The Stability and Predictive Power of Financial Literacy: Evidence from Longitudinal Data
We administered the FINRA Foundation’s National Financial Capability Study questionnaire to members of the RAND American Life Panel (ALP) in 2012 and 2018. Using this unique, longitudinal data set, we investigate the evolution of financial literacy over time and shed light on the causal effect of financial knowledge on financial outcomes. Over a six-year observation period, financial literacy appears to be rather stable, with a slight tendency to decline at older ages. Moreover and importantly, financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline outcomes and a wide set of demographics and individual characteristics that influence financial decision making. This estimated relationship is significantly stronger for older individuals, for women, and for those with lower income than for their counterparts in the study. Altogether, our findings suggest that differences in the stock of financial knowledge may lead to increasing inequality over the life course.
We would like to thank Gerri Walsh and participants to the CIPHER2020 conference for many helpful suggestions and comments. We also acknowledge financial support from the FINRA Foundation. All errors are our responsibility. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.