy, by achieving scale and efficiency in future programs as well.

In August 2017, I was appointed Director of the Italian Financial Education Committee, tasked with designing and implementing the national strategy for financial literacy. I will be able to apply my research to policy and program initiatives in Italy to promote financial literacy: it is an essential skill in the twenty-first century, one that individuals need if they are to thrive economically in today’s society. As the research discussed in this paper well documents, financial literacy is like a global passport that allows individuals to make the most of the plethora of financial products available in the market and to make sound financial decisions. Financial literacy should be seen as a fundamental right and universal need, rather than the privilege of the relatively few consumers who have special access to financial knowledge or financial advice. In today’s world, financial literacy should be considered as important as basic literacy, i.e., the ability to read and write. Without it, individuals and societies cannot reach their full potential.

See Brown and Graf ( 2013 ).

Abbreviations

Defined benefit (refers to pension plan)

Defined contribution (refers to pension plan)

Financial Literacy around the World

National Financial Capability Study

Organisation for Economic Co-operation and Development

Programme for International Student Assessment

Survey of Consumer Finances

Survey of Household Economics and Financial Decisionmaking

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Acknowledgements

This paper represents a summary of the keynote address I gave to the 2018 Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants of the Annual Meeting for useful discussions and comments, and Raveesha Gupta for editorial support. All errors are my responsibility.

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Lusardi, A. Financial literacy and the need for financial education: evidence and implications. Swiss J Economics Statistics 155 , 1 (2019). https://doi.org/10.1186/s41937-019-0027-5

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Financial Literacy and Financial Education: An Overview

This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education.

We thank Luis Oberrauch for excellent research assistance and Allen N. Berger, Phil Molyneux, and John O.S. Wilson for helpful comments. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

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The Relationship between Financial Literacy and Financial Inclusion

DIW Berlin Discussion Paper No. 1914

25 Pages Posted: 23 Nov 2020

Antonia Grohmann

Aarhus University

Lukas Menkhoff

Humboldt-Universität zu Berlin; Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin)

Date Written: November 2020

About two billion people in the world do not own a financial account and there are many more who use financial services only occasionally. In the past, initiatives which address these problems of financial exclusion focused on the supply side of financial markets, in particular by increasing the branch network of banks and by offering cheap bank products. While this had the desired effect, recent evidence shows that improving the demand side of financial markets is also helpful. There are numerous initiatives and public policies to enhance financial education and to improve financial literacy. Microeconometric studies, often randomized controlled trials, show that financial literacy has a causal effect on financial inclusion; educated individuals understand the advantages of financial services better but also feel more confident about contacting providers. Cross-country evidence indicates that in poorer countries improved financial supply and demand are substitutes, i.e., they work independently of each other. In higher-income economies, however, these instruments are complements, i.e., it is useful to improve financial literacy in order to make better use of available financial services.

Keywords: Financial inclusion, financial literacy, financial development

JEL Classification: G53,O16

Suggested Citation: Suggested Citation

Aarhus University ( email )

Nordre Ringgade 1 DK-8000 Aarhus C, 8000 Denmark

Lukas Menkhoff (Contact Author)

Humboldt-universität zu berlin ( email ).

Humboldt Universität Unter den Linden 6 Berlin, 10099 Germany

Kiel Institute for the World Economy ( email )

P.O. Box 4309 Kiel, Schleswig-Hosltein D-24100 Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58 Berlin, 10117 Germany

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Research Topics & Ideas: Finance

PS – This is just the start…

We know it’s exciting to run through a list of research topics, but please keep in mind that this list is just a starting point . To develop a suitable education-related research topic, you’ll need to identify a clear and convincing research gap , and a viable plan of action to fill that gap.

Overview: Finance Research Topics

• Corporate finance topics
• Investment banking topics
• Private equity & VC
• Asset management
• Hedge funds
• Financial planning & advisory
• Quantitative finance
• Treasury management
• Financial technology (FinTech)
• Commercial banking
• International finance

Corporate Finance

These research topic ideas explore a breadth of issues ranging from the examination of capital structure to the exploration of financial strategies in mergers and acquisitions.

• Evaluating the impact of capital structure on firm performance across different industries
• Assessing the effectiveness of financial management practices in emerging markets
• A comparative analysis of the cost of capital and financial structure in multinational corporations across different regulatory environments
• Examining how integrating sustainability and CSR initiatives affect a corporation’s financial performance and brand reputation
• Analysing how rigorous financial analysis informs strategic decisions and contributes to corporate growth
• Examining the relationship between corporate governance structures and financial performance
• A comparative analysis of financing strategies among mergers and acquisitions
• Evaluating the importance of financial transparency and its impact on investor relations and trust
• Investigating the role of financial flexibility in strategic investment decisions during economic downturns
• Investigating how different dividend policies affect shareholder value and the firm’s financial performance 

Investment Banking

The list below presents a series of research topics exploring the multifaceted dimensions of investment banking, with a particular focus on its evolution following the 2008 financial crisis.

• Analysing the evolution and impact of regulatory frameworks in investment banking post-2008 financial crisis
• Investigating the challenges and opportunities associated with cross-border M&As facilitated by investment banks.
• Evaluating the role of investment banks in facilitating mergers and acquisitions in emerging markets
• Analysing the transformation brought about by digital technologies in the delivery of investment banking services and its effects on efficiency and client satisfaction.
• Evaluating the role of investment banks in promoting sustainable finance and the integration of Environmental, Social, and Governance (ESG) criteria in investment decisions.
• Assessing the impact of technology on the efficiency and effectiveness of investment banking services
• Examining the effectiveness of investment banks in pricing and marketing IPOs, and the subsequent performance of these IPOs in the stock market.
• A comparative analysis of different risk management strategies employed by investment banks
• Examining the relationship between investment banking fees and corporate performance
• A comparative analysis of competitive strategies employed by leading investment banks and their impact on market share and profitability

Private Equity & Venture Capital (VC)

These research topic ideas are centred on venture capital and private equity investments, with a focus on their impact on technological startups, emerging technologies, and broader economic ecosystems.

• Investigating the determinants of successful venture capital investments in tech startups
• Analysing the trends and outcomes of venture capital funding in emerging technologies such as artificial intelligence, blockchain, or clean energy
• Assessing the performance and return on investment of different exit strategies employed by venture capital firms
• Assessing the impact of private equity investments on the financial performance of SMEs
• Analysing the role of venture capital in fostering innovation and entrepreneurship
• Evaluating the exit strategies of private equity firms: A comparative analysis
• Exploring the ethical considerations in private equity and venture capital financing
• Investigating how private equity ownership influences operational efficiency and overall business performance
• Evaluating the effectiveness of corporate governance structures in companies backed by private equity investments
• Examining how the regulatory environment in different regions affects the operations, investments and performance of private equity and venture capital firms

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Asset Management

This list includes a range of research topic ideas focused on asset management, probing into the effectiveness of various strategies, the integration of technology, and the alignment with ethical principles among other key dimensions.

• Analysing the effectiveness of different asset allocation strategies in diverse economic environments
• Analysing the methodologies and effectiveness of performance attribution in asset management firms
• Assessing the impact of environmental, social, and governance (ESG) criteria on fund performance
• Examining the role of robo-advisors in modern asset management
• Evaluating how advancements in technology are reshaping portfolio management strategies within asset management firms
• Evaluating the performance persistence of mutual funds and hedge funds
• Investigating the long-term performance of portfolios managed with ethical or socially responsible investing principles
• Investigating the behavioural biases in individual and institutional investment decisions
• Examining the asset allocation strategies employed by pension funds and their impact on long-term fund performance
• Assessing the operational efficiency of asset management firms and its correlation with fund performance

Hedge Funds

Here we explore research topics related to hedge fund operations and strategies, including their implications on corporate governance, financial market stability, and regulatory compliance among other critical facets.

• Assessing the impact of hedge fund activism on corporate governance and financial performance
• Analysing the effectiveness and implications of market-neutral strategies employed by hedge funds
• Investigating how different fee structures impact the performance and investor attraction to hedge funds
• Evaluating the contribution of hedge funds to financial market liquidity and the implications for market stability
• Analysing the risk-return profile of hedge fund strategies during financial crises
• Evaluating the influence of regulatory changes on hedge fund operations and performance
• Examining the level of transparency and disclosure practices in the hedge fund industry and its impact on investor trust and regulatory compliance
• Assessing the contribution of hedge funds to systemic risk in financial markets, and the effectiveness of regulatory measures in mitigating such risks
• Examining the role of hedge funds in financial market stability
• Investigating the determinants of hedge fund success: A comparative analysis

Financial Planning and Advisory

This list explores various research topic ideas related to financial planning, focusing on the effects of financial literacy, the adoption of digital tools, taxation policies, and the role of financial advisors.

• Evaluating the impact of financial literacy on individual financial planning effectiveness
• Analysing how different taxation policies influence financial planning strategies among individuals and businesses
• Evaluating the effectiveness and user adoption of digital tools in modern financial planning practices
• Investigating the adequacy of long-term financial planning strategies in ensuring retirement security
• Assessing the role of financial education in shaping financial planning behaviour among different demographic groups
• Examining the impact of psychological biases on financial planning and decision-making, and strategies to mitigate these biases
• Assessing the behavioural factors influencing financial planning decisions
• Examining the role of financial advisors in managing retirement savings
• A comparative analysis of traditional versus robo-advisory in financial planning
• Investigating the ethics of financial advisory practices

The following list delves into research topics within the insurance sector, touching on the technological transformations, regulatory shifts, and evolving consumer behaviours among other pivotal aspects.

• Analysing the impact of technology adoption on insurance pricing and risk management
• Analysing the influence of Insurtech innovations on the competitive dynamics and consumer choices in insurance markets
• Investigating the factors affecting consumer behaviour in insurance product selection and the role of digital channels in influencing decisions
• Assessing the effect of regulatory changes on insurance product offerings
• Examining the determinants of insurance penetration in emerging markets
• Evaluating the operational efficiency of claims management processes in insurance companies and its impact on customer satisfaction
• Examining the evolution and effectiveness of risk assessment models used in insurance underwriting and their impact on pricing and coverage
• Evaluating the role of insurance in financial stability and economic development
• Investigating the impact of climate change on insurance models and products
• Exploring the challenges and opportunities in underwriting cyber insurance in the face of evolving cyber threats and regulations

Quantitative Finance

These topic ideas span the development of asset pricing models, evaluation of machine learning algorithms, and the exploration of ethical implications among other pivotal areas.

• Developing and testing new quantitative models for asset pricing
• Analysing the effectiveness and limitations of machine learning algorithms in predicting financial market movements
• Assessing the effectiveness of various risk management techniques in quantitative finance
• Evaluating the advancements in portfolio optimisation techniques and their impact on risk-adjusted returns
• Evaluating the impact of high-frequency trading on market efficiency and stability
• Investigating the influence of algorithmic trading strategies on market efficiency and liquidity
• Examining the risk parity approach in asset allocation and its effectiveness in different market conditions
• Examining the application of machine learning and artificial intelligence in quantitative financial analysis
• Investigating the ethical implications of quantitative financial innovations
• Assessing the profitability and market impact of statistical arbitrage strategies considering different market microstructures

Treasury Management

The following topic ideas explore treasury management, focusing on modernisation through technological advancements, the impact on firm liquidity, and the intertwined relationship with corporate governance among other crucial areas.

• Analysing the impact of treasury management practices on firm liquidity and profitability
• Analysing the role of automation in enhancing operational efficiency and strategic decision-making in treasury management
• Evaluating the effectiveness of various cash management strategies in multinational corporations
• Investigating the potential of blockchain technology in streamlining treasury operations and enhancing transparency
• Examining the role of treasury management in mitigating financial risks
• Evaluating the accuracy and effectiveness of various cash flow forecasting techniques employed in treasury management
• Assessing the impact of technological advancements on treasury management operations
• Examining the effectiveness of different foreign exchange risk management strategies employed by treasury managers in multinational corporations
• Assessing the impact of regulatory compliance requirements on the operational and strategic aspects of treasury management
• Investigating the relationship between treasury management and corporate governance

Financial Technology (FinTech)

The following research topic ideas explore the transformative potential of blockchain, the rise of open banking, and the burgeoning landscape of peer-to-peer lending among other focal areas.

• Evaluating the impact of blockchain technology on financial services
• Investigating the implications of open banking on consumer data privacy and financial services competition
• Assessing the role of FinTech in financial inclusion in emerging markets
• Analysing the role of peer-to-peer lending platforms in promoting financial inclusion and their impact on traditional banking systems
• Examining the cybersecurity challenges faced by FinTech firms and the regulatory measures to ensure data protection and financial stability
• Examining the regulatory challenges and opportunities in the FinTech ecosystem
• Assessing the impact of artificial intelligence on the delivery of financial services, customer experience, and operational efficiency within FinTech firms
• Analysing the adoption and impact of cryptocurrencies on traditional financial systems
• Investigating the determinants of success for FinTech startups

Commercial Banking

These topic ideas span commercial banking, encompassing digital transformation, support for small and medium-sized enterprises (SMEs), and the evolving regulatory and competitive landscape among other key themes.

• Assessing the impact of digital transformation on commercial banking services and competitiveness
• Analysing the impact of digital transformation on customer experience and operational efficiency in commercial banking
• Evaluating the role of commercial banks in supporting small and medium-sized enterprises (SMEs)
• Investigating the effectiveness of credit risk management practices and their impact on bank profitability and financial stability
• Examining the relationship between commercial banking practices and financial stability
• Evaluating the implications of open banking frameworks on the competitive landscape and service innovation in commercial banking
• Assessing how regulatory changes affect lending practices and risk appetite of commercial banks
• Examining how commercial banks are adapting their strategies in response to competition from FinTech firms and changing consumer preferences
• Analysing the impact of regulatory compliance on commercial banking operations
• Investigating the determinants of customer satisfaction and loyalty in commercial banking

International Finance

The folowing research topic ideas are centred around international finance and global economic dynamics, delving into aspects like exchange rate fluctuations, international financial regulations, and the role of international financial institutions among other pivotal areas.

• Analysing the determinants of exchange rate fluctuations and their impact on international trade
• Analysing the influence of global trade agreements on international financial flows and foreign direct investments
• Evaluating the effectiveness of international portfolio diversification strategies in mitigating risks and enhancing returns
• Evaluating the role of international financial institutions in global financial stability
• Investigating the role and implications of offshore financial centres on international financial stability and regulatory harmonisation
• Examining the impact of global financial crises on emerging market economies
• Examining the challenges and regulatory frameworks associated with cross-border banking operations
• Assessing the effectiveness of international financial regulations
• Investigating the challenges and opportunities of cross-border mergers and acquisitions

Choosing A Research Topic

These finance-related research topic ideas are starting points to guide your thinking. They are intentionally very broad and open-ended. By engaging with the currently literature in your field of interest, you’ll be able to narrow down your focus to a specific research gap .

When choosing a topic , you’ll need to take into account its originality, relevance, feasibility, and the resources you have at your disposal. Make sure to align your interest and expertise in the subject with your university program’s specific requirements. Always consult your academic advisor to ensure that your chosen topic not only meets the academic criteria but also provides a valuable contribution to the field. 

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• Financial Literacy
• Financial Literacy Resource Center

Financial Literacy: What It Is, and Why It Is So Important To Teach Teens

Education is the key to a successful financial future

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What Is Financial Literacy?

Understanding financial literacy.

• Why It Matters

The Bottom Line

• Financial Literacy: What It Is, and Why It Is So Important To Teach Teens CURRENT ARTICLE
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• Personal Finance Influencers to Know

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

When you are financially literate, you have the essential foundation for a smart relationship with money. This can help start a lifelong journey of learning about the financial aspects of your life. The earlier you start to become financially literate, the better off you'll be because education is the key to a successful financial future.

Key Takeaways

• The term “financial literacy” refers to understanding a variety of important financial skills and concepts.
• Financially literate people are generally less vulnerable to financial fraud.
• A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business.
• Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
• Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional.

Investopedia / Paige McLaughlin

Since about 2000, financial products and services have become increasingly widespread throughout society. Whereas earlier generations of U.S. residents may have purchased goods primarily in cash, various credit products are popular today, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Bank of San Francisco revealed that 28% of all payments were made via credit card, with only 20% being made in cash.

Given the importance of finance in modern society, a lack of financial literacy can be very damaging to an individual’s long-term financial success.

