“What we really wanted to figure out is, is there a really clear relationship between improvement in financial literacy and then better financial outcomes later in life?”
He used longitudinal data on Dutch households and connected financial literacy measured in 2011 with financial outcomes in 2019 for 475 individuals.
People were asked questions about the conception of inflation, diversification and other basic financial literacy questions.
“It’s a good proxy for what people know about money,” he said.
Frijns said the results were striking.
“An increase in financial literacy led to a 12% increase in income and a significant impact on savings as well, on wealth accumulation by 25%.
“There’s definitely a push from the literacy to becoming better off.
“A push from literacy into financial success but it also shows those people that invested in financial literacy in 2011 were still benefiting from that financial literacy eight years on.”
He said a one-point increase in financial literacy in 2011 was observed to lead to annual income increases of €4644 (about $7900 or a 12% increase relative to the average income in the sample), and savings increased by €12,540 ($21,000 or a 25% increase relative to the average savings in the sample).
He said it aligned with predictions that up to 40% of wealth inequality at retirement could be due to differences in financial knowledge.
He said the research also showed differences in how financial literacy was used.
Younger people tended to earn higher incomes when they were financially literate while older people were more likely to accumulate more savings.
“This suggests that people apply financial knowledge in ways that reflect their changing financial priorities over the life course. As a result, financial education may be most effective when tailored to specific life stages.
“Programmes aimed at younger people could focus on career development, income growth and early financial decision-making, whereas programmes for older adults may be better directed towards retirement planning and wealth accumulation.”
The gender differences
There were gender differences, though that did not bode as well for women.
The researchers found that while financial literacy had strong associations with higher income and savings among men, there were no significant relationships for women.
Frijns said the results suggested that gender differences may extend beyond financial literacy levels themselves.
They said that could be because traditional gender roles, unequal influence over household finances, labour market inequalities and other factors could be limiting how much women could turn their knowledge into decisions.
Previous research has consistently shown that women report lower levels of financial literacy than men.
He said the experience was likely to be similar in New Zealand.
“I don’t see a reason why you would expect different results in the relationship between financial literacy and wellbeing … I think it’s an important discussion for New Zealand.”
He said the results supported Government initiatives for financial literacy education in schools.
“That financial education is likely better targeted at maximising income, as our results show that is how young adults use their financial knowledge.”
He said it was also important for KiwiSaver.
“One could think about what this could mean for KiwiSaver balances if New Zealanders were provided with more targeted financial literacy education on their retirement savings.
“Finally, with average household debt at 90.6% of GDP, compared with the United Kingdom at 73.9% and the United States at 68%, improved financial literacy may result in better debt management strategies.
“Based on our findings that a one-point increase in financial literacy leads to a 25% increase in savings and the theoretical predictions that differences in financial knowledge can lead to a 30% to 40% wealth gap at retirement, improving financial literacy of those with the lowest financial knowledge could help close this gap.
“For all New Zealanders the message is clear: learning about and understanding your finances can lead to substantial improvements in wealth.”