Psychological Factors and Financial Literacy

Over the last several decades, there has been a well-documented trend away from defined benefit plans toward defined contribution plans, in which an employee's retirement income depends on contributions to the plan along with the investment earnings on those contributions. Current workers increasingly must decide how much to contribute to retirement plans and how to invest plan contributions. By understanding which personal characteristics are associated with financial literacy, policymakers may target limited education resources to individuals with psychosocial traits that indicate risk for low financial literacy and insufficient retirement planning. Traditional, prior research on financial literacy has examined the impact of mainstay economic variables. This study examines the impact of previously unexplored variables- financial satisfaction, hopelessness and religiosity-on financial literacy. The study uses Health and Retirement (HRS) data and finds that financial satisfaction and religiosity are both significant independent predictors of financial literacy.