Pitfalls of Illiteracy

Being financially illiterate can lead to many pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit , bankruptcy, housing foreclosure , and other negative consequences.

Thankfully, there are now more resources than ever for those wishing to educate themselves about financial topics. One such resource is the U.S. government-sponsored Financial Literacy and Education Commission, which offers a range of free learning opportunities.

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy

Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts , and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.

Financial literacy can cover short- and long-term financial strategies. The strategy you use will depend on several factors, such as your age, investment time horizon, and  risk tolerance . Financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial products such as mortgages, student loans, health insurance, and self-directed investment accounts have grown in importance. It is imperative for individuals to understand how to use them responsibly. It's also important to know which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement.

Other developments in finance such as e-wallets, digital money, and P2P lending can be convenient and cost-effective but require that consumers be educated adequately to use them to their advantage.

Why Financial Literacy Matters

It supports financial well-being.

Day-to-day living expenses, living within your means, short-term borrowing, long-term budget forecasting. To manage these and other essential financial realities properly as you go through life, you must be financially literate.

It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

In its "Economic Well-Being of U.S. Households in 2022" report, the U.S. Federal Reserve System Board of Governors found that many Americans are not prepared for retirement. Twenty-eight percent indicated that they have no retirement savings, while about 31% of those not yet retired felt that their retirement savings were on track. Among those who have self-directed retirement savings, about 63% admitted to feeling low levels of confidence in making retirement decisions.

Millennials' Challenge

Lack of financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who reported having a high  knowledge of personal finance , only 19% answered questions about fundamental financial concepts correctly.

Forty-three percent reported using expensive alternative financial services, such as  payday loans  and pawnshops. More than half lacked an emergency fund to cover three months’ of expenses, and 37% were financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency).

Millennials also carry large amounts of student loan and mortgage debt. In fact, 44% of them said they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. The lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to  predatory lending . The financial impact of that crisis affected the entire economy.

Financial literacy is an issue with broad implications for economic health.

If you are a younger individual, retirement may seem years away. Yet it is one of the best goals to begin saving for. That's because the earlier you start, the longer your invested savings will have to compound and the more money you'll end up with. An employer-sponsored retirement account, such as a 401(k) , can help.

Benefits of Financial Literacy

Broadly speaking, the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances. In addition:

• Financial literacy can prevent devastating financial mistakes : Floating rate loans may have different interest rates each month, while traditional individual retirement account (IRA) contributions can’t be withdrawn until retirement. For someone unaware of these and other financial facts, seemingly innocent financial decisions may have long-term implications that cost them money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.
• Financial literacy prepares people for financial emergencies : Topics such as saving or emergency preparedness get individuals ready for uncertain times. Though losing a job or having a major unexpected expense can be financially impactful, an individual can cushion the blow by saving regularly.
• Financial literacy can help individuals reach their goals : By better understanding how to budget and save money, individuals can create plans that define expectations, hold them accountable to their finances, and set a course for achieving important financial goals. Though someone may not be able to afford a dream today, they can create a plan that can help make it happen.
• Financial literacy gives rise to confidence : Imagine having to make a life-changing financial decision without all the necessary information. With knowledge about finances, individuals can approach major life choices with greater confidence. They'll be more likely to achieve the outcome they desire and less likely to be surprised or negatively impacted by unforeseen outcomes.

Strategies to Improve Financial Literacy Skills

Developing financial literacy involves learning and practicing skills related to budgeting, managing, and paying off debts , and more. It means understanding and using credit and investment products wisely. The good news is that, no matter where you are in life and financially, it’s never too late to start practicing good financial habits.

Here are several practical strategies to consider.

Create a Budget

Track how much money you receive each month and how much you spend. You can use an Excel spreadsheet, paper, or a budgeting app . Your budget should include income (paychecks, investments, alimony), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings.

Pay Yourself First

To build savings, this reverse budgeting strategy involves choosing a savings goal, such as paying for higher education, deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up the rest of your expenses.

Pay Bills Promptly

Stay on top of monthly bills, making sure that your payments are always sent to arrive on time. Consider taking advantage of automatic debits from a checking account or bill-pay apps, and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report

Once a year, consumers can request a free credit report from each of the three major credit bureaus —Equifax, Experian, and TransUnion—through the federally created website AnnualCreditReport.com.

Review these reports and dispute any errors by informing the credit bureau of inaccuracies. Because you can get three of them, consider spacing out your requests throughout the year to monitor your credit regularly.

In a 2022 survey by the Federal Reserve, 27% of adults in the U.S. reported not "doing okay" financially. The number who reported not living comfortably increased from 2021.

Check Your Credit Score

A good credit score enables you to obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score via a free credit monitoring service. Or, if you can afford to and want to add an extra layer of protection for your personal information, use a credit monitoring service . In addition, be aware of what can raise or lower your scores, such as credit inquiries and credit utilization ratios.

Manage Debt

Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt reduction plan , such as paying down the loan with the highest interest rate first. If your debt is excessive, contact lenders to renegotiate repayment, consolidate loans , or find a debt counseling program.

Invest in Your Future

If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match . Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal.

Example of Financial Literacy

Emma is a high school teacher who tries to inform her students about financial literacy through her curriculum. She educates them on the basics of a variety of financial topics, such as personal budgeting, debt management, saving for college and retirement, insurance, investing, and even tax planning. Emma’s students can and will use these concepts for things like renting an apartment, getting a first job, or even just paying for fun activities such as going to the movies.

Understanding concepts such as credit cards, bank accounts, interest rates, opportunity costs, debt management , compound interest, and budgets, for example, could help her students start saving and manage the student loans that they might rely on to fund their college education. It could keep them from amassing dangerous levels of debt and threatening their credit scores.

Similarly, she expects that certain topics, such as income taxes and retirement planning, will eventually prove useful to all students, no matter what they end up doing after high school.

Why Is Financial Literacy Important?

Financial literacy gives an individual the tools and resources they need to be financially secure throughout their life. The lack of financial literacy can lead to many pitfalls, such as overspending and accumulating unsustainable debt burdens. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

How Do I Become Financially Literate?

Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, making timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

What Are Some Popular Personal Budget Rules?

Two commonly used personal budgeting methods are the 50/20/30 and 70/20/10 rules, and their simplicity is what makes them popular. The first entails dividing your after-tax, take-home pay into three areas: needs (50%), savings (20%), and wants (30%). The 70/20/10 rule also follows a similar blueprint, recommending that your after-tax, take-home income be divided into segments that cater to expenses (70%), savings or reducing debt (20%), and investments and charitable donations (10%).

What Are the Principles of Financial Literacy?

There are five broad principles of financial literacy. Though other models may list different key components, the overarching goal of financial literacy is to teach individuals about earning, spending, saving, borrowing, and protecting their money.

Financial literacy is the knowledge of various aspects of personal finance and the ability to make smart decisions about money.

It includes preparing a budget, knowing how much to save, recognizing favorable loan terms, understanding what impacts credit, and distinguishing different investment options that can be used to save for retirement.

The financial skills that come from financial literacy can help individuals handle their personal finances responsibly which, in turn, can help them protect the well-being of their financial futures.

Federal Reserve Bank of San Francisco. “ 2022 Findings from the Diary of Consumer Payment Choice .” Page 6.

U.S. Department of the Treasury. “ Financial Literacy and Education Commission .”

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Pages 68, 71.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 5, 6, 15, 22.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 13.

Federal Trade Commission. " Free Credit Reports ."

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Page 5.

MyMoney.gov. " My Money Five ."

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A study of financial literacy of investors—a bibliometric analysis.

1. Introduction

2. materials and methods, 3.1. general descriptive statistics, 3.2. citation network analysis, 3.3. co-citation analysis, 3.3.1. clustering, 3.3.2. content analysis, cluster #0: credit counseling, cluster #1: machine learning, cluster #2: individual investor, cluster #5: inclusive education, cluster #6: community college student debt, cluster #16: behavioral biases, cluster #21: financial judgment, cluster #28: investor behavior, 3.4. topmost active areas, recent research trends, and emerging themes, 4. discussion, 5. limitations and future research.

• The study was based on a review of 2182 publications published in the last two decades on financial literacy in the financial sector. The study adopted a combination of keywords, and various keyword combinations may have shown different results.
• To better understand the topic, future studies should include all ten clusters. Because of these findings, this field requires more in-depth research.

6. Conclusions

Author contributions, institutional review board statement, acknowledgments, conflicts of interest, abbreviations.

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Ansari, Y.; Albarrak, M.S.; Sherfudeen, N.; Aman, A. A Study of Financial Literacy of Investors—A Bibliometric Analysis. Int. J. Financial Stud. 2022 , 10 , 36. https://doi.org/10.3390/ijfs10020036

Ansari Y, Albarrak MS, Sherfudeen N, Aman A. A Study of Financial Literacy of Investors—A Bibliometric Analysis. International Journal of Financial Studies . 2022; 10(2):36. https://doi.org/10.3390/ijfs10020036

Ansari, Yasmeen, Mansour Saleh Albarrak, Noorjahan Sherfudeen, and Arfia Aman. 2022. "A Study of Financial Literacy of Investors—A Bibliometric Analysis" International Journal of Financial Studies 10, no. 2: 36. https://doi.org/10.3390/ijfs10020036

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• Published: 03 June 2021

How does financial literacy impact on inclusive finance?

• Morshadul Hasan   ORCID: orcid.org/0000-0001-9857-9265 1 ,
• Thi Le 1 &
• Ariful Hoque 1  

Financial Innovation volume  7 , Article number:  40 ( 2021 ) Cite this article

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Inclusive finance is a core concept of finance that makes various financial products and services accessible and affordable to all individuals and businesses, especially those excluded from the formal financial system. One of the leading forces affecting people's ability to access financial services in rural areas is financial literacy. This study investigated the impacts of financial knowledge on financial access through banking, microfinance, and fintech access using the Bangladesh rural population data. We employed three econometrics models: logistic regression, probit regression, and complementary log–log regression to examine whether financial literacy significantly affects removing the barriers that prevent people from participating and using financial services to improve their lives. The empirical findings showed that knowledge regarding various financial services factors had significant impacts on getting financial access. Some variables such as profession, income level, knowledge regarding depositing and withdrawing money, and knowledge regarding interest rate highly affected the overall access to finance. The study's results provide valuable recommendations for the policymaker to improve financial inclusion in the developing country context. A comprehensive and long-term education program should be delivered broadly to the rural population to make a big stride in financial inclusion, a key driver of poverty reduction and prosperity boosting.

Introduction

With the support of inclusive finance, the rural population has contributed significantly to the entire economy's development (Hasan et al. 2020b ; Johnston 2005 ; Le et al. 2019 ; Stein 2010 ). Therefore, promoting financial services access to inclusive people will deeply connect them with the significant growth of the whole financial systems (Hasan et al. 2020b , 2020c ; Rashidin et al. 2020b ). Access to financial services is the most critical factor working behind the financial exclusion of the rural population. Chao et al. ( 2021 ) mentioned that financial inclusion is deeply connected to poverty reduction. However, both formal and informal financial institutions are responsible for providing financial access to those financially excluded people (Helms 2006 ; Hussain et al. 2018 ; Zulkhibri 2016 ). The crucial obstacle of financial inclusion process is financial illiteracy (Bongomin et al. 2016a ; Grohmann et al. 2018 ; Hasan et al. 2020a ; Kodongo 2018 ; Koomson et al. 2019 ; Lyons and Kass-Hanna 2019 ; Mogilevskii and Asadov 2018 ; Segre 2018 ).

Nowadays, consumers have to specify a comprehensive range of financial products and services. Financial literacy, particularly the saliency and relevance of financial education regarding financial products, services, and activities (Fernandes et al. 2014 ; Sun et al. 2020 ), has played a crucial role in helping people select suitable financial products (Bianchi 2018 ; van Rooij et al. 2011 ; Von Gaudecker 2015 ). Financial literacy has a strong link with the development of every country's financial systems. It has dramatical implications on financially personal decisions making (Kezar and Yang 2010 ; Lusardi and Mitchell 2014 ; Maturana and Nickerson 2019 ; Paiella 2016 ; Rashidin et al. 2020a ) and economic development by increasing economic security and decreasing unemployment (Berry et al. 2018 ; Hogarth 2006 ; Pompei and Selezneva 2019 ). Financial education improves people's understanding of different financial products and concepts through various instructions, information, and advice to develop financial risks and opportunities recognition skills. As a person with a low-level knowledge of financial activities is more likely to make financial errors, investors should enhance their financial knowledge to improve their portfolio performance. Financial education involves planning, investing, and saving, relying on formal financial methods such as financial calculators, methods, financial education-related seminars to help people make a sound financial decision (Lusardi 2012 ; Lusardi and Mitchell 2011 ).

Bangladesh is an emerging market economy with an overpopulation of around 166 million people. The country's high population density is leading to different financial and economic problems. One of the prevalent burning issues in such countries consists of access to financial products and services. Almost 53% of adult people are excluded from financial access, especially low-income groups (LightCastle Partners 2019 ). Although the number of banks is increasing day by day, no noticeable improvement has been reported. A large proportion of the rural population is still out of formal financial services. Millions of people in the countryside do not know about banking services, FinTech, and microfinance. Thus, research on financial literacy and financial access has been highly demanded in Bangladesh. However, limited studies are investigating the impact of financial knowledge on finance access for rural areas. These issues motivate us to conduct an empirical analysis to show the impact of financial literacy on the rural population's finance services access.

This study aims to investigate the impact of financial literacy on financial access through three sections: (i) impact on banking access, (ii) impact on microfinance access, and (iii) impact on mobile banking access. We employ logit and probit models to examine financial literacy's impact on getting financial access. Also, a robustness test is conducted using complementary log–log regression to prove the significance of our expected models.

The empirical findings show that financial knowledge has a significant effect on getting financial access. Some variables such as profession, income level, education level, knowledge regarding depositing and withdrawing money, and knowledge regarding interest rate are highly significant for overall financial access. However, training on different services is insignificant because of the low response rate in all cases. In most circumstances, rural residents are not aware of financial service training.

This study is a reflection of the timely demand of financial literacy because knowledge regarding financial services is receiving significant attention from researchers, government officials and educators, and policymakers (Berry et al. 2018 ; Frisancho 2019 ; Lusardi et al. 2019 ; Opletalová 2015 ; Postmus et al. 2013 ; Urban et al. 2018 ). It will significantly contribute to the current literature in inclusive finance, rural development, financial literacy, economic development, banking, and microfinance.

The paper is divided into six sections. The first to third sections include an introduction, review of the literature, and theoretical discussion, respectively. The methodology is explained in section four. The results and findings are reported in Sect. 5. Finally, Sect. 6 discusses the results, theoretical and practical implications, and future research directions.

Literature review

Financial literacy and banking access.

Kou et al. ( 2021 ) identified access to finance as a challenge; thereby, financial literacy is treated as one of the influential financial inclusion components by different national and international organisations. Lyons and Kass-Hanna ( 2019 ) found that economically vulnerable populations are considerably less likely to be included in the financial systems. Also, higher levels of financially literate people are more likely to be engaged in positive savings behaviours and less likely to borrow from different informal sources. Financial literacy helps educate and empower people to evaluate various financial products and services. Bongomin et al. ( 2016b ) raised questions about financial literacy's impact on financial inclusion, emphasising social capital. The findings showed that financial literacy indirectly affected financial inclusion through complete mediation of social capital. The absence of social capital might lead to financial literacy failure in boosting the level of financial inclusion among Uganda poor rural households. Hussain et al. ( 2018 ) examined the relationship between education level and business owners' engagement with financial services. They identified that financial literacy positively influenced a firm's access to finance and a firm's growth. Shen et al. ( 2019 ) showed a statistically meaningful association between digital financial product usage and financial literacy, except internet usage.

Financial literacy and microfinance

Nawaz ( 2015 ) focused on financial literacy with women empowerment. A right socio-economic empowerment level is possible for women who can utilise their money effectively and efficiently with enough financial literacy competence. They usually gain training programs offered by the different microfinance agencies. Many NGOs are offering various training programs to their account holders. This financial literacy training helps women better understand the productive use of money, such as remaining bank accounts, utilising money effectively and efficiently, advising their husband and other family members about different economic activities. The women can take control of the overall financial situation of their families. The author finally concluded that the financial training component should be a must for all microfinance programs. Bijli ( 2012 ) highlighted that the financial literacy regarding microfinance included four thematic areas; budgeting, saving, debt management, and bank services. These four thematic areas are considered into two aspects; current behaviour and desired behaviour. The current behaviour related to budgeting for day-to-day living, reactive financial behaviour, lack of forwarding financial planning, wasteful expenditures, irregular savings, savings not linked to goals, borrow for emergencies, over-indebtedness, borrowing with little understanding of terms, limited knowledge of bank services, limited use of bank services. The desired behaviours involved planning for expenditures, making a budget, using a budget to manage money, avoiding unnecessary spending, having a savings plan, saving regularly, maintaining an emergency savings account, making a plan to reduce debt, avoiding excessive debt, borrowing with a full understanding of terms, knowing about financial options, their terms and conditions, and using bank services to support financial goals.

