Benefits of financial literacy

Existing empirical evidence shows that adults in both developed and emerging economies who have been exposed to financial education are subsequently more likely than others to save and plan for retirement (Bernheim, Garrett, and Maki, 2001; Cole, Sampson, and Zia, 2010; Lusardi, 2009). This evidence suggests a link between financial education and outcomes; it indicates that improved levels of financial literacy can lead to positive behavioural change.

Other research, stemming largely from developed countries, and the United States in particular, indicates a number of potential benefits of being financially literate. There is mounting evidence that those with higher financial literacy are better able to manage their money, participate in the stock market and perform better on their portfolio choice, and that they are more likely to choose mutual funds with lower fees (Hastings and Tejeda- Ashton, 2008; Hilgert, Hogarth, and Beverly, 2003; Lusardi and Mitchell, 2008; Lusardi and Mitchell, 2011; Stango and Zinman, 2009; van Rooij, Lusardi, and Alessie, 2011; Yoong, 2011). Moreover, those who have greater financial knowledge are more likely to accumulate higher amounts of wealth (Lusardi and Mitchell, 2011).

Higher levels of financial literacy have been found to be related not only to asset building but also to credit and debt management, with more financially literate individuals opting for less costly mortgages and avoiding high interest payments and additional fees (Gerardi, et al., 2010; Lusardi and Tufano, 2009a, 2009b; Moore, 2003).

In addition to the benefits identified for individuals, financial literacy is important to economic and financial stability for a number of reasons. Financially literate consumers can make more informed decisions and demand higher quality services, which will encourage competition and innovation in the market. They are also less likely to react to market conditions in unpredictable ways, less likely to make unfounded complaints and more likely to take appropriate steps to manage the risks transferred to them. All of these factors will lead to a more efficient financial services sector and potentially less costly financial regulatory and supervisory requirements. They can also ultimately help in reducing government aid (and taxation) aimed at assisting those who have taken unwise financial decisions - or no decision at all.

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