Definition and Concept of Financial Literacy

Financial literacy is an important concept for individuals, societies and countries in a changing and developing world. For this reason, researches do research on financial literacy in both developing and developed countries. Importance of this subject has increased in recent years.

There is no accepted common definition of the financial literacy. Countries use different definitions related to financial literacy. The USA, Australia, Turkey and some other countries use the concept of “financial literacy”. In some countries such as the UK and Canada, they use the concept of “financial capability”.

Financial literacy is the ability of individuals to make accurate evaluations in the process of money management. Schagen, and Lines (1996) stated that this concept consists of three main skills: financial planning, problem-solving and decision making. The authors argued that a financially literate person could understand the most significant aspects of money management, understand financial institutions and systems and be successful in managing financial issues.

Lusardi has many types of research on the financial literacy and has done research and evaluations in different samples. Lusardi  considers financial literacy as the ability of consumers and investors to choose between risks and alternative financial products when they improve their financial knowledge. Two years later, Lusardi  examined financial literacy under two titles. These are basic financial literacy and advanced literacy. The Jumpstart Program which is related to financial literacy in the USA argues that “Financial literacy is the ability to use the elements that secure their lives effectively and to obtain this information for the individual.

By making use of all definitions, the financial literacy has been defined as individuals having information about financial instruments and can make the right decisions thanks to learning financial knowledge. The level of financial literacy is significant for individuals to make the right decisions in their financial lives, to move safely in the financial markets and to live in prosperity.

Development of Financial Literacy

Financial services are increasing day by day in the 21st century. Therefore, individuals should have more knowledge and options to solve financial problems they face. They need financial knowledge to be able to use new technologies and make the right financial decisions. Many people do not have ability to know and use basic financial concepts such as interest calculation.

The number of people who have an idea of more complicated issues such as differences between bonds and stocks, how to create an investment funds and primary asset pricing is much less. To be aware of concepts about financial instruments expressed by Lusardi, obtain, understand and evaluate necessary information related to decision making are considered in the scope of financial literacy.

The financial literacy has been the subject of foreign literature since the mid-1990s and of the national literature since the early of 2000s and especially as of the Financial Crisis of 2008 due to increasing importance of the subject and many studies have intensely been done on this subject. The level of the financial literacy affects individuals and societies during processes of economic crises and economic change.

According to a study carried out by The Economist Journal (2008), following the Financial Crisis of 2008, those who took a mortgage loan in order to buy a house in the United States lost their houses and were unable to pay their debts. This was because they did not know payment would rise in case of an increase of interests. This finding reveals that low level of the financial literacy is a problem for not only developing countries but also developed ones. One of the methods which can eliminate this ignorance and wrong decision-making is the financial literacy.

Klapper, Lusardi, and Panos wanted to research knowledge level of the financial literacy in Russia during the crisis period. According to this research, only 41% of the participants of survey knew compound interest during the crisis environment. 46% of the participants could answer a simple question about inflation. Furthermore, those with high financial literacy during negative income shock of 2009 suffered less.

Although studies differ in terms of sample examined, they generally discuss the financial literacy and affecting factors. In the study carried out by Rooij et al. (2011) including 1508 people with the aim of examining relationship between the level of the financial literacy and financial decision-making, it was understood that educational attainment and the financial literacy had direct proportion. Another result of the study was that consumers with low financial literacy were also less likely to invest in stocks and command the financial instruments.

Financial Literacy 2022

The Importance of Financial Literacy

The low level of financial knowledge of individuals has many negative consequences. For example, they can make wrong decisions and believe they are right. As a result, they may lose money, and then, affect the country’s financial systems negatively. At the beginning of the 21st century, there were rapid developments and changes in the world economy. Especially, the financial system changed.

In the 1970s, the system of Bretton Woods was destroyed. Therefore, financial markets became global and competition increased in international markets. As a result of extraordinary developments in technology, prices and costs became transparent and capital costs decreased. After the liberalization in foreign trade, capital movements were liberalized and liberalization of the movement of capital was ensured. As a result of this liberalization, more complex financial products emerged. It is an important issue for individuals and societies to understand these situations. Correct decisions have become more critical for long-term financial plans.