Financial literacy and FinTech usage

Financial technology is playing a very significant role in providing financial access to rural people. Mobile banking is an alternative replacement when people fail to reach banking services. They are very willing to deals in financial communication as it is comparatively easy to access and available everywhere in the country (Hasan et al. 2020b ). Brown and Slagter van Tryon ( 2010 ) mentioned financial education as one of the most popular financial and economic terms of this Twenty-first century because of the growing use of technologies. In this case, it required tech education to look for new ways to operate new financial technologies. Every type of financial communication is based on technology, causing tech education and financial education in the current century's financial communication. Shen et al. ( 2019 ) specified that financial literacy worked as a significant force in bridging the gap between frequent internet usage and low financial management usage. Financial literacy reflected consumers' educational level, and the usage of financial literacy in FinTech influenced digital financial inclusion. Also, financial literacy increased the likelihood of using digital financial products and services to improve financial access (Hasan et al. 2020c ). Only financial literacy alone did not influence financial inclusion, but the combination of financial literacy and internet usage could improve better financial access. Belayeth Hussain et al. ( 2019 ) recognised the reliability of financial education and financial literacy for financial stability. Lyons and Kass-Hanna ( 2019 ) found that respondents from the high-income economies' areas were significantly more likely to engage in online payments. They were also expected to make financial transactions using their mobile phones more frequently than in low-income economies where most people are uneducated.

Theoretical discussion

Financial literacy for rural people.

Financial literacy arises with the debate of financial exclusion, financial market fluctuation, deprivation of financial access, and inability to financial communication. Different literature expressed the meaning of financial literacy with specified areas where they find interest. This study highlights every definition in the perspectives of financial access. Recently, financial literacy has become a prominent issue on the financial and economic agenda worldwide (Williams and Satchell 2011 ; Postmus et al. 2013 ). Financial literacy is treated as having the proper knowledge of making the right decision in choosing financial products and services (Fernandes et al. 2014 ). Understanding financial language is crucial to improve financial education. Worthington ( 2016 ) highlighted financial literacy as the ability to decision-making in all aspects of people's budgeting, saving, and spending matters. Huston ( 2010 ) specified financial knowledge as an input to model the need for financial education and explain variation in financial outcomes. Wang et al. ( 2020 ) identified that poor knowledge regarding financial issues increases the chances of making unsecured P2P loans and personal loans.

In this study, the rural population's financial literacy represents their knowledge about financial services and activities in formal and informal economic sectors. The financial knowledge level of the rural group is completely different from the educated group. The basic financial knowledge is whether they know various financial services or not and how much they know about the general financial terms relating to banking, microfinance, and mobile banking.

Access through banking

The first aspect of financial access is banking services, which are the formal way of providing financial communication and services. Being able to access a bank account is the first step toward greater financial inclusion because a transaction account helps people reach broader financial services (Bhaskar 2013 ; Helms 2006 ; Patwardhan et al. 2018 ). It is suggested that all adults have access to appropriate financial products and services, mainly by banks (Demirguc-Kunt et al. 2017 ). Financial access through banking allows the countryside households to save money, support their business and family plans, hedge against everyday risks, and promote their economic activities (Sinha et al. 2018 ; Sun 2017 ; Wall 2017 ).

Access through microfinance

The second most effective way of financial access is microfinance, which is regarded as a valuable and powerful tool for poverty reduction. It is also specified as the provision of financial services for poor households. Cull and Morduch ( 2018 ) proposed a broader notion, "financial inclusion", for microfinance activities, such as providing savings, insurance, and payment services in under-served communities. Microfinance is also a solution to bring credit markets to underprivileged people on self-employment. It provides self-employment opportunities for the rural population (Cull et al. 2009 ; Morduch 1999 ). In remote areas where banks cannot deliver their services, microfinance replaces banks to provide the countryside residents with financial assistance.

Access through FinTech

FinTech is trendy in the present financial market, and its rapid development is an emerging issue of the financial world (Casanova et al. 2018 ; Gai et al. 2018 ; Gimpel et al. 2017 ; Hasan et al. 2020b , 2020c ). FinTech refers to a combined form of 'Finance' & 'Technology' (Zavolokina et al. 2016 ). The terms' Internet finance', 'FinTech', and 'digital finance', 'mobile banking' are almost similar in meaning and used interchangeably worldwide (Hasan et al. 2020b , 2020c ). Beyond the traditional financial systems, the involvement of digital financial services in the inclusive financial sector is reflected by the emerging issue' FinTech.' It relates to a wide range of financial services such as online banking, third-party payment, direct sales of funds, online insurance, crowdfunding, and online banking (Claessens et al. 2002 ; Hill and Hill 2018 ; Salampasis and Mention 2018 ).

Conceptual framework

Financial access is categorised into three parts; financial access through banking, financial access through microfinance, and financial access through financial technology (mobile banking). This research's theoretical structure is given in Fig.  1 .

Source : Author's Explanation

Theoretical framework.

According to Fig.  1 , there are three stages of promoting rural finance or inclusive finance: limited financial access, extended financial access, and advanced inclusive finance. The concept of promoted inclusive finance has been taken from (Hasan et al. 2020b ). In the limited financial access stages, illiterate people are completely excluded from financial institutions' products and services. The second stage is financial access extension, where financial literacy works as moderating factor. Financial literacy helps to provide necessary financial knowledge to the rural illiterate people. After achieving proper financial knowledge relating to financial activities and services, those people are also included in the financial access group. Finally, the theory of more financial involvement of rural people contributes more to the rural economy, and the country's entire economy positively affects rural finance promotion. All the adults who have at least an income or earning source will be included within the financial systems.

Methodology

Research procedure and sample characteristics.

Our sample consisted of 852 participants from three main populous cities in Bangladesh, including the capital (Dhaka) and the other two industrially developed cities (Gazipur and Narayongonj). We selected the respondents if they were 18 years of age or over and should have at least earning sources. Millions of people are working in these cities from all around the country. Therefore, getting a respondent who has at least earning source is comparatively more possible than in other areas or cities. Participants' age, level of education, professional status, as well as income were obtained. A random sampling process was applied in the entire data collection process. The study followed an analysis of literature review and reports to develop a set of questionnaires. The questionnaire will be sent to targeted respondents randomly after a direct presence in some local residency areas. An invitation 852 completed questionnaires were received and analysed. Table 1 provides general information collected from the participants. We divided respondents into 5 age groups: 26.7% were below 25, 29.5% were between 26 and 30 years old, 21.1% were between 31 and 35 years old, 11.9% were between 36 and 40 years old, and 10.5% were 40 or over. More than 87% of respondents had a higher secondary education level or lower. 40% of the participants had their own business while the remaining were employees. The majority of respondents had an income between BDT10001 and 20,000 (USD 120—$235), our study's prominent target. The detailed sample distribution is shown in Table 1 .

The measurement of the questionnaire was segmented into four sections. The first section dealt with social-demographic information: name, age, educational level, income range, and location. The last three sections involved participants' usage of banking, micro-finance, and FinTech. Participants were asked about their access to banking services, microfinance, and FinTech. The answers were coded to be "1" if the respondents have utilised the services and "0" if they did not use them. We measured and defined the variables based on different perspectives. The respondent's knowledge level toward banking services and microfinance was assessed on a five-point Likert scale ranging from 1 (poor) to 5 (excellent). The measuring and determining of all the variables are taken from Kadoya et al. ( 2018 ). Mainly the concept of the variables used in this study was selected from the research of Adele Atkinson ( 2017 ), Atkinson ( 2015 ), Atkinson and Messy ( 2012 ), Bongini et al. ( 2018 ), OECD ( 2011 ), Williams and Satchell ( 2011 ). Table 2 presents the measurement of the variables.

Analytical procedure

The analysis was conducted in three steps: (a) based on participants' self-reported behaviour, respondents were identified as banking, microfinance, and FinTech user or non-user, respectively; (b) the confirmatory factor analysis (CFA) was used to determine whether the covariates are significantly related to their factors or not; (c) binary regression was conducted to test the real impact of financial literacy on the three elements (banking, microfinance, and FinTech access). Hassan Al-Tamimi and Anood Bin Kalli ( 2009 ), Fernandes et al. ( 2014 ), Kiliyanni and Sivaraman ( 2018 ), Agyei ( 2018 ), and Ouma et al. ( 2017 ), and Feng et al. ( 2019 ) used a probabilities regression model to estimate the impact of financial literacy in different circumstances. There are two commonly used models for binary dependent variables; these are the logit and probit models. This study followed probability distributions. The following algorithm follows the econometrics modelling of this study;

The term \(log\left( {\frac{p}{1 - p}} \right)\) is called the logit function, and it has a natural interpretation as the logarithm of odds. The logistic model is widely used for binomial data and is implemented in many statistical programs.

Reliability test

The reliability test value ranges between 0 and 1.00, with 0 indicates no reliability and 1.00 means perfect reliability. The larger value of the reliability coefficient, the more reliable the test scores. Table 3 present the reliability statistics of this study. According to the reliability test, all models had acceptable Cronbach's alpha values. After the separate reliability test for each model (banking model, microfinance model, FinTech model), the overall reliability test with all the variables was conducted. The Cronbach's alpha value of the overall reliability test was 0.912, representing excellent reliability.

Findings and analysis

The Logit model, Probit model, and complementary log–log regression model were employed to show the likelihood of getting financial access in the rural area. Also, confirmatory factor analysis and descriptive statistics were presented as empirical findings.

Descriptive statistics

First of all, Table 4 presents the descriptive statistics of the three models' variables. This table has four phases: common variables, banking variables, microfinance variables, and financial technology variables.

According to Table 3 , most of the respondents were service holders (60%), the average income structure of the respondents was 2.15, which referred to 10,001 to 20,000 BDT (USD120 to USD 240). The education level is 3.15, which means most of the respondents obtained the secondary education level (almost 42% of all the respondents). On average, 60% of the respondents had banking access, and most of the respondents know how to deposit money into the bank and withdraw money from their accounts. Though the mean score of the knowledge regarding deposit and withdrawal ability from a bank was above the average, the knowledge regarding DPS and loan, knowledge regarding DPS & loan interest rate, and knowledge regarding security money had a below-average mean value (2.37, 2.26, and 2.24 respective). It indicated that the respondents have moderate knowledge regarding those three variables. However, the respondent had good knowledge about bank instalments for a loan or fixed deposit, with the mean value of knowledge regarding instalment was 2.78.

On the other hand, only 45% of respondents had microfinance access. As stated earlier, if someone has access to a banking account, she/he knows how to deposit and withdraw from the personal microfinance account. The mean value of the deposit and withdrawal ability was 0.47, almost similar to the microfinance account (0.45). The mean value of knowledge regarding DPS and loan was virtually more than fair (2.36); however, knowledge regarding DPS & loan interest rate was approximately fair (2.02). The respondents had good knowledge regarding instalment (2.49). The mean value of knowledge regarding security money and personal investment was good (2.17 and 2.25, respectively). The mean value of 0.06 for microfinance training, indicating respondents almost had training on microfinance activities.

Nowadays, almost 75 per cent of the populations have mobile banking access. Footnote 1 This study has found that nearly 70% of people had FinTech access, one of the most promising financial inclusion factors in financial technology (Hasan et al. 2020b , 2020c ). It is a noticeable fact that regardless of whether the respondent has a bank account/microfinance account, respondents prefer a mobile banking account. That is why almost 62% of people could send money and withdraw money from their accounts. However, there is one critical issue that some people have FinTech access to, but they don't know how to send money to others account and withdraw from their account. In these cases, they depend entirely on others. Who are mobile banking agents for sending and withdrawing cash? Except mobile banking software using ability (mean value 0.46), other variables such as bill pay through mobile banking, online dealings ability, and FinTech training had comparatively lower mean values, suggesting that respondents are not familiar with these activities. Finally, the more educated people had a high possibility to have FinTech access.

Confirmatory Factor Analysis

The confirmatory factor analysis (CFA) was employed to achieve a clear view of the data and use the output in subsequent analyses by running logit and probit regressions. The majority of variables show statistically significant standardised factor loading value with a p -value of more than 0.001. The exception occurred for the income variable of microfinance accounts holders, which experienced an insignificant p -value, 0.173. The result suggested that the independent variables were significantly related to their factors (see Table 5 ). Also, Appendix 1 presents the variance and covariance of the variables. According to Appendix 1, the covariance of banking access and FinTech access was significant; however, the other two covariance shows insignificant p -values.

Regression results

Table 6 , 7 , 8 , and 9 present the regression results of two separate models (logit and probit regression model). Each model has been shown into two categories, A and B, where part A excluded the model's common variables and part B included all variables. The banking access model is presented as in Eq. ( 2 ):

The dependent variable was coded 1 if the respondent had a personal bank account and coded 0 if the respondent was not the bank account holder. The independent variables, including profession, and money deposit and withdrawal ability, are dummy variables. The other independent variables, such as income, education, knowledge (Kn) of savings & loans, knowledge of savings & loan interest rate, knowledge of instalment, knowledge of security money, are categorical with a five-point Likert scale.

Table 6 presents the regression results of the banking access model. All common variables (profession, income, education) were found to significantly impact an individual's banking access. People with higher income and higher education are more likely to open a bank account. For the banking-related variables, the knowledge regarding deposit and withdrawal ability significantly affected the finance access ( p  = 0.000) with the highest coefficient (7.495), suggesting that rural residents considered the ability to deposit and withdraw as their primary driven factor of opening an account. Similarly, savings and loan interest rates substantially influenced people's use of banking products and services (coefficient = 3.765 and p  = 0.000).

The microfinance access model is presented in Eq. ( 3 ) as given below:

The dependent variable was coded 1 if the respondent had a microfinance or NBFI account. However, it was coded 0 if the respondent was not the microfinance and NBFI holder. The independent variables such as profession and deposit & withdrawal ability are dummy variables. Other independent variables, knowledge of savings and loans, knowledge of savings and loan interest rate, knowledge of instalments, knowledge of security money, knowledge of personal investment, are categorical with a five-point Likert scale.

Table 7 presents the regression results of the microfinance access model. First, the microfinance access model's result was different from the banking access model for common demographic variables. The profession variable was not significant in the logit model; however, weakly significant at a 90% confidence level in the Probit model, suggesting that people involved in business were more willing to open a microfinance account. Other two common variables (income and education) have highly significant influence on microfinance access (coefficient = -5.221 & p  = 0.001, and coefficient = 1.756 & p  = 0.008, respectively). The findings indicated that lower-income but comparatively higher-educated people are more likely to open a microfinance account. Though the education variable was highly significant in the logit model at 99% confidence level, the probit model showed a lower confidence level at only 95%.

For the other variables, similar to the banking access model, knowledge regarding depositing into a bank and withdraw from the bank, and savings and loan interest rates variables were highly and positively significant (coefficient is 22.55 and p -value is 0.000, and the coefficient is 4.58 and p -value is 0.002, respectively). The identical results were reported for knowledge regarding savings and loan and security money variables (Coefficient is 5.911 & p -value is 0.000, and the coefficient is 4.708 & p -value is 0.002, respectively). The findings suggested that more literate respondents towards deposit, withdrawal, savings, and loans had a higher probability of getting microfinance access. The personal investment negatively impacted the participants' access to microfinance, showing the lower capability of seeking microfinance help led to a higher possibility of opening a microfinance account. Security knowledge was positively associated with microfinance access. Finally, knowledge regarding personal investment variable was found to impact microfinance access negatively. People who have better investment knowledge seemed to less use microfinance services.

Equation ( 4 ) presents the FinTech access model, which is given as below:

In Eq. ( 4 ), the dependent variable is the usage of FinTech (mainly mobile money) account. Both the dependent and independent variables are dummy variables with binary code. They have coded 1if the respondent had a positive response (Yes) and coded 0 if the respondent provided a negative response (No).

