Tuesday, November 10, 2020

Want to Do Well? Be Financially Literate

Does it pay to be financially literate? Yes, according to the findings of a longitudinal study by the FINRA Investor Education Foundation. The study began in 2012 when researchers measured the financial literacy of a group of participants in the RAND American Life Panel. The study ended in 2018 when the financial status of the same respondents was measured to determine whether those with greater financial literacy were doing better than those with less. They were.

Financial literacy was measured using the FINRA Investor Education Foundation's National Financial Capability Study questionnaire, which consists of five questions about savings, inflation, mortgages, interest rates, and credit cards. The questionnaire can be accessed here

The study measured three positive outcomes: the respondent's level of satisfaction with their financial situation, the respondent's ability to meet an unexpected $2,000 expense, and whether the respondent is planning for retirement. All three positive outcomes were increasingly likely with greater financial literacy, even after controlling for demographic characteristics and current financial condition. The biggest impact was seen in the ability to pay an unexpected $2,000 expense. Among those who failed to answer any of the financial literacy questions correctly, only 46 percent said they would be able to pay such an expense. Among those who answered all five questions correctly, a much larger 67 percent said they would be able to pay the expense. 

"Differences in one's stock of financial knowledge can lead to increasing disparities over the life course," the researchers conclude. "Thus, differential levels of financial literacy may contribute to widening inequality among different segments of the population."

Source: FINRA Investor Education Foundation, The Stability and Predictive Power of Financial Literacy: Evidence from Longitudinal Data

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