How does financial literacy affect the savings decision

Abstract

Savings decisions are essential in reallocating income across periods but understanding this concept may be mired by low levels of financial literacy. We survey individuals to identify the role of financial literacy in savings rates. We note differences in financial literacy and savings rates between genders and across age groups and income levels. We show that in each income group, people with low financial literacy save significantly less than others. We examine specific components of financial literacy and show that understanding diversification is associated with increases in savings rates in several income groups.