Table 8 presents the regression results of the FinTech access model. This model experienced a comparatively lower value of Pseudo R 2 compared to the other two models for banking access and microfinance access. However, there were still 70% of respondents who have access to financial technology. The majority of respondents coming from lower-income and less educated groups did not show their interest in using any FinTech devices or mobile money. Income and education showed a positive relationship with FinTech access at the significant level of99% (coefficient 0.490 & 0.779, respectively). These two variables had a lower effect on FinTech access compared to banking and microfinance access. Like the other two access methods, money sending and withdrawal ability were highly associated with Fintech access (coefficient is 5.312 and p -value is 0.000). Besides, software using ability, online dealing ability, and fintech training are positively related to FinTech usage, particularly for mobile money account. The result shows a currently increasing trend when more people have been using software for FinTech activities and online shopping.

Logistic and probit regression models are commonly used for analysing binary response data, but these models' maximum likelihood estimators are not robust to outliers. The robustness of the method is tested using real and simulated data sets. This study used a complementary log–log regression model to check the other two models' acceptability, logit & probit. Table 9 and the logit models' results indicate that most of the variables' value was similar to the complementary log–log regression model. In some cases, there were slight differences in p -value; however, these were insignificant to consider for any decision.

Discussion & conclusion

Financial access is the leading factor in promoting rural finance and financial inclusion. Our study aimed to examine the impact of financial knowledge on accessing financial products and services in Bangladesh, using the logit model, probit model, and complementary log–log regression model. For this study, we consider three approaches to getting financial access: banking, microfinance, and FinTech (mobile banking). Some variables showed insignificant results due to participants' poor responses, supporting the assumption that respondents were not familiar with those financial activities; Their lack of knowledge about financial activities was considered the obstacle for preventing financial access development. Overall, the empirical findings demonstrated that financial literacy had a positive effect on access to finance. Financial knowledge was one of the most influential forces to enhance financial inclusion. It is expected to provide a significant contribution toward promoting financial communication for rural and lower-income people. Proper knowledge regarding different financial services influenced strongly in getting financial access and extending other financial services. Rural respondents' knowledge was limited to a small number of banking services and activities. The financial institutions have not paid enough attention to educating people from rural areas about financial access.

The three models' results indicated that people were not familiar with any financial training, which might positively influence future financial inclusion. Only 14%, 6%, and 18% of people had proper banking, microfinance, and FinTech uses, respectively. Koomson et al. ( 2019 ) revealed that financial literacy training significantly impacted account ownership, and financial literacy training beneficiaries were more likely to intensify inclusive finance. Besides, this study recommended that financial literacy training might reduce the financial gap.

First, demographic variables significantly impacted banking, microfinance, and FinTech access. Higher-income level groups were more likely to be the bank account holder and FinTech users. Grohmann et al. ( 2018 ) specified that income was usually related to financial literacy. The opposite trends were reported for microfinance, where people at lower-income levels had a higher probability of using microfinance products and services. This can be explained by the popularity of microfinance for poor people. Microfinance, as the banking for poor people, was introduced broadly by Nobel laureate Professor Muhammad Yunus . Similarly, the profession also highly positively affected banking access and showed a negative influence on microfinance. Education played an important role in individuals' banking and microfinance access, although its impact on FinTech access was not clear. Though FinTech users accounted for 70% of respondents, which was higher than the number of banking and microfinance account holders (60% and 45%, respectively), respondents were less familiar with FinTech services. This result was in line with the literature (Morgan and Trinh 2019 ; Kodongo 2018 ), which emphasised financial literacy as a determinant to increase financial inclusion.

People seemed to know better about banking services than those of another two access options. More knowledge regarding financial services and activities led to more accounts open in financial institutions. Knowledge regarding bank savings and loans, instalment, and security money seemed to not affect the financial access. For example, individuals' good knowledge of the instalment procedure did not affect their access to microfinance. However, in the literature, increasing financial literacy would increase account ownership (Grohmann et al. 2018 ).

As stated earlier in the discussion section, respondents were not familiar with FinTech products and services; thus, there is a big platform to enhance financial inclusion through FinTech access. As basic training on FinTech services was not deployed widely to the whole population, most people only used Fintech services for sending and withdrawing money. Proper knowledge regarding other FinTech activities may help them to utilise more effectively those financial technology applied services.

Theoretical and practical implication

Rural consumers' knowledge about financial services is a new aspect of inclusive finance research. This study will significantly contribute to the study on financial literacy concept. It mainly highlights the importance of knowledge regarding specific products and services to promote financial inclusion. The idea of financial literacy is still underway to be included as a core issue of finance, both in the theoretical and practical perspectives. Our research emphasises the importance of financial literacy to include excluded people from formal financial systems. These excluded people came from the unprivileged and vulnerable groups in rural areas. More financial training and education will inspire rural consumers to involve in financial services. The rural consumers will be equipped with the knowledge to select suitable financial products and services. The study's empirical findings also provide valuable recommendations for the policymaker to improve financial inclusion in the developing country context. A comprehensive and long-term education program should be introduced broadly to the rural population to make a big stride in financial inclusion, a key driver of poverty reduction and prosperity boosting.

Financial literacy is considered as one of the vital factors of financial inclusion. Rural people who have better knowledge of financial services s/she has more possibility to be included into formal financial systems. Based on these concepts, this study was conducted. In order to investigate the likelihood of getting financial access (banking, microfinance, and fintech), mainly two experimental models were experimented in this study; the logit model, and probit model. Also, the complementary log–log regression model was used to test robustness of the primary models. Usually, the probit model and a complementary log–log regression model are the two common models used as the alternative model to logistic regression. Whatever, after investigating the findings of this research, this study concludes that knowledge regarding financial services is one of the most influential forces to promote inclusive finance. It also has a significant contribution to developing financial communication capabilities for rural and lower-income countryside people. Proper understanding of different financial services has a significant impact on access to financial opportunities, especially the expansion of the use of other financial services. Rural people only know a limited number of banking services and activities; this is why, they continue to be limited to these services. In most cases, they believe that the only activities of banks are also limited to deposits and withdrawals from banks. This is the reason for why they do not go for other financial services. In addition, financial institutions have not yet arranged any obvious training programs to stimulate access to financial opportunities. All the common covariates can have a significant impact on financial access, but it depends on each access pattern. In any case, there are also several challenges that exist in getting financial access. These works are considered as the major obstacle to the promotion of inclusive finance. More specifically, the interviewee only knew about the general services of banking, microfinance, and financial technology access. Even, financial institutions have not carried out such activities to literate rural people about financial access. For example, the banking training and microfinance training were insignificant and dropped from the main model due to very poor response. This is also considerd here as a significant limitation. Usually, institutions use the advertising policies to inform rural people about services; however, this study considered these advertising policies are not enough to inform the rural people about financial products or services.

Future research scope

Future studies could be undertaken for different countries and regions, such as other underdeveloped and developing countries, where financial inclusion is still an emerging issue. Studies examine the measure of financial knowledge and compare this factor between low-income rural groups and high-income educated people are in need. The proposal of an index for financial literacy, especially in underdeveloped and developing countries, could be conducted. As financial technology has become the most emerging financial communication approach, avenues for possible future research focusing on financial innovation training and developing FinTech access to all population groups are also open.

Availability of data and materials

Our data will be available on request.

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Morshadul Hasan, Thi Le & Ariful Hoque

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The concept, design, methods, result analysis, paper writing (Morshadul Hasan), Introduction, discussion, implications, and conclusion (Thi Le), editing, revising, proofreading, language editing (Ariful Hoque).

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Morshadul Hasan is currently enrolled as a PhD student (Finance) at Murdoch University, WA 6150, Australia. He has completed his Masters in Finance from Nanjing Audit University, China. His research interests include inclusive finance, financial literacy, big data, machine learning, fintech, and so on. He has nearly 5 years of academic experiences. He has several SSCI & SCOPUS Q1 and Q2 level publications. Currently, some of his research projects are under review on SSCI Q1 and ABDC A level journals such as Annals of Operation Research, Finance Research Letter, Journal of Knowledge Economy, European Finance Journal, Journal of Big Data, and so other Q2 level journals.  Dr. Thi Le, Ph.D. is a Research Associate at Murdoch University, Australia. She served both industries and academia with ten years of teaching experiences in Finance and Accounting and working experiences in several industry projects. Her research interests include derivatives, financial forecasting, fintech, supply chain, and accounting framework. She has published many research papers in prominent international journals, conferences and received a number of industry grants. Dr. Ariful Hoque, Ph.D. is a senior lecturer at Murdoch University, Australia. He joined the Murdoch Business School in February 2012 as Senior Lecturer in Finance. He earned his Doctor of Philosophy (Ph.D.) in Finance from Curtin University (Australia). He held different positions in the industry for thirteen (13) years before commencing my academic profession. He worked as a business analyst, programmer and software developer for several well-reputed organisations, including St George Bank (Australia) and Air New Zealand (New Zealand). He has had seventeen (17) years of experience teaching in all areas of Finance, including research methodology and data analytics to undergraduate and postgraduate students at Curtin University, University of Dubai (AACSB accredited), University of Southern Queensland, University of South Australia, and Murdoch University. His research interest areas (alphabetically) include, but are not limited to, Data Analytics, Derivatives, Financial Engineering, Fintech and Market Micro Structure. He has published his research works in various journals including Energy Economics, International Review of Economics and Finance, Pacific-Basin Finance Journal, Global Finance Journal, International Journal of Managerial Finance, Energy Policy and Multinational Finance Journal. He has also received several grants and awards for excellence in research.

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Hasan, M., Le, T. & Hoque, A. How does financial literacy impact on inclusive finance?. Financ Innov 7 , 40 (2021). https://doi.org/10.1186/s40854-021-00259-9

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Financial Literacy

Helping you prepare for life..

We want financial literacy to be a part of your life. To that end, we have focused our resources on providing support and education on financial understanding for all students. The more you know, and the more tools you have at your disposal, the better prepared you will be for life at and beyond Harvard.

In this guide, you'll find information on budgeting, credit, saving and investing, and taxes.

A budget is, simply put, a plan for your money. By tracking income and expenses you can create a plan for your spending and saving. 

Why do you need a budget?

If you have ever found yourself looking at your bank account and wondering where your money went, a budget can help. The most common cause of financial problems is spending more than you are earning. With a flexible, sensible budget, you can control of your money and avoid financial stress. It can help you limit spending and ensure there is enough money to do the things that you want. 

How to get started

• Build a starting budget with your best guess of what you spend in a month (on average), separated into categories like books, personal expenses, rent, phone, and entertainment.
• Track your expenses for a few months. Then, compare these figures with your previous projections. You may be surprised to see where your guesses were higher or lower.
• Once you have tracked your expenses, compare these to your income. If you are spending more than you are earning, you need to make changes.
• Be honest about "needs" vs. "wants". Enjoying a store-bought coffee every single day is nice, but you could save up to $80/month by reducing this purchase from daily to weekly.
• Review your monthly budget for any necessary changes. Remember: a budget is fluid, meaning that it will (and should) adjust as your income and goals adjust.

Determining How Much Disposable Income You Have

Consider setting some of your income aside in a savings account, and putting limits on how much you can spend on non-essential items.

Let’s say you buy a cup of coffee on most days, grab a quick bite a couple times a week, and go out on Saturday nights for fun with friends. Your yearly spending may look like this:

• Coffee 4x/week @ $2.50 = $520
• Quick late-night snack 3x/week @ $6.50 = $1,014
• Weekend Fun @ $25-30 each weekend = $1,560

Your total spending would be $3,094 per year, or $12,376 for the four years of college--enough to buy a car. Considering this, make sure you’re being thoughtful about how you want to spend and save your money!

Moving forward with a flexible budget

For your budget to be useful, you need to follow it for more than a few months. Tracking your daily purchases only takes a few minutes. It takes even less time with a budgeting app that links to your bank and credit card accounts and automatically categorizes your purchases. Finding it hard to stick to your budget? Some of your figures may be unrealistic so review and adjust as needed. Perhaps you need to allocate more towards books and travel, and less on clothing. The best budget is one that grows and changes to meet your needs

What can you do now?

Setting up financial goals will help you plan and prioritize what’s important to you, and how you should set up a budget to align with your interests. Goals will also help you be more aware of how you spend your money day-to-day. It’s a good idea to write out these goals, and to stay mindful of them as you go through college!

If you like a pen and paper approach, you can try a simple tracking sheet like this one from Balance Pro or a more comprehensive budget worksheet like this one from the Harvard University Employees Credit Union . If you prefer a phone app, there are many to choose from and most are free. Read reviews to determine what makes the most sense for you.

Credit is a major factor in today's economy and is your reputation as a borrower. In order to have the best reputation, credit wise, you should take the time to learn about managing your credit. This is especially important when it comes time to rent an apartment, finance a car, buy a house, or even find a job. The sooner you start building your credit profile, the better off you'll be in the future.

Credit Report vs. Credit Score

A credit report is a detailed report of your credit history. It has personal information, employment history, and a list of open and closed credit accounts. You can get a free copy of your credit report once per year from each of the three credit reporting bureaus: Equifax, Experian, and Transunion. The website to check is  www.annualcreditreport.com . It’s a good idea to review your report at least once per year to ensure accuracy and check for fraud. If someone were to fraudulently open a line of credit in your name, you might never know without checking your report.

A credit score is a snapshot of your credit risk at a point in time, based off of your credit report. Credit scores such as FICO range from 300-850, with the majority of Americans scoring between 600-800. For lenders, a higher score means a lower chance of default.

Lenders often charge higher interest rates when taking on higher risk, so a low credit score means a more expensive loan. Conversely, a higher credit score means a less expensive loan. With solid credit history you can pay less for many credit products like private loans, credit cards, insurance, auto loans, and mortgages.

Do Your Research

Before applying for a credit card, compare each potential card’s annual fees, interest rates, special rewards, and credit limit. Little differences can have major impacts. Once you choose a credit card and begin using it, make your payments on time and pay off your balance each month. Failure to do so can result in large fees and do serious damage to your credit score. Try not to carry a balance on the card; instead, make occasional and sensible purchases.

Components of Your Credit Score

• Payment History (35%)  This is the largest factor and thus the best way to improve your score: make consistent, on-time payments. If you are more than 30 days late even once, that record remains on your credit report for 7 years and could result in a drop of 90 points or more in your credit score.
• Amount of Debt (30%)  How much debt you have relative to your available credit makes up the second largest factor in your score. A good rule of thumb is to keep your debt utilization ratio ( amounts owed/total credit limit ) below 30%. Pretend you have two credit cards and both have a limit of $500. To stay within 30% you would spend no more than $300 between the two cards.
• Length of Credit History (15%)  Lenders like to see long relationships with other lenders. One easy thing you can do to build credit history is open a no-annual-fee credit card, charge a few dollars each month, and pay it in full each month when the bill comes. 
• New Credit (10%)  Anytime you apply for a line of credit and a lender does what is called a "hard pull" on your credit score, your score can drop by a few points. This isn’t a big deal as new credit only makes up 10% of your score, but if you do this often enough it can substantially impact your score and ability to secure new credit. This information remains on your report for 2 years.
• Credit Mix (10%)  Lenders like to see a variety of credit accounts in good standing because it signals that you are a responsible borrower. A person who is making on-time monthly payments on a credit card, an auto loan, and a student loan is considered less risky. Your access to different types of credit may be limited as a student, and most lenders realize this.

U.S. News and World Report Student Credit Card Survey

Each year, U.S. News and World Report conducts a survey of students who own a credit card. From the results, they identify and address common credit topics such as credit scores, costs of credit, and providing tools that help guide students with credit card best practices. View the survey and guide here .

Helpful Reads

For more information on effective credit building as a student, the following articles are useful.

• CreditCards.com Presents: 10 Ways Students Can Build Good Credit
• A College Student’s Guide to Building Credit

Saving and Investing

Figuring out how to secure your financial well being is one of the most important things you can do. 

For many people, the path to financial security is with saving and investing. As a student, these topics may not yet be on your radar, but saving is a key concept for financial well-being. If you make saving a regular habit, even a small amount, you are building a foundation for financial success.

