Financial literacy a pathway to wealth
Financial literacy is widely regarded as an important factor in financial well-being. People with greater financial knowledge tend to earn more and save more. However, it remains unclear whether financial literacy is a cause or a consequence of financial success. Does financial literacy help people achieve better financial outcomes, or do people become more financially literate as they gain experience managing their finances?
In a recent study, we examine the long-term implications of financial literacy on wealth accumulation. Specifically, using longitudinal data on Dutch households, we were able to connect financial literacy measured in 2011 with financial outcomes in 2019 for 475 individuals. We found that higher levels of financial literacy in 2011 relate to higher levels of income and savings in 2019. This not only suggests that financial literacy contributes to better financial outcomes but also indicates that these effects may persist over long periods of time: individuals with higher levels of financial literacy in 2011 continue to have higher incomes and savings eight years later.
The wealth and income gap we observed due to financial literacy is meaningful: for a one-point increase in financial literacy in 2011 (on a 4-point scale), we observe that annual income increases by €4,644 (about NZD 7,900 or a 12% increase relative to the average income in the sample), and that savings increase by €12,540 (about NZD 21,000 or a 25% increase relative to the average savings in the sample).
These results stack up well with the theoretical predictions, which estimate that 30%-40% of wealth inequality at retirement could be attributed to differences in financial knowledge.
Our study also provides insights into how financial literacy is used at different stages of life. We find that financially literate younger individuals tend to earn higher incomes, while financially literate older individuals are more likely to accumulate greater 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.
We also find a striking gender difference. Previous research has consistently shown that women report lower levels of financial literacy than men. Our results suggest that gender differences may extend beyond financial literacy levels themselves. While financial literacy is strongly associated with higher income and savings among men, we find no significant relationship for women. Traditional gender roles, unequal influence over household finances, labour market inequalities, and other factors may limit the extent to which financial knowledge can be translated into financial decisions and economic opportunities. As a result, barriers to women's financial wellbeing may not primarily reflect differences in financial knowledge, but also broader constraints that shape financial outcomes.
So why should these Dutch results be of interest to New Zealanders? First, the results show that financial literacy has a considerable and long-term impact on wealth. That result supports the New Zealand governments initiatives for financial literacy education in schools (curriculum will be required in years 1-10 from 2027 onwards), as it could support long-term financial wellbeing for our youth. That financial education is likely better targeted at maximising income, as our results show that that is how young adults use their financial knowledge.
Second, given the large impact that an increase in financial literacy has on savings (a 25% increase), 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. Only 44% of New Zealanders feel financially prepared for retirement, while 43% indicate that they feel financially literate according to the 2025 Financial Services Council Financial Resilience Index.
The impact of New Zealanders making better financial decisions for their KiwiSaver/retirement funds could be substantial, and targeted training through workplaces, community centres, or other could be beneficial.
Finally, with average household debt at 90.6% of GDP (compared with the UK at 73.9% and the US at 68%), improved financial literacy may result in better debt management strategies (mortgages, consumer debt, etc.). 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% - 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.