Financial Literacy Explicated: The Case for a Clearer Definition in an Increasingly Complex Economy

Abstract

This study explicates the concept of financial literacy, which has blossomed in use this century. Scholars, policy officials, financial experts and consumer advocates have used the phrase loosely to describe the knowledge, skills, confidence and motivation necessary to effectively manage money. As a result, financial literacy has varying conceptual definitions in existing research, as well as diverse operational definitions and values. This study dissects the differing financial literacy definitions and measures, urging researchers toward common ground. A clearer definition should improve future research, in turn helping consumers better understand and adapt to changing life events and an increasingly complex economy.

Does Financial Literacy Moderate the Relationship among Demographic Characteristics and Financial Risk Tolerance? Evidence from Egypt

“…U.S. Financial Literacy and Education Commission (2007) defined financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being." Furthermore, Remund (2010) defined financial literacy as a measure of the degree to which one understands key financial concepts and possesses the ability and confidence to manage his or her personal finances. After a review of previous studies, Huston (2010) defined financial literacy as a process of understanding and applying financial concepts and developing techniques to manage financial resources effectively.…”

Is financial literacy an economic good?

“…A number of authors attribute this to the fl literature's lack of a sound conceptual framework (Mason and Wilson, 2000;Willis, 2008;Remund, 2010, andHuston, 2010).…”

Errare humanum est: Financial Literacy in European Consumer Credit Law

“…46 A clear example is the next question about interest compounding that is used in a recent financial literacy survey by Van Rooij et al (2007). Note that the studies that will be discussed further on in this article did not use the conceptualization of financial literacy by Remund (2010) in their empirical research. Nevertheless, some studies use concepts that come close to Remund's definition.…”

“…The study conducted by him looked at more than 100 different definitions of financial literacy across multiple countries and various types of studies (Remund 2010). Based on an analysis of the different definitions of the term, Remund suggests that future research conceptualizes financial literacy as follows:…”

“…10 For this approach to be successful, therefore, consumers need to be able to digest information and to assess it adequately; in other words, to have a high level of "financial literacy." The measure of financial literacy is to a certain extent abstract, but in short it can be referred to as the consumers' ability to understand complex financial products and their knowledge of and experience with financial products and/or services (Capuano and Ramsay 2011;Hung et al 2009;Remund 2010). A higher level of financial literacy means that consumers are better equipped the moment they enter the financial marketplace.…”