Tips on getting started with saving and investing

• Pay yourself first:  This means that for every paycheck you receive, commit to putting an amount (even a small amount) aside in a savings account. An effective way of doing this is to have a set amount of your paycheck directly deposited into a savings account, separate from what you use for everyday expenses. You will be surprised how quickly your savings can grow.
• Keep track of your saving:  People who track their savings tend to save more because it is on their mind. With online and mobile banking, there should be no excuse not to know exactly how much money you have.
• Set Goals:  Setting financial goals is crucial. As a student, you may only have a few financial goals, but this is the perfect opportunity to hone your skills. Think of this scenario: You want to pay off a student loan before graduation, how will you accomplish this? How much do you need to work? To save? The better you do now, the easier accomplishing future goals will become.

Thinking ahead

Even now there may be long range financial goals that you start saving for. Here are some tips for investing in your long term financial goals.

• Plan ahead:  As with any endeavor, advance planning is a way to figure out what you want, when you want it, and what you can do to achieve it. The sooner you start planning, the sooner you start accomplishing.
• Understand the time value of money /compound interest:  This is the principle that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. The longer the time frame for investment, the more you can increase the income potential of your investment. On the flip side, waiting to invest can make it more difficult to achieve your financial goals. Discover how much waiting to save could cost you with the SEC  compound interest calculator .
• Understand your objectives:  As a general rule, the shorter your time frame for investing, the more conservative you should be. For example if you are in your twenties and trying save for a down payment on a house, you are going to want to put your money in a vehicle that ensures the least risk of losing your principle investment. When your time frame for investing is long, you can consider less conservative options. Retirement savings are an example. Starting young allows you to save for a longer period and allows time to make up for potential loses in a less conservative environment.

Do you need to file taxes? Are you aware of the tax benefits for Education? Find out the answers to these important tax related questions.

U.S. Federal Taxes: Overview

If you are planning to work in the US, then navigating the tax code is going to be a large part of your financial well being. Gathered here are aspects of the tax code that deal with education and college related expenses. While the information here is a good start, it is only a broad overview and not a complete guide to filing taxes. For specific questions or additional information, you may wish to visit the  IRS website  or consult a tax professional. International students should consult the  Taxes & Social Security  page of the Harvard International Office website.

Do I need to file taxes?

Determining whether or not you need to file taxes depends on two things: how much money you earned and how much was taken out (aka “withheld”) for taxes.

If your earned income is over a certain limit as determined by the IRS, you may be required to file taxes regardless of how much was withheld from your paycheck.

• As an example, a typical Harvard undergraduate was required to file (2018) taxes if their income (including  taxable scholarships ) was equal to or greater than $12,000.
• The IRS strongly suggests that you file taxes, even if you are not required to do so. By filing your taxes, you may be eligible for a refund of some or all of the income withheld.

Types of tax benefits for education

The information provided here is intended only to get you started to learn about potential tax benefits related to higher education. It is important to note that there are eligibility restrictions and we strongly suggest visiting the  IRS website  directly for the most comprehensive information about tax benefits for higher education.

American Opportunity Credit

• This is a credit of up to $2,500 per eligible student based on Qualified Education Expenses paid during the tax year. The American Opportunity Credit can only be used for up to four years per eligible student.

Lifetime Learning Credit

• This is a credit of up to $2,000 per eligible student based on Qualified Education Expenses paid during the tax year. The Lifetime Learning Credit does not have a limit on the number of years it can be used per eligible student.

Tuition and Fees Deduction

• This is a deduction of up to $4,000 from your Adjusted Gross Income (AGI) based on amounts paid for Qualified Education Expenses. This deduction can be claimed for multiple students and the maximum deduction in a tax year is $4,000.

Student Loan Interest Deduction

• If you are a student making payments on an education loan that is accruing interest, you may be able to deduct some or all of the interest you paid that year from your taxes.
• Your parents may be able to deduct some or all of the interest they paid on their loans, taken on your behalf, if they still claim you as a dependent. The current limit is $2,500 per year, subject to income restrictions.

Important questions to consider

What are Qualified Education Expenses?

When filing taxes, you should know what counts as “qualified” and what doesn’t. This can be confusing because the definition of “qualified” is contextual. For example, the IRS may have a different definition of “qualified” than a 529 plan or other education savings plan provider.

What does the IRS count as Qualified Education Expenses?

• Per IRS guidelines, the expenses that you paid directly (or with a loan) for tuition, fees, and other related expenses count as qualified education expenses.
• The IRS website states that the following expenses do not qualify: room, board, insurance, medical expenses (including student health fees), transportation, and personal/living/family expenses.

What are Credits and Deductions?

Credits and deductions are two different ways to reduce your tax liability.

A  deduction  reduces the amount of income you have that is subject to tax. The actual benefit is tied to your tax bracket. In other words, if you are in the 25% tax bracket and have a Deduction of $1,000, your benefit is a $250 reduction in your taxes (25% of $1,000.)

A  credit  on the other hand reduces the amount of income tax you have to pay in a 1:1 ratio. In other words, if you have a $1,000 Credit, then your benefit is a $1,000 reduction in your taxes.

As a general rule, you should seek out credits before deductions, since the benefit is usually larger (i.e. to your advantage).

Additional Resources and Information

The information provided here is taken from the IRS website and is intended solely as a guideline. Because tax laws are constantly changing, information found here may change. For the most up to date and comprehensive information, we strongly suggest visiting the  IRS website , or consult a tax professional should you have specific questions. 

http://sfs.harvard.edu/taxes

http://www.irs.gov/Individuals/Education-Credits

IRS Publication 970 (Tax Benefits for Education)

http://www.irs.gov/Individuals/Qualified-Ed-Expenses

Throughout the year, we offer events on a wide range of financial literacy topics. Some events are in person and some are virtual, but all are geared toward helping you understand, manage, and move forward with your financial life. 

• First-Year Finance - A session delivered in the fall of your first year which provides an overview of all things Financial Aid. We also cover credit, budgeting, and the various financial literacy programs that we have available. Take advantage of this wonderful opportunity to ask questions and learn more about Harvard’s generous financial aid offerings.(This session has been cancelled for fall 2020).
• Money Management 201  – You’re getting ready to graduate and you have borrowed to help cover the cost of education. Is your financial health in order? Join us at one of our Spring semester sessions where we explain debt, loan repayment, and a host of other financial literacy topics. Regardless of whether you’re joining the work force, taking time off to travel, or prepping for grad school, these sessions are invaluable as you start your life post-Harvard.
• University Efforts  - In June 2011 the Directors of Financial Aid at each Harvard School as well as the University Financial Aid Liason’s Office decided to work on Financial Literacy as a University wide endeavor. One result of this collaboration was a university resource on financial wellness .

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FINANCIAL LITERACY, FINANCIAL EDUCATION AND ECONOMIC OUTCOMES

In this article we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature, and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes, and compare the evidence to evidence on the efficacy and cost of financial education. Finally, we discuss directions for future research.

“The future of our country depends upon making every individual, young and old, fully realize the obligations and responsibilities belonging to citizenship...The future of each individual rests in the individual, providing each is given a fair and proper education and training in the useful things of life...Habits of life are formed in youth...What we need in this country now...is to teach the growing generations to realize that thrift and economy, coupled with industry, are necessary now as they were in past generations.”

--Theodore Vail, President of AT&T and first chairman of the Junior Achievement Bureau (1919, as quoted in Francomano, Lavitt and Lavitt, 1988 )

“Just as it was not possible to live in an industrialized society without print literacy—the ability to read and write, so it is not possible to live in today's world without being financially literate... Financial literacy is an essential tool for anyone who wants to be able to succeed in today's society, make sound financial decisions, and—ultimately—be a good citizen.”

-- Annamaria Lusardi (2011)

1. INTRODUCTION

Can individuals effectively manage their personal financial affairs? Is there a role for public policy in helping consumers achieve better financial outcomes? And if so, what form should government intervention take? These questions are central to many current policy debates and reforms in the U.S. and around the world in the wake of the recent global financial crises.

In the U.S., concerns about poor financial decision making and weak consumer protections in consumer financial markets provided the impetus for the creation of the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Wall Street Reform and Consumer Project Act which was signed into law by President Obama on July 21, 2010. This law gives the CFPB oversight of consumer financial products in a variety of markets, including checking and savings accounts, payday loans, credit cards, and mortgages (CFPB authority does not extend to investments such as stocks and mutual funds which are regulated by the SEC, or personal insurance products that are largely regulated at the state level). In addition to establishing its regulatory authority, the Dodd-Frank Act mandates that the CFPB establish “the Office of Financial Education, which shall develop a strategy to improve the financial literacy of consumers.” It goes on to state that the Comptroller must study “effective methods, tools, and strategies intended to educate and empower consumers about personal financial management” and make recommendations for the “development of programs that effectively improve financial education outcomes.” 1

In line with this second mandate for the CFPB, there has been much recent public discussion on financial literacy and the role of financial education as an antidote to limited individual financial capabilities. As the title suggests, this is a main focus of the current paper; however, it is important not to lose the forest for the trees in the debate on policy prescriptions. The market failure that calls for a policy response is not limited to financial literacy per se, but the full complement of conditions that lead to suboptimal consumer financial outcomes of which limited financial literacy is one contributing factor. Similarly, the policy tools for improving consumer financial outcomes include financial education but also encompass a wide variety of regulatory approaches. One of our aims in this paper is to place financial literacy and financial education in this broader context of both problems and solutions.

The sense of public urgency over the level of financial literacy in the population is, we believe, a reaction to a changing economic climate in which individuals now shoulder greater personal financial responsibility in the face of increasingly complicated financial products. For example, in the U.S. and elsewhere across the globe, individuals have been given greater control and responsibility over the investments funding their retirement (in both private retirement savings plan such as 401(k)s and in social security schemes with private accounts). Consumers confront ever more diverse options to obtain credit (credit cards, mortgages, home equity loans, payday loans, etc.) and a veritable alphabet soup of savings alternatives (CDs, HSAs, 401(k)s, IRAs, 529s, KEOUGHs, etc.). Can individuals successfully navigate this increasingly complicated financial terrain?

We begin by framing financial literacy within the context of standard models of consumer financial decision making. We then consider how to define and measure financial literacy, with an emphasis on the growing literature documenting the financial capabilities of individuals in the U.S. and other countries. We then survey the literature on the relationship between financial literacy and economic outcomes, including wealth accumulation, savings decisions, investment choices, and credit outcomes. We then assess the evidence on the impact of financial education on financial literacy and on economic outcomes. Next we evaluate the role of government in consumer financial markets: what problems do limited financial capabilities pose, and are market mechanisms likely to correct these problems? Finally, we suggest directions for future research on financial literacy, financial education, and other mechanisms for improving consumer financial outcomes.

2. WHAT IS FINANICAL LITERACY AND WHY IS IT IMPORTANT?

“Financial literacy” as a construct was first championed by the Jump$tart Coalition for Personal Financial Literacy in its inaugural 1997 study Jump$tart Survey of Financial Literacy Among High School Students. In this study, Jump$tart defined “financial literacy” as “the ability to use knowledge and skills to manage one's financial resources effectively for lifetime financial security.” As operationalized in the academic literature, financial literacy has taken on a variety of meanings; it has been used to refer to knowledge of financial products (e.g., what is a stock vs. a bond; the difference between a fixed vs. an adjustable rate mortgage), knowledge of financial concepts (inflation, compounding, diversification, credit scores), having the mathematical skills or numeracy necessary for effective financial decision making, and being engaged in certain activities such as financial planning.

Although financial literacy as a construct is a fairly recent development, financial education as an antidote to poor financial decision making is not. In the U.S., policy initiatives to improve the quality of personal financial decision making through financial education extend back at least to the 1950s and 1960s when states began mandating inclusion of personal finance, economics, and other consumer education topics in the K-12 educational curriculum ( Bernheim et al. 2001 ; citing Alexander 1979, Joint Council on Economic Education 1989, and National Coalition for Consumer Education 1990). 2 Private financial and economic education initiatives have an even longer history; the Junior Achievement organization had its genesis during World War I, and the Council for Economic Education goes back at least sixty years. 3

Why are financial literacy and financial education as a tool to increase financial literacy potentially important? In answering these questions, it is useful to place financial literacy within the context of standard models of consumer financial decision making and market competition. We start with a simple two-period model of intertemporal choice in the face of uncertainty. A household decides between consumption and savings at time 0, given an initial time 0 budget, y , an expected real interest rate, r , and current and future expected prices, p , for goods consumed, x .

Solving this simple model requires both numeracy (the ability to add, subtract, and multiply), and some degree of financial literacy (an understanding of interest rates, market risks, real versus nominal returns, prices and inflation).

Alternatively, consider a simple model of single-period profit maximization for a single-product firm competing on price in a differentiated products market:

The firm chooses price, p , to maximize profits given marginal costs, mc , its product characteristics, x , its competitors’ prices and product characteristics, p -j and x -j , respectively, and the distribution of consumer preferences over price and product characteristics, θ . Doing so results in the familiar formula relating price mark-up over costs to the price elasticity of demand: prices are higher relative to costs in product markets in which demand is less sensitive to price.

Competitive outcomes in this model rest on the assumption that individuals can and do make comparisons across products in terms of both product attributes and the prices paid for those attributes. This may be a relatively straightforward task for some products (e.g., breakfast cereal), but is a potentially tall order for products with multidimensional attributes and complicated and uncertain pricing (e.g., health care plans, cell phone plans, credit cards, or adjustable rate mortgages).

A lack of financial literacy is problematic if it renders individuals unable to optimize their own welfare, especially when the stakes are high, or to exert the type of competitive pressure necessary for market efficiency. This has obvious consequences for individual and social welfare. It also makes the standard models used to capture consumer behavior and shape economic policy less useful for these particular tasks.

Research has documented widespread and avoidable financial mistakes by consumers, some with non-trivial financial consequences. For example, in the U.S., Choi et al. (2011) examine contributions to 401(k) plans by employees over age 59 ½ who are eligible for an employer match, vested in their plan, and able to make immediate penalty-free withdrawals due to their age. They find that 36% of these employees either don't participate or contribute less than the amount that would garner the full employer match, essentially foregoing 1.6% of their annual pay in matching contributions; the cumulative losses over time for these individuals are likely to be much larger.

Duarte & Hastings (2011) and Hastings et al. (2012) show that many participants in the private account Social Security system in Mexico invest their account balances with dominated financial providers who charge high fees that are not offset by higher returns, contributing to high management fees in the system overall. Similarly, Choi et al. (2009) use a laboratory experiment that show that many investors, even those who are well educated, fail to choose a fee minimizing portfolio even in a context (the choice between four different S&P 500 Index Funds) in which fees are the only significant distinguishing characteristic of the investments and the dispersion in fees is large.

Campbell (2006) highlights several other of financial mistakes: low levels of stock market participation, inadequate diversification due to households’ apparent preferences to invest in local firms and employer stock, individuals’ tendencies to sell assets that have appreciated while holding on to assets whose value has declined even if future return prospects are the same (the disposition effect first documented in Odean 1998 ), and failing to refinance fixed rate mortgages in a period of declining interest rates.

Other financial mistakes discussed in the literature include purchasing whole life insurance rather than a cheaper combination of term life insurance in conjunction with a savings account ( Anagol et al. 2012 ); simultaneously holding high-interest credit card debt and low-interest checking account balances ( Gross & Souleles 2002 ); holding taxable assets in taxable accounts and non-taxable or tax-preferred assets in tax-deferred accounts ( Bergstresser & Poterba 2004 , Barber & Odean 2003 ); paying down a mortgage faster than the amortization schedule requires while failing to contribute to a matched tax-deferred savings account (Amromin et al. 2007); and borrowing from a payday lender when cheaper sources of credit are available ( Agarwal et al. 2009b ).

Agarwal et al. (2009a) document the prevalence of several different financial mistakes ranging from suboptimal credit card use after making a balance transfer to an account with a low teaser rate, to paying unnecessarily high interest rates on a home equity loan or line of credit. They find that across many domains, sizeable fractions of consumers make avoidable financial mistakes. They also find that the frequency of financial mistakes varies with age, following a U-shaped pattern: financial mistakes decline with age until individuals reach their early 50s, then begin to increase. The declining pattern up to the early 50s is consistent with the acquisition of increased financial decision-making capital over time, either formally or through learning from experience ( Agarwal et al. 2011 ); but the reversal at older ages highlights the natural limits that the aging process places on individuals’ financial decision-making capabilities, however those capabilities are acquired.