People trained in finance have a hard time making the right decisions and understanding the new system. This proved that the new system is not very simple. Changing financial developments and population changes highlight the importance of financial education. Especially in many developed countries like the USA, most of the individuals do not save money and manage their money.

The importance of financial information as follows; “Financial crises faced on the global platform have increased importance of the financial knowledge because natural resources have reduced and financial markets have become complicated for individuals. For these reasons, financial literacy, which provides information on financial instruments and fundamental finance issues, is increasing day by day.

Changes in today’s financial systems in terms of economic, political, technological and demographic factors caused individuals to manage their economies individually. However, the increase and complexity of the instruments in the financial system also cause an increase in the responsibilities and risks of individuals. In such environment, it is difficult for people who do not know the basic financial concepts to make decisions about their financial management, and their chances of success are reduced. Therefore, importance of the financial literacy, which provides information on financial instruments and basic financial issues, has increased.

A financially literate person can make right decisions about savings, investment, and borrowing. According to Jariwala, and Sharma (2011), financial literacy has many benefits. Individuals spend less money and save more. Furthermore, they estimate the risks and manage correctly. At the macro level, it causes economic fluctuations to decrease, financial instruments to develop, and economic development to accelerate. Financial literate individuals direct financial institutions that provide services to them because they make their choices in financial life.

Financial institutions that are in supply-demand equilibrium pay more attention to preferred financial instruments. There is a competition in this field. This enables the increase and development of new products and services (OECD, 2005). Financial literacy level results do not affect only individuals but also affects societies. In societies which do not have the habit of saving and budgeting, individuals can go bankrupt, so they can negatively affect the financial sector.

For these reasons, individuals should be provided with financial literacy training. Since it is an important issue for the economic future, financial literacy education should increase in educational institutions. As a result, the importance of financial literacy has increased because of global crises, debt ratios, diversification of financial instruments, and technological development. Individuals and societies must have a certain level of financial literacy.

Factors Affecting Financial Literacy

While studying financial literacy, it is not enough to know the definition and concept of financial literacy. In order to understand financial literacy in general, it is necessary to examine the factors affecting financial literacy. Factors affecting financial literacy are socio-demographic characteristics and budgeting.

Demographic Features

The demographic feature is a factor used in many studies because it affects the results of many subjects. Cases which influence financial literacy level of college students and cases which are influenced by the financial literacy level are examined by researchers. As a reason for this, Temizel, and Bayram state in their study in that college students are at the beginning of their career and life plans and young people have a long process to plan and manage financially.

They express that this period has to be managed successfully in financial terms and it is important to learn this knowledge. They also concluded that college students have active financial instruments such as paying school fee, having travel and health insurance and education loans by means of internet banking. Researchers continued to widely investigate relationship between factors such as age, gender, class grade, educational attainment, education type and the financial literacy.

Adeleke applied a survey to 100 participants of Oklahoma State University in the USA to investigate whether gender of college students affected the financial literacy level. Variance analysis was carried out in the study. The researcher did not find out a relationship between gender of college students and their financial literacy level. On the other hand, according to the results of correlation analysis, significant relationships were found between how many years they were in university and their age and their financial literacy levels. In studies, generally surveys are conducted to students in order to find results.


Measurement of the financial literacy levels of young people, especially college students and whether this level differs depending on different socio-demographic variables such as gender is focused on both national and international literatures. Chen, and Volpe (2002), 924 college students were applied a survey in order to test their financial literacy. Effects of gender factor were revealed as a result of the study.

According to the result of the study, female students had less knowledge. Additionally, it was observed that the students with lower financial literacy tended to make wrong decisions. Another study examining gender factor on the financial literacy was carried out by Falahati, and Paim (2011). This study included 2340 college students. According to the study, male students were more knowledgeable than female ones. However, one of the striking results of the study that although male students had more knowledge about issues such as loan and risk management, female ones were better at general knowledge.

Lusardi, and Mitchell detected that women and people with low educational attainment had low financial literacy. Er et al. (2014), a survey was applied to 221 students of the School of Economics and Administrative Sciences of Anadolu University. The study concluded that participants of the survey had high financial literacy. Furthermore, it was stated that gender difference and financial knowledge sources were not effective factors on the financial literacy.

