Financial literacy and the level of financial planning individuals use

Abstract

There is little evidence in the existing literature on the relationship between financial literacy and the level of financial planning that individuals use. Different financial decisions require varying levels of financial planning, ranging from simple planning to complex planning. These decisions involve tradeoffs between taxes, retirement planning, and consumption to name a few. Making these decisions can be difficult without the right knowledge, and financial literacy can ease the decision-making pro- cess. This article evaluates the relationship between financial literacy and the level of financial planning behavior that individuals display. We use the 2012 and 2014 waves of the National Longitudinal Survey of Youth (NLSY79) and found that higher levels of financial literacy are positively associated with more “comprehensive” levels of financial planning behaviors. The results of this article indicate that individuals at the highest level of financial literacy are more likely to choose “comprehensive” planning over doing nothing at all. In addition, those with higher levels of financial literacy are also more likely to display some level of financial planning behavior compared with doing nothing at all. The implications of this may support efforts related to providing broad based financial education, with a specific focus on the value of planning, in the hopes increasing the financial literacy and level of plan- ning of the overall population.