The constellation of findings described above has been cited by some as prima facie evidence that individuals lack the requisite levels of financial literacy for effective financial decision making. On the other hand, Milton Friedman (1953) famously suggested that just as pool players need not be experts in physics to play pool well, individuals need not be financial experts if they can learn to behave optimally through trial and error. There is some evidence that such personal financial learning does occur. Agarwal et al. (2011) find that in credit card markets during the first three years after an account is opened, the fees paid by new card holders fall by 75% due to negative feedback: by paying a fee, consumers learn how to avoid triggering future fees. The role of experience is also evident in the answers to a University of Michigan Surveys of Consumers question that asked about the most important way respondents’ learned about personal finance. Half cited personal financial experience, more than twice the fraction who cited friends and family, and four to five times the fraction who credit formal financial education as their most important source of learning (Hilgert & Hogarth 2003).

Although experiential learning may be an important self-correcting mechanism in financial markets, many important financial decisions like saving and investing for retirement, choosing a mortgage, or investing in an education, are undertaken only infrequently and have delayed outcomes that are subject to large random shocks. Learning by doing may not be an effective substitute for limited financial knowledge in these circumstances ( Campbell et al. 2010 ), and consumers may instead rely on whatever limited institutional knowledge and numeracy skills they have.

3. MEASURING FINANCIAL LITERACY

If financial literacy is an important ingredient in effective financial decision making, a natural question to ask is how financially literate are consumers? Are they well equipped to make consequential financial decisions? Or do they fall short? Efforts to measure financial literacy date back to at least the early 1990s when the Consumer Federation of America (1990; 1991; 1993; 1998) began conducting a series of “Consumer Knowledge” surveys among different populations which included questions on several personal finance topics: consumer credit, bank accounts, insurance, and major consumer expenditures areas such as housing, food and automobiles. The 1997 Jump$tart survey of high school students referenced above has been repeated biennially since 2000 and was expanded to include college students in 2008 (see Mandell 2009 , for an analysis these surveys). Hilgert et al. (2003) analyze a set of “Financial IQ” questions included in the University of Michigan's monthly Surveys of Consumers in November and December 2001.

More recently, Lusardi & Mitchell (2006) added a set of financial literacy questions to the 2004 Health and Retirement Study (HRS, a survey of U.S. households aged 50 and older) that have, in the past decade, served as the foundational questions in several surveys designed to measure financial literacy in the U.S. and other countries. The three core questions in the original 2004 HRS financial literacy module were designed to assess understanding of three core financial concepts: compound interest, real rates of return, and risk diversification (see Table 1 ). Because these questions are parsimonious and have been widely replicated and adapted, they have come to be known as the “Big Three.”

Financial Literacy Questions in the 2004 Health and Retirement Study (HRS) and the 2009 National Financial Capability Study (NFCS)

Note: The answer categorized as correct is italicized in the last column.

These questions were incorporated into the 2009 National Financial Capability Study (NFCS) in the U.S., a large national survey of the financial capabilities of the adult population. 4 The NFCS asked two additional financial literacy questions which, together with the “Big Three,” have collectively come to be known as the “Big Five.” These two additional questions test knowledge about mortgage interest and bond prices. Table 1 lists the “Big Five” questions as asked with their potential answers (the correct answers are italicized).

Because the “Big Three” questions have been more widely adopted in other surveys, we focus here on the answers to these three questions, although we return to the “Big Five” later. The second and fourth columns of Table 2 report the percent of correct and “Don't know” responses to each of the “Big Three” questions for the 2004 HRS respondents and the 2009 NFCS respondents. Because the NFCS represents the entire adult population, we focus on those results here. Among respondents to the 2009 NFCS, 78% correctly answered the first question on interest rates and compounding, 65% correctly answered the second question on inflation and purchasing power, and 53% correctly answered the third question on risk diversification. Note that all three questions were multiple choice (rather than open-ended), so that guessing would yield a correct answer to the first two questions 33% of the time and to the last question 50% of the time. Only 39% of respondents correctly answered all three questions.

Financial Literacy Around the World

Notes: Countries ranked by 2010-2011 International Monetary Fund GDP per capita. + denotes statistics directly drawn from publications: Netherlands: van Rooij et al. 2011 . Financial literacy and retirement preparation in the Netherlands. J. Pension. Econ. 10(4): 527-545; Japan: Sekita. 2011. Financial literacy and retirement planning in Japan. J. Pension. Econ. 10(4): 637-656. Germany: Lusardi & Bucher-Koenen. 2011. Financial literacy and retirement planning in Germany. J. Pension. Econ. 10(4): 565-584. Cole et al. 2011. Prices or knowledge? What drives demand for financial services in emerging markets. J. Financ. 66(6): 1933-1967.

X denotes missing information.

Clearly individuals who cannot answer the first or second questions will have a difficult time navigating financial decisions that involve an investment today and real rates of return over time; they are likely to have trouble making even the basic calculations assumed in a rational intertemporal decision-making framework. The inability to correctly answer the third question demonstrates ignorance about the benefits of diversification (reduced risk) and casts doubt on whether individuals can effectively manage their financial assets. With only 39% of the population able to answer these three fairly basic financial literacy questions correctly, we might be justifiably concerned about how many individuals make suboptimal financial decisions in everyday life and the types of marketplace distortions that could follow.

As noted earlier, dozens of surveys in addition to the NFCS have included the trio of questions discussed above from the 2004 HRS. In addition to the results for the 2004 HRS and the 2009 NFCS, Table 2 shows how respondents in several countries answered these same questions. The first six columns list comparative statistics for six developed economy surveys from the U.S., The Netherlands, Japan and Germany. The next three columns take data from the upper-middle income countries of Chile and Mexico. The last two columns report responses from the lower-income countries of India and Indonesia. Proficiency rates vary widely; in Germany, 53% of respondents correctly answer the three HRS financial literacy questions, whereas only 8% of respondents in Chile do so. In general, the level of financial literacy is highest in the developed countries and lowest in the lower-income countries. The responses to these questions in the 2004 and 2010 HRS suggest that financial literacy for HRS respondents has increased somewhat over time, perhaps from participating in the panel, or perhaps as a result of increased financial discussion surrounding the 2008 financial crisis. In Chile and Mexico, respondents have particularly low levels of financial literacy despite being responsible for managing the investment decisions for the balances accumulated in their privatized social security accounts. Chile also witnessed massive student protests over college loan debt in 2011, and yet only 16% of college entrants can correctly answer these three questions despite the fact that 22% of them are taking out student loans. 5

Although the Lusardi and Mitchell “Big Three” questions from the 2004 HRS have quickly become an international standard in assessing financial literacy, there is remarkably little evidence on whether this set of survey questions is the best approach, or even a superior approach, to measuring financial literacy. The question of how best to assess the desired behavioral capabilities remains open, both in terms of establishing whether survey questions are best-suited for the task or which questions are most effective. Longer financial literacy survey batteries do exist, including the National Financial Capability Study (NFCS) which asks the “Big Five” financial literacy questions described above along with an extensive set of questions on individual financial behaviors. The biennial Jump$tart Coalition financial literacy surveys used to assess the financial literacy of high school and college students in the U.S. include more than fifty questions. Whether using additional survey questions (and how many more) better explains individual behavior is unclear as little research has evaluated the relative efficacy of different measurements.

Table 3 lists the fraction of respondents correctly answering the “Big Three” and “Big Five” financial literacy questions in the 2009 NFCS for various demographic subgroups. There is a strong positive correlation between the performance on the “Big Three” and the “Big Five” questions (although part of this correlation is mechanical as the “Big Three” are a subset of the “Big Five”). Table 3 also lists three other self-assessed measures of financial capability (self-assessed overall financial knowledge, self-assessed mathematical knowledge and self-assessed capability at dealing with financial matters). These self-assessed measures are all highly correlated with each other, and fairly highly correlated with the performance-based measures of financial literacy in the first two columns. All of the measures of financial capability are also highly correlated with educational attainment, suggesting that traditional measures of education could also serve as proxies for financial literacy (we will discuss causality in Section 4).

Measures of Financial Literacy

Note: Authors’ calculations from the 2009 NFCS State-by-State Survey (n=28,146). The top panel of Table 1 lists the “Big 3” questions in Column (1); the “Big 5” questions in Column (2) include the “Big 3” and the additional two questions from the bottom panel of Table 1 . Columns (3) through (5) report the mean of the participants’ self-assessments based on the following scale: 1=Strongly Disagree to 7= Strongly Agree.

In a survey of 18 different financial literacy studies, Hung et al. (2009) report that the predominant approach used to operationalize the concept of financial literacy is either the number, or the fraction, of correct answers on some sort of performance test (measures akin to those in columns 1 and 2 of Table 3 ). This approach was used in all of the studies they evaluated, although two adopted a more sophisticated methodology, using factor analysis to construct an index that assigned different weights to each question ( Lusardi & Mitchell 2009 , van Rooij et al. 2011 ).

In addition to evaluating how previous studies have operationalized the concept of financial literacy, Hung et al. (2009) also perform a construct validation of seven different financial literacy measures calculated from various question batteries administered to the same set of respondents in four different waves of the RAND American Life Panel. Their measures include three performance tests (one of which has three subtests) based on either 13, 23, or 70 questions, and one behavioral outcome (performance in a hypothetical financial decision-making task). They find that the measures based on the different performance tests are highly correlated with each other, and when the same questions are asked in multiple waves, the answers have high test-retest reliability. The outcomes of the performance tests are less highly correlated with outcomes in the decision-making task. They also find that the relationship between demographics and the different performance test based measures of financial literacy is similar, but that the relationship between demographics and the outcomes in the decision-making task is much weaker. The different financial literacy measures are more variable in their predictive relationships for actual financial behaviors such as planning for retirement, saving, and wealth accumulation.

One unanswered question in this literature is whether test-based measures provide an accurate measure of actual financial capability. To our knowledge, no study has provided incentives for giving correct answers as a mechanism to encourage thoughtful answers that reflect actual knowledge; neither has any study allowed individuals to access other sources of information (e.g., the internet, or friends and family) in completing a performance test to assess whether individuals understand their limitations and can compensate for them by engaging other sources of expertise. If individuals have effective compensatory mechanisms, we may see discrepancies between performance test results and actual outcomes and behaviors in the field.

A second measure of financial literacy that has been operationalized in the literature is individuals’ self-assessments of their financial knowledge or, alternatively, the level of confidence in their financial abilities. In the 18 studies evaluated by Hung et al. (2009) discussed above, one-third analyzed self-reported financial literacy in addition to a performance test-based measure. Two issues with such self-reporting warrant mention. First, individual self-reports and actual financial decisions do not always correlate strongly ( Hastings & Mitchell 2011 , Collins et. al. 2009 ). Second, consumers are often overly optimistic about how much they actually know ( Agnew & Szykman 2005 , OECD 2005 ). Even so, in general the literature finds that self-assessed financial capabilities and more objective measures of financial literacy are positively correlated (e.g., Lusardi & Mitchell 2009 , Parker et al. 2012 ), and self-reported financial literacy or confidence often have independent predictive power for financial outcomes relative to more objective test-based measures of financial literacy. For example, Allgood & Walstad (2012) find that in the 2009 NFCS State-by-State survey, both self-assessed financial literacy and the fraction of correct answers on the “Big Five” financial literacy questions are predictive of financial behaviors in a variety of domains: credit cards (e.g., incurring interest charges or making only minimum payments), investments (e.g., holding stocks, bonds, mutual funds or other securities), loans (e.g., making late payments on a mortgage, comparison shopping for a mortgage or auto loan), insurance coverage, and financial counseling (e.g., seeking professional advice for a mortgage, loan, insurance, tax planning or debt counseling). Similarly, Parker et al. (2012) find that both self-reported financial confidence and a test-based measure of financial literacy predict self-reported retirement planning and saving, and van Rooij et al. (2011) find that both self-perceived financial knowledge and a test-based measure of financial literacy predict stock market participation.

Although test-based and self-assessed measures of financial literacy are the norm in the literature, other approaches to measuring financial literacy may be worth considering. One alternative measurement strategy, limited by the requirement for robust administrative data, is to identify individuals exhibiting financially sophisticated behavior (e.g., capitalizing on matching contributions in an employer's savings plan, or consistently refinancing a mortgage when interest rates fall) and use these indicators to predict other outcomes. For example, Calvet et al. (2009) use administrative data from Sweden to construct an index of financial sophistication based on whether individuals succumb to three different types of financial “mistakes”: under-diversification, inertia in risk taking, and the disposition effect in stock holding.

An outcomes-based approach like this may be fruitful for predicting future behavior, more so than the traditionally used measures of financial literacy (although Calvet et al. 2009 do not perform such an exercise in their analysis). If we are interested in understanding the abilities that improve financial outcomes, we should define successful measures as those that, when changed, produce improved financial behavior. Such a strategy will likely generate greater internal validity for predicting consumer decisions in specific areas (e.g., portfolio choice or retirement savings), although it will significantly increase the requirements for research relative to strategies that rely on more general indicators of financial literacy (e.g., the “Big Three”).

4. WHAT IS THE RELATIONSHIP BETWEEN FINANCIAL EDUCATION, FINANCIAL LITERACY AND FINANCIAL OUTCOMES?

Consistent with the notion that financial literacy matters for financial optimization, a sizeable and growing literature has established a correlation between financial literacy and several different financial behaviors and outcomes. In one of the first studies in this vein, Hilgert et al. (2003) document a strong relationship between financial knowledge and the likelihood of engaging in a number of financial practices: paying bills on time, tracking expenses, budgeting, paying credit card bills in full each month, saving out of each paycheck, maintaining an emergency fund, diversifying investments, and setting financial goals. Subsequent research has found that financial literacy is positively correlated with planning for retirement, savings and wealth accumulation ( Ameriks et al. 2003 , Lusardi 2004 , Lusardi & Mitchell 2006 ; 2007 , Stango & Zinman 2008, Hung et al. 2009 , van Rooij et al. 2012 ). Financial literacy is predictive of investment behaviors including stock market participation ( van Rooij, et al. 2011 , Kimball & Shumway 2006 , Christelis et al. 2006), choosing a low fee investment portfolio ( Choi et al. 2011 , Hastings 2012), and better diversification and more frequent stock trading ( Graham et al. 2009 ). Finally, low financial literacy is associated with negative credit behaviors such as debt accumulation (Stango & Zinman 2008, Lusardi & Tufano 2009 ), high-cost borrowing ( Lusardi & Tufano 2009 ), poor mortgage choice ( Moore 2003 ), and mortgage delinquency and home foreclosure ( Gerardi et al. 2010 ).

Other related research documents a relationship between either numeracy or more general cognitive abilities and financial outcomes. Although these concepts are distinct from financial literacy, they tend to be positively correlated: individuals with higher general cognitive abilities or greater facility with numbers and numerical calculations tend to have higher levels of financial literacy ( Banks & Oldfield 2007 , Gerardi et al. 2010 ). Numeracy and more general cognitive ability predict stockholding ( Banks & Oldfield 2007 , Christelis et al. 2010 ), wealth accumulation ( Banks & Oldfield 2007 ), and portfolio allocation ( Grinblatt et al. 2009 ).

Although this evidence might lead one to conclude that financial education should be an effective mechanism to improve financial outcomes, the causality in these relationships is inherently difficult to pin down. Does financial literacy lead to better economic outcomes? Or does being engaged in certain types of economic behaviors lead to greater financial literacy? Or does some underlying third factor (e.g., numerical ability, general intelligence, interest in financial matters, patience) contribute to both higher levels of financial literacy and better financial outcomes? To give a more concrete example, individuals with higher levels of financial literacy might better recognize the financial benefits and be more inclined to enroll in a savings plan offered by their employer. On the other hand, if an employer automatically enrolls employees in the firm's saving plan, the employees may acquire some level of financial literacy simply by virtue of their savings plan participation. The finding noted earlier that most individuals cite personal experience as the most important source of their financial learning ( Hilgert et al. 2003 ) suggests that some element of reverse causality is likely. While this endogeneity does not rule out the possibility that financial literacy improves financial outcomes, it does make interpreting the magnitudes of the effects estimated in the literature difficult to interpret as they are almost surely upwardly biased in magnitude.

In addition, unobserved factors such as predisposition for patience or forward-looking behavior could contribute to both increased financial literacy and better financial outcomes. Meier & Sprenger (2010) find that those who voluntarily participate in financial education opportunities are more future-oriented. Hastings & Mitchell (2011) find that those who display patience in a field-experiment task are also more likely to invest in health and opt to save additional amounts for retirement in their mandatory pension accounts. Other unobserved factors like personality ( Borgans et al. 2008 ) or family background ( Cunha & Heckman 2007 , Cunha et al. 2010 ) could upwardly bias the observed relationship between financial education and financial behavior in non-experimental research.

