Financial literacy and household financial behavior in Singapore

Abstract

Ordinary consumers make a variety of various financial decisions over their life course, and this has become more challenging over time given the proliferation of financially complex products in the retail marketplace. Using a representative survey in Singapore, we show that that financial literacy explains a wide range of savings, investment, and borrowing decisions among households. Financially savvy individuals are more likely to allocate their savings to assets such as stocks, retirement annuities, and life insurance, and additionally, demonstrate greater propensity to own at least two financially complex products. There is also suggestive evidence that Singaporeans are using debt instruments in an informed manner: while financially literate respondents have more debt, they are also far more likely to repay their debt on time. We provide empirical evidence that these relationships are causal. Accordingly, boosting financial literacy can help strengthen household balance sheets on both the asset and liability sides.