Financial Literacy and Saving Behaviors of Households

Abstract

This paper studies the relationship between financial/numeric literacy and household saving and investment behaviors using the New York Feds Survey of Consumer Expectations. Using a panel dataset and a regression analysis, the study finds that although overall propensities to save, measured by saving rate and savings-to-wealth ratio, does not show a significant correlation with literacy measures, individuals portfolio choices between risk-free and risky assets are indeed affected by both literacy measures. The research indicates that individuals who report higher self-rated financial literacy and attain higher numeracy scores tend to allocate a more substantial portion of their savings into stocks. By contrast, they are inclined to hold a smaller portion of their wealth in risk-free liquid assets, such as checking accounts. More particularly, individuals with higher numeracy scores tend to allocate approximately 5.384% greater portion of their investments into stocks while simultaneously reducing their investments in checking accounts by 4.251%. Similarly, those with higher financial literacy tend to demonstrate an average increase of 10.085% in stock investments, coupled with a decrease of 12.506% in checking account investments. Notably, these effects are separate from influences of other factors like education, gender, and income.