Despite the challenges in pinning down causality, understanding causal mechanisms is necessary to make effective policy prescriptions. If the policy goal is increased financial literacy, then we need to know how individuals acquire financial literacy. How important is financial education? And how important is personal experience? And how do they interact? If, on the other hand, the goal is to improve financial outcomes for consumers, then we need to know if financial education improves financial outcomes (assuming it increases literacy) and we need to be able to weigh the cost effectiveness of financial education against other policy options that also impact financial outcomes.

What evidence is there that financial education actually increases financial literacy? The evidence is more limited and not as encouraging as one might expect. One empirical strategy has been to exploit cross sectional variation in the receipt of financial education. Studies using this approach have often found almost no relationship between financial education and individual performance on financial literacy tests. For example, Jumps$tart (2006) and Mandell (2008) document surprisingly little correlation between high school students’ financial knowledge levels and whether or not they have completed a financial education class. This empirical approach has obvious problems for making causal inferences: the students who take financial education courses in districts where such courses are voluntary are likely to be different from the students who choose not to take such courses, and the districts who make such courses mandatory for all students are likely to be different from the districts that have no such mandate. Nonetheless, the lack of any compelling evidence of a positive impact is surprising. Carpena et al. (2011) use a more convincing empirical methodology to get at the impact of financial education on financial literacy and financial outcomes. They evaluate a relatively large randomized financial education intervention in India and find that while financial education does not improve financial decisions that require numeracy, it does improve financial product awareness and individuals’ attitudes towards making financial decisions. There is definitely room in the literature for more research using credible empirical methodologies that examine whether, or in what contexts, financial education actually impacts financial literacy.

In the end, we are more interested in financial outcomes than financial knowledge per se. The literature on financial education and financial outcomes includes several studies with plausibly exogenous sources of variation in the receipt of financial education, ranging from small-scale field experiments to large-scale natural experiments. The evidence in these papers on whether financial education actually improves financial outcomes is best described as contradictory.

Several studies have looked toward natural experiments as a source of exogenous variation in who receives financial education. Skimmyhorn (2012) uses administrative data to evaluate the effects of a mandatory eight-hour financial literacy course rolled out by the U.S. military during 2007 and 2008 for all new Army enlisted personnel. Because the roll-out of the financial education program was staggered across different military bases, we can rule out time effects as a confounding factor in the results. He finds that soldiers who joined the Army just after the financial education course was implemented have participation rates in and average monthly contributions to the Federal Thrift Savings Plan (a 401(k)-like savings account) that are roughly double those of personnel who joined the Army just prior to the introduction of the financial education course. The effects are present throughout the savings distribution and persist for at least 2 years (the duration of the data). Using individually-matched credit data for a random subsample, he finds limited evidence of more widespread improved financial outcomes as measured by credit card balances, auto loan balances, unpaid debts, and adverse legal actions (foreclosures, liens, judgments and repossessions).

Bernheim et al. (2001) and Cole & Shastry (2012) examine another natural experiment which created variation in financial education exposure: the expansion over time and across states in high school financial education mandates. The first of these studies concludes that financial education mandates do have an impact on at least one measure of financial behavior: wealth accumulation. But Cole & Shastry (2012) , using a different data source and a more flexible empirical specification, 6 examine the same natural experiment and conclude that there is no effect of the state high school financial education mandates on wealth accumulation, but rather, that the state adoption of these mandates was correlated with economic growth which could have had an independent effect on savings and wealth accumulation.

In addition to examining natural experiments, researchers have also randomly assigned financial aid provision to evaluate the impact of financial education on financial outcomes. For example, Drexler et al. (2012) examine the impact of two different financial education programs targeted at micro-entrepreneurs in the Dominican Republic as part of a randomized controlled trial on the effects of financial education. Their sample of micro-entrepreneurs was randomized to be in either a control group or one of two treatment groups. Members of one treatment group participated in several sessions of more traditional, principles-based financial education; members of the other treatment group participated in several sessions of financial education oriented around simple financial management rules of thumb. The authors examine participants’ use of several different financial management practices approximately one year after the financial education courses were completed. Relative to the control group, the authors find no difference in the financial behaviors of the treatment group who received the principles-based financial education; they do find statistically significant and economically meaningful improvements in the financial behavior of the treatment group who participated in the rule-of-thumb oriented financial education course. The results of this study suggest that how financial education is structured could matter in whether it has meaningful effects at the end of the day, and might help explain why many other studies have found much weaker links between financial education and economic outcomes.

Gartner & Todd (2005) evaluate a randomized credit education plan for first-year college students but find no statistically significant differences between the control and treatment groups in their credit balances or timeliness of payments. Servon & Kaestner (2008) used random variation in a financial literacy training and technology assistance program find virtually no differences between the control and treatment groups in a variety of financial behaviors (having investments, having a credit card, banking online, saving money, financial planning, timely bill payment and others), though they suspect that the program was implemented imperfectly. In a small randomized field experiment, Collins (2010) evaluates a financial education program for low and moderate income families and finds improvements in self-reported knowledge and behaviors (increased savings and small improvements in credit scores twelve months later), but the sample studied suffers from non-random attrition. Finally, Choi et al. (2011) randomly assign some participants in a survey to an educational intervention designed to teach them about the value of the employer match in an employer sponsored savings plan. Using administrative data, they find statistically insignificant differences in future savings plan contributions between the treatment and the control group, even in the face of significant financial incentives for savings plan participation.

Additional non-experimental research using self-reported outcomes and potentially endogenous selection into financial education suggests a positive relationship between financial education and financial behavior. This positive relationship has been documented for credit counseling ( Staten 2006 ), retirement seminars ( Lusardi 2004 , Bernheim & Garrett 2003 ), optional high school programs ( Boyce & Danes 2004 ), more general financial literacy education ( Lusardi & Mitchell 2007 ), and in the military ( Bell et al. 2008 ; 2009 ).

Altogether, there remains substantial disagreement over the efficacy of financial education. While the most recent reviews and meta-analyses of the non-experimental evidence ( Collins et al. 2009 , Gale & Levine 2011 ) suggest that financial literacy can improve financial behavior, these reviews do not appear to fully discount non-experimental research and its limitations for causal inference. Of the few studies that exploit randomization or natural experiments, there is at best mixed evidence that financial education improves financial outcomes. The current literature is inadequate to draw conclusions about if and under what conditions financial education works. While there do not appear to be any negative effects of financial education other than increased expenditures, there are also almost no studies detailing the costs of financial education programs on small or large scales ( Coussens 2006 ), and few that causally identify their benefits towards improved financial outcomes.

To inform policy discussion, this literature needs additional large-scale randomized interventions designed to effectively identify causal effects. Randomized interventions coupled with measures of financial literacy could address the question of how best to measure financial literacy while also providing credible assessments of the effect of financial education on financial literacy and economic outcomes. A starting point could be incorporating experimental components into existing large scale surveys like the NFCS; for example, a subset of respondents could be randomized to participate in an on-line financial education course or to receive a take-home reference guide to making better financial decisions. Measuring financial literacy before and immediately after the short course would test if financial education improves various measures of financial literacy in the short-run. A subsequent follow-up survey linked to administrative data on financial outcomes (e.g., credit scores) would measure if short-run improvements in financial literacy last, and which measures of financial literacy, if any, are correlated with improved financial outcomes. Studies along these lines are needed to identify the causal effects of financial education on financial literacy and financial outcomes, identify the best measures of financial literacy, and inform policy makers about the costs and benefits of financial education as a means to improve financial outcomes.

5. WHAT IS THE ROLE OF PUBLIC POLICY IN IMPROVING INDIVIDUAL FINANCIAL OUTCOMES?

Given the current inconclusive evidence on the causal effects of financial education on either financial literacy or financial outcomes, there remains disagreement over whether financial education is the most appropriate policy tool for improving consumer financial outcomes. As expected, those who believe that financial education works favor more financial education ( Lusardi & Mitchell 2007 , Hogarth 2006 , Martin 2007 ). Others, optimistic about the promise of financial education despite what they view as weak empirical evidence of positive effects, support more targeted and timely education with greater emphasis on experimental design and evaluation ( Hathaway & Khatiwada 2008 , Collins & O'Rourke 2010 ). Finally, some who do not believe the research demonstrates positive effects support other policy options ( Willis 2008 ; 2009 ; 2011 ). In this section, we place financial education in the context of the broader research on alternative ways to improve financial outcomes.

5.1 Is There a Market Failure?

As economists, we start this section with the question of market failure: Is there a need for public policy in improving financial knowledge and financial outcomes, or can the market work efficiently without government intervention? If, like other forms of human capital, financial knowledge is costly to accumulate, there may be an optimal level of financial literacy acquisition that varies across individuals based on the expected need for financial expertise and individual preference parameters (e.g., discount rates). Jappelli & Padula (2011) and Lusardi et al. (2012) both use the relationship between financial literacy and wealth as their point of departure in modeling the endogenous accumulation of financial literacy. In both papers, investments in financial literacy have both costs (time and monetary resources) and benefits (access to better investment opportunities) which may be correlated with household education or initial endowments. In the model of Jappelli & Padula (2011) , the optimal stock of financial literacy increases with income, the discount factor (patience), the return to financial literacy, and the initial stock of financial literacy. 7 In the model of Lusardi et al. (2012) , more educated households have higher earnings trajectories than those with less education and also have stronger savings motives due to the progressivity built into the social safety net. Because they save more, they value better financial management technologies more than those with lower incomes, and they rationally acquire a higher level of financial literacy.

These models suggest that differences in financial literacy acquisition may be individually rational. Consistent with this supposition, Hsu (2011) uses data from the Cognitive Economics Survey which includes measures of financial literacy for a set of husbands and their wives to examine the determination of financial literacy in married couples. She finds that wives have a lower average level of financial literacy than their husbands (cf. the gender differences in Table 3 ), which she posits arise from a rational division of household labor with men being more likely to manage household finances. Women, however, have longer life expectancies than their husbands and many will eventually need to assume financial management responsibilities. She finds that women actually acquire increased financial literacy as they approach widowhood, with the majority catching up to their husbands prior to being widowed.

More generally, limited financial knowledge may be a rational outcome if other entities—a spouse, an employer, a financial advisor—can help individuals compensate for their deficiencies by providing information, advice, or financial management. We don't expect individuals to be experts in all other domains of life—that is the essence of comparative advantage. Specialization in financial expertise may be efficient if it allows computational and educational investment to be concentrated or aggregated in specialized individuals or entities that develop algorithms and methods to guide consumers through financial waters.

Although low levels of financial literacy acquisition may be individually rational in some models, limited financial knowledge may create externalities such as reduced competitive pressure in markets which leads to higher equilibrium prices ( Hastings et al. 2012 ), higher social safety net usage, lower quality of civic participation, and negative impacts on neighborhoods ( Campbell et al. 2011 ), children ( Figlio et al. 2011 ) and families. Such externalities may imply a role for government in facilitating improved financial decision making through financial education or other mechanisms.

Individuals may also be subject to biases such as present-bias that lead to lower investments in financial knowledge today but which imply ex post regret in the future (sometimes referred to as an “internality”). Barr et al. (2009) note that in some contexts, firms have incentives to help consumers overcome their fallibilities. For example, if present bias leads consumers to save too little, financial institutions whose profits are tied to assets under management have incentives reduce consumer bias and encourage individuals to save more. In other contexts, however, firms may have incentives to exploit cognitive biases and limited financial literacy. For example, if consumers misunderstand how interest compounds and as a consequence borrow too much ( Stango & Zinman 2009 ), financial institutions whose profits are tied to borrowing have little incentive to educate consumers in a way that would correct their misperceptions.

What evidence is there on whether markets help individuals compensate for their limited financial capabilities? Unfortunately, many firms exploit rather than offset consumer shortcomings. Ellison (2005) and Gabaix & Laibson (2006) develop models of add-on and hidden pricing to explain the ubiquitous pricing contracts observed in the banking, hotel, and retail internet sales industries. Both models have naïve and informed customers and show that for reasonable parameter values, firms do not have an incentive to debias naïve consumers even in a competitive market. This leads to equilibrium contracts with low advertised prices on a “salient” price and high hidden fees and add-ons which naïve customers pay and sophisticated customers take action to avoid.

Opaque and complicated fees are widespread, and several empirical papers link these fee structures to shortcomings in consumer optimization. Ausubel (1999) analyzes a large field experiment in which a credit card company randomized mail solicitations varying the interest rate and duration of the credit card's introductory offer. He finds that individuals are overly responsive to the terms of the introductory offer and appear to underestimate their likelihood of holding balances past the introductory offer period with a low interest rate. 8 In a similar vein, Ponce (2008) evaluates a field experiment in Mexico in which a bank randomized the introductory teaser rate offered to prospective customers. He finds that a lower teaser rates leads to substantially higher levels of debt, even several months after the teaser rate expires, and that the higher debt results from lower payments rather than higher purchases or cash advances. Evaluating non-randomized offers to potential customers, he shows that banks do not randomly assign teaser rates but dynamically price discriminate by targeting offers to consumers who are more likely to permanently increase their balances.

Given that many firms are trying to actively obfuscate prices, it should not be surprising that there is little evidence that firms act to debias consumers through informative advertising or investments in financial education. In models of add-on prices, firms can hide prices or make them salient. Similarly, firms can invest in advertising that lowers price sensitivity, focusing consumer choice on non-price attributes, or in advertising that increases price competition by alerting customers to lower prices. In models of informative advertising, firms reduce information costs and expand the market by informing consumers of their price and location in product space. In contrast, in models of persuasive advertising, firms emphasize certain product characteristics and deemphasize others to change consumer's expressed preferences. For example a financial firm could advertise returns for the last year rather than management fees to convince investors that they should primarily evaluate past returns when choosing a fund manager. A financially literate consumer may be unmoved by this advertising strategy, but those who are less literate might be persuaded and end up paying higher management fees.

Hastings et al. (2012) use administrative data on advertising and fund manager choices for account holders in Mexico's privatized pension system. When the privatized system started, the government presumed that firms would compete on price (management fees) and engage in informative advertising to explain fees to consumers and win their accounts. Instead, firms invested heavily in sales force and marketing, and the authors find that heavier exposure to sales force (appropriately instrumented) resulted in lower price sensitivity and higher brand loyalty. This in turn lowered demand elasticity (recall equation 2) and increased management fees in equilibrium.

Importantly, informative advertising itself may be a public good. For example, advertising that explains the value of savings to individuals can benefit both the firm that makes the investment and its competitors if it increases demand for savings products in general. On the other hand, persuasive advertising attempts to convince customers that one product is better than another so that the benefits accrue to the firm that is advertising. The market may underprovide informative advertising in equilibrium because of the inherent free rider problem. Hastings et al. (in progress) test this theory using a marketing field experiment with two large banks in the Philippines. They find evidence that if firms face advertising constraints, persuasive rather than informative advertising maximizes profits. This suggests a role for government to remedy underprovision of public goods. In particular, these results suggest that financial products firms would welcome a tax that would fund public financial education as it would expand the market (e.g., increase total savings) and commit each institution to contribute to the public good. Note in equilibrium this could change firms’ incentives for add-on pricing as well by lowering the fraction of naïve customers in financial products markets ( Gabaix & Laibson 2006 ).

Even if firms do not have incentives to facilitate efficient consumer outcomes, a competitive market may generate an intermediate sector providing advice and guidance. This sector could provide unbiased decision-making-assistance that would lower decision making costs and efficiently expand the market. However, classic principal-agent problems may make such an efficient intermediate market difficult to attain.

Two recent studies highlight the limits of the financial advice industry as incentive-compatible providers of guidance and counsel on financial products and financial decision making. Mullainathan et al. (2012) conduct an audit study of financial advisors in Boston, sending to them scripted investors who present needs that are either in line with or at odds with the financial advisor's personal interests (e.g., passively managed vs. actively managed funds). They find that many advisors act in their personal interests regardless of the client's actual needs and that they reinforce client biases (e.g., about the merits of employer stock) when it benefits them to do so. Similarly, Anagol et al. (2012) conduct an audit study of life insurance agents in India who are largely commission motivated. As in the previous study, scripted customers present themselves to the agents with differing amounts of financial and product knowledge. They find that life insurance agents recommend products with higher commissions even if the product is suboptimal for the customer. They also find that agents are likely to cater to customer's beliefs, even if those beliefs are incorrect. Finally, instead of debiasing less literate consumers, agents are less likely to give correct advice if the customer presents with a low degree of financial sophistication. Together these studies suggest that with asymmetric information, there is both a principal agent problem and an incentive for advisors to compete by reinforcing biases rather than providing truthful recommendations ( Gentzkow & Shapiro 2006 ; 2010 , Che et al. 2011 ).

Overall, this section suggests that are several potential roles for government in improving financial outcomes for consumers. First, government can help solve the public goods problems which result in underinvestment in financial education. Second, government can regulate the disclosure of fees and pricing. And third, government can provide unbiased information and advice.

5.2 The Scope for Government Intervention

If there is a role for government intervention, what form should it take? We have already summarized the literature on financial education. Briefly, there is at best conflicting evidence that financial education leads to improved economic outcomes either through increasing financial literacy directly or otherwise. So while the logical public policy response to many observers is to increase public support for financial education, this option may not be an efficient use of public resources even if it will likely do no harm. 9 In some contexts, other policy responses such as regulation may be more cost effective.

One regulatory alternative is to design policies that address biases and reduce the decision making costs that consumers face in financial product markets ( Thaler & Sunstein 2008 ). Because the financial literacy literature currently offers only limited models of behavior that give rise to the observed differences in financial literacy and economic outcomes, it is difficult to turn to this literature to design policies that address the underlying behaviors that lead to low levels of financial literacy and poor financial decision making. However, the literatures in behavioral economics and decision theory have developed several models that are relevant, and policies from this literature that address behavioral biases like present bias and choice overload may provide templates for effective and efficient remedies.

Several papers in this vein have already had substantial policy influence. For example, Madrian & Shea (2001) and Beshears et al. (2008) examine the impact of default rules on retirement savings outcomes. They find that participation in employer-sponsored savings plans is substantially higher when the default outcome is savings plan participation (automatic enrollment) relative to when the default is non-participation. Beshears et al. ascribe this finding to three factors. First, automatic enrollment simplifies the decision about whether or not to participate in the savings plan by divorcing the participation decision from related choices about contribution rates and asset allocation. Second, automatic enrollment directly addresses problems of present bias which may result in well-intentioned savers procrastinating their savings plan enrollment indefinitely. Finally, the automatic enrollment default may service as an endorsement (implicit advice) that individuals should be saving. In related research, Thaler & Benartzi (2004) find that automatic contribution escalation leads to substantially higher savings plan contribution rates over a period of four years. These results collectively motivated the adoption of provisions in the Pension Protection Act of 2006 that encourage U.S. employers to adopt automatic enrollment and automatic contribution escalation in their savings plan.

Hastings and co-authors ( Duarte & Hastings 2011 , Hastings et al. 2012 , Hastings, in progress) examine Mexico's experience in privatizing their social security system and draw lessons for policy design. Hastings et al. (2012) find that without regulation, advertising reduces investor sensitivity to financial management fees and increases investor focus on non-price attributes such as brand name and past returns. In simulations, they find that neutralizing the impact of advertising on preferences results in price-elastic demand. These results suggest that centralized information provision and regulation of both disclosure and advertising are important to ensure that individuals with limited financial capabilities have access to the information necessary for effective decision making and to minimize their confusion or persuasion by questionable advertising tactics.

In a related paper, Duarte & Hastings (2011) examine the impact of an information disclosure policy mandated in Mexico. In 2005 the government attempted to increase fee transparency in the privatized social security system by introducing a single fee index which collapsed multiple fees (loads and fees on assets under management) into one measure. Prior to the policy, investor behavior was inelastic to either type of fee or, indeed, any measure of management costs. In contrast, after the policy, demand was very responsive to the fee index. Once investors had a simple way to assess ‘price’, they shifted their investments to the funds with a low index value. This example suggests that investors can be greatly helped by policies that simplify fee structures and either advertise fees or require that they are disclosed in an easy-to-understand way. This example also highlights the potential pitfalls of ill-conceived regulations. Although the policy shifted demand, it had little impact on overall management costs. This is because the index combined fees according to a formula and firms could game the index by lowering one fee while raising another. Not surprisingly, firms optimized accordingly (another example of obfuscated pricing as discussed earlier). The government eventually responded by restricting asset managers to charging only one kind of fee, obviating the need for a fee index.

Hastings (in progress) evaluates two field experiments as part of a household survey (the 2010 EERA referenced in Table 2 ) to further understand the impact of information and incentives on management fund choice by affiliates of Mexico's privatized social security system. Households in the survey were randomly assigned to receive simplified information on fund manager net returns (the official information required by the social security system at the time) presented as either a personalized projected account balance or as an annual percentage rate. In addition to that treatment, households were randomly assigned to receive a small immediate cash incentive for transferring assets to any fund manager that had a better net return (or a higher projected personal balance). While those with lower financial literacy scores are better able to rank the fund managers correctly when presented with information on balance projections instead of APRs (replicating prior results in Hastings & Tejeda-Ashton 2008 , Hastings & Mitchell 2011 ), she finds no impact of this information on subsequent decisions to change fund managers. Rather, individuals who receive the small cash incentive are more likely to change fund managers (for the better) regardless of the type of information received. These preliminary results suggest that incentives that both address procrastination and that are tied to better behavior may be more effective than financial education as financial education does not carry with it any incentive to act. We note that these results are still short-run and preliminary as they are based on a follow-up survey. Final results will depend on administrative records for switching which are not subject to problems inherent in self-reports. 10

Campbell et al. (2011) lay out a useful framework for thinking about potential policy options to improve financial outcomes for consumers. They suggest that evaluating consumers along two dimensions, their preference heterogeneity and their level of financial sophistication (or, in the parlance of this paper, their financial literacy), may help narrow the set of appropriate policy levers for improving consumer financial outcomes. At one extreme, take the case of stored value cards, a product used by a large number of unsophisticated consumers and for which consumer preferences are relatively homogeneous. Campbell et al. propose that in this case, since everyone largely wants the same thing, consumers are probably best served through the application of strict rules. This is likely to be more efficient and cost effective than attempting to educate consumers in an environment in which firms are less stringently regulated. In contrast, if consumers are financially knowledgeable and have heterogeneous preferences other approaches may make more sense. Although Campbell et al. do not discuss financial education in this context, it would seem that financial education, to the extent that it impacts financial literacy and economic outcomes, is a tool that holds most promise in markets for products with some degree of preference heterogeneity and that require some degree of financial knowledge. At the other extreme, there are products like hedge funds that cater to individuals with tremendous preference heterogeneity and that require a sizeable amount of financial knowledge for effective use. The latter condition may seem like a perfect reason to justify financial education. We would counter, however, that in such a context it may be difficult for public policy to effectively intervene in providing the level of financial education that would be required. For products for which extensive expertise is required, it may be more efficient to restrict markets to those who can demonstrate the skills requisite for appropriate and effective use.

Overall, the literature suggests that there are many alternatives to financial education that can be used to improve financial outcomes for consumers: strict regulation, providing incentives for improved choice architecture, simplifying disclosure about product fees, terms, or characteristics, and providing incentives to take action. Although none of the studies that we reviewed here ran a horse race between these other approaches and financial education, many of them show larger effects than can be ascribed to financial education in the existing literature. Expanding these studies to other relevant markets such as credit card regulation, payday loan regulation, mortgages, and car or appliance loans present important next steps in understanding how best to improve consumer financial outcomes.

6. DIRECTIONS FOR FUTURE RESEARCH

In this paper, we have evaluated the literature on financial literacy, financial education, and consumer financial outcomes. This literature consistently finds that many individuals perform poorly on test-based measures of financial literacy. These findings, coupled with a growing literature on consumers’ financial mistakes and documenting a positive correlation between financial literacy and suboptimal financial outcomes, have driven policy interest in efforts to increase financial literacy through financial education. However, there is little consensus in the literature on the efficacy of financial education. The existing research is inadequate for drawing conclusions about if and under what conditions financial education works.

The directions for future research depend in part on the goal at hand. If the goal is to improve financial literacy, the directions for future research that follow hinge on financial literacy and the role of financial education in enhancing financial literacy.

One set of fundamental issues relate to capabilities. What are the basic financial competencies that individuals need? What financial decisions should we expect individuals to successfully make independently, and what decisions are best relegated to an expert? To draw an analogy, we don't expect individuals to be experts in all domains of life—that is the essence of comparative advantage. Most of us consult doctors when we are ill and mechanics when our cars are broken, but we are mostly able to care for a common cold and fill the car with gas and check our tire pressure independently. What level of financial literacy is necessary or desirable? And should certain financial transactions be predicated on demonstrating an adequate level of financial literacy, much like taking a driver's education course or passing a driver's education test is a prerequisite for getting a driver's license. If so, for what types of financial decisions would such a licensing approach make most sense?

Another set of open questions relate to measurement. How do we best measure financial literacy? Which measurement approaches work best at predicting financial outcomes? And what are the tradeoffs implicit in using different measures of financial literacy (e.g., how does the marginal cost compare to the marginal benefit of having a more effective measure?).

A third set of issues surrounds how individuals acquire financial literacy and the mechanisms that link financial literacy to financial outcomes. How important are skills like numeracy or general cognitive ability in determining financial literacy, and can those skills be taught? To the extent that financial literacy is acquired through experience, how do we limit the potential harm that consumers suffer in the process of learning by doing? Is financial education a substitute or a complement for personal experience?

We need much more causal research on financial education, particularly randomized controlled trials. Does financial education work, and if so, what types of financial education are most cost effective? Much of the literature on financial education focuses on traditional, classroom based courses. Is this the best way to deliver financial education? More generally, how does this approach compare with other alternatives? Is a course of a few hours length enough, or should we think more expansively about integrated approaches to financial education over the lifecycle? Or, on the other extreme, should financial education be episodic and narrowly focused to coincide with specific financial tasks? There are many other ways to deliver educational content that could improve financial decision making: internet-based instruction, podcasts, web sites, games, apps, printed material. How effective (and how cost effective) are these different delivery mechanisms, and are some better-suited to some groups of individuals or types of problems than others? Should the content of financial education initiatives be focused on teaching financial principles, or rules of thumb? In the randomized controlled trial of two different approaches to financial education for microenterprise owners in the Dominican Republic discussed earlier, Drexler et al. (2011) find that rule-of-thumb based financial education is more effective at improving financial practices than principles-based education. How robust is this finding? And to what extent can firms nullify rules-of-thumb through endogenous responses to consumer behavior (see Duarte & Hastings 2011 )?

Even if we can develop effective mechanisms to deliver financial education, how do we induce the people who most need financial education to get it? School-based financial education programs have the advantage that, while in school, students are a captive audience. But schools can only teach so much. Many of the financial decisions that individuals will face in their adult lives have little relevance to a 17-year-old high school student: purchasing life insurance, picking a fixed vs. an adjustable rate mortgage, choosing an asset allocation in a retirement savings account, whether to file for bankruptcy. How do we deliver financial education to adults before they make financial mistakes, or in ways that limit their financial mistakes, when we don't have a captive audience and financial education is only one of many things competing for time and attention?

Finally, what is the appropriate role of government in either directly providing or funding the private provision of financial education? If financial education is a public good (Hastings et al., in progress), would industry support a tax to finance publically-provided financial education? If so, what form would that take?

If instead of improving financial literacy our goal is to improve financial outcomes, then the directions for future research are slightly different. The overarching questions in this case center around the tools that are available to improve financial outcomes. This might include financial education, but it might also include better financial market regulation, different approaches to changing the institutional framework for individual and household financial decision making, or incentives for innovation to create products that improve financial outcomes.

With this broader frame, one important question on which we have little evidence is which tools are most cost effective at improving financial outcomes? For some outcomes, the most cost effective tool might be financial education, but for other outcomes, different approaches might work better. For example, financial education programs have had only modest success at increasing participation in and contributions to employer-sponsored savings plans; in contrast, automatic enrollment and automatic contribution escalation lead to dramatic increases in savings plan participation and contributions ( Madrian & Shea 2001 , Beshears et al. 2008 , Thaler & Benartzi 2004 ). Moreover, automatic enrollment and contribution escalation are less expensive to implement than financial education programs. What approaches to changing financial behavior generate the biggest bang for the buck, and how does financial education compare to other levers that can be used to change outcomes?

Despite the contradictory evidence on the effectiveness of financial education, financial literacy is in short supply and increasing the financial capabilities of the population is a desirable and socially beneficial goal. We believe that well designed and well executed financial education initiatives can have an effect. But to design cost effective financial education programs, we need better research on what does and does not work. We also should not lose sight of the larger goal—financial education is a tool, one of many, for improving financial outcomes. Financial education programs that don't improve financial outcomes can hardly be considered a success.

Unfortunately, we have little concrete evidence to provide answers. We have a pressing need for more and better research to inform the design of financial education interventions and to prioritize where financial education resources can be best spent. To achieve this, funding for financial education needs to be coupled with funding for evaluation, and the design and implementation of financial education interventions needs to be done in a way that facilitates rigorous evaluation.

Acknowledgments

We acknowledge financial support from the National Institute on Aging (grants R01-AG-032411-01, A2R01-AG-021650 and P01-AG-005842). We thank Daisy Sun for outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Institute on Aging, the National Bureau of Economic Research, or the authors’ home universities. For William Skimmyhorn, the views expressed herein are those of the author and do not reflect the position of the United States Military Academy, the Department of the Army, the Department of Defense, or the National Bureau of Economic Research. See the authors’ websites for lists of their outside activities. When citing this paper, please use the following: Hastings JS, Madrian BC, SkimmyhornWL. 2012. Financial Literacy, Financial Education and Economic Outcomes. Annual Review of Economics 5: Submitted. Doi: 10.1146/annurev-economics-082312-125807.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Financial Literacy, Financial Education and Economic Outcomes Justine S. Hastings, Brigitte C. Madrian, and William L. Skimmyhorn NBER Working Paper No. 18412 September 2012 JEL No. C93,D14,D18,D91,G11,G28

1 See Dodd-Frank Wall Street Reform and Consumer Protection Act. H.R. 4173. Title X - Bureau of Consumer Financial Protection 2010, Section 1013. < http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf , accessed September 13, 2012>

2 By 2011, economic education had been incorporated into the K-12 educational standards of every state except Rhode Island, and personal finance was a component of the K-12 educational standards in all states except Alaska, California, New Mexico, Rhode Island, and the District of Columbia (Council for Economic Education, 2011).

3 See http://www.ja.org/about/about_history.shtml and http://www.councilforeconed.org/about/ .

4 The NFCS has three components, a national random-digit-dialed telephone survey, a state-by-state on-line survey, and a survey of U.S. military personnel and their spouses.

5 Based on author's calculations using TNE survey responses from 2012 linked to college loan taking data in Chile. See Hastings, Neilson and Zimmerman (in progress) for details on the survey and data.

6 Cole and Shastry (2010) are able to replicate the qualitative results of Bernheim, Garrett and Maki (2001) when using the same empirical specification even though they use a different source of data.

7 Financial literacy and savings are positively correlated in this model, although the relationship is not causal as both are endogenously determined.

8 See the Frontline documentary ”The Card Game” about how teaser rate policies were developed in response to customer service calls in which consumers were persistently overconfident in their ability to repay their debt.

9 See the discussion in Section 4. There is also a large literature in the economics of education documenting the fact that large increases in real spending per pupil in the United States has led to no measurable increase in knowledge as measured by ability to answer questions on standardized tests.

10 If the preliminary results hold, this policy is a very inexpensive alternative to financial education. Hastings notes that the immediate return (net of the incentive) on each incentivized offer from resorting of individuals across fund managers, before allowing firms to drop prices in response, results in $30 USD in expectation. Aggregated over 30 million account holders, this is a large savings even before allowing for secondary competitive effects, and in equilibrium it is virtually costless to implement.

RELATED RESOURCES

The following datasets with financial literacy questions that are referenced in this article are currently publically available.

2004 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2010 U.S. Health and Retirement Survey: http://hrsonline.isr.umich.edu/index.php?p=data

2009 Rand American Life Panel Wellbeing 64: https://mmicdata.rand.org/alp/index.php?page=data&p=showsurvey&syid=64

2009 U.S. National Financial Capability Study: http://www.finrafoundation.org/programs/p123306

2009 Chilean Social Protection Survey (EPS): http://www.proteccionsocial.cl/index.asp

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