Financial Literacy 2021


The age element is determined as a variable in many studies. It is accepted as a specific variable used in research on financial literacy. Harrison, and Chudy (2011) conducted a study examining the relationship between financial literacy and age in the UK. As a result of the research, a positive relationship was found between age and financial literacy. At the end of the research, students who older are more successful in financial literacy.

Vieira (2012) conducted a study measuring effects of department differences of universities and ages. The goal of the study was to determine levels of financial literacy of 612 college students in Portugal. For this purpose, ‘‘Portuguese Student Finance Survey 2012’’ was applied to 612 students. The aim was to analyses differences between departments hence the students were chosen from engineering, business and administration, design and tourism departments.

As a result of the study, a positive relationship was found between age factor and financial literacy. Accordingly, students older than the age of 25 had middle level of financial literacy with the rate of 92%. Moreover, according to results depending on the departments, the students of business and administration department were found to be more successful in financial literacy.

Level of Grade

Individuals’ level of knowledge varies with their grade level. In addition, level of class effect on financial literacy level. Beal, and Dalpachitra (2003) applied a survey to students at Federation University Australia. This study aimed to reveal the effect of grade level of the students thus a survey was applied to 837 freshmen of the Department of Business and other faculties. The study showed that financial literacy levels of the students were low. The reason for this was thought to be lack of financial ability education. Survey questions covered five main fields.

These were basic financial concepts, financial markets – instruments, financial planning, financial analysis and decision-making and insurance. Average score for the financial analysis and decision-making was 47% and was 46% for the insurance knowledge. The decision-making and insurance knowledge were fields that they least developed. The students were more successful in simple questions of basic financial concepts.

The responding rate to compound interest question which was the most difficult was 52.9%. Mandell (2008) examining relationship between general educational attainment and level of financial literacy by taking into consideration school levels contrary to class grade carried out a study with 5150 high school students and 1030 college students between 2002-2008. In this study, those scoring 70% and above were with high financial literacy, those scoring 50% and below were with low financial literacy and those scoring between 50% and 70% were with middle financial literacy.

The study found out that while the college students had middle financial literacy level with rate of 62.2%, high school students had low financial literacy level with the rate of 43.3%. In other words, he concluded that American students had better financial literacy level and could make more right decisions after graduating from university. Borden et al. (2008) examining whether courses of college students influenced their financial literacy analyses their knowledge levels and their attitudes on this matter before and after taking loan course by taking into account socio-demographic features. The study concluded that knowledge increase led to positive changes in credit card use and financial risks.

Family History

The family is the first place where individuals start to learn many topics. Researchers also investigated how the family factor influence financial literacy. Lawrence et al. (2006) who examined effect of family factor, one of demographic features on the financial literacy found that the family played a major role for financial  life of children and family affected the level of financial literacy. The study was conducted by applying a survey to 1891 students in total including 491 ones of University of Georgia (UGA) and 1400 ones of Luisiana State University (LSU). Another study examining the effect of parents was carried out by Jorgensen (2007).

As a result of the study, parents were seen to influence financial attitudes and behavior but not financial knowledge. The family is the first place where individuals start to learn many topics. Researchers also investigated how the family factor influences financial literacy. Lusardi, Michell, and Curto (2010), who has conducted many researches on financial literacy, emphasized that family history has a significant effect on financial literacy. As a result of the research, the education level of parents affects the ability of children to understand and manage their future financial instruments.

Jorgensen, and Savla (2010), on the other hand, investigated the family impact of young adults on financial literacy level. The survey was applied to 420 students. As a result of the survey, they found that the family had a moderate impact on financial literacy and financial attitude. however, it was not observed to have an impact on financial information.

Financial Literacy Level and Attitudes

Financial literacy level is an effect on attitudes. The level of financial literacy level changes some decisions made. Bayram  investigated basic financial literacy of the students of the School of Economics and Administrative Sciences of Anadolu University and Porsuk Vocational School of Eskişehir Technical University. This study concluded that the students found themselves well in terms of financial knowledge, but their success rates were low. Additionally, the students at the School of Economics and Administrative Sciences had more financial knowledge and financial responsibilities than the students of the Vocational School.

A survey was carried out by Çam, and Barut (2015) to 400 associate degree program students of Gümüşhane University with the purpose of determining their financial literacy level and attitudes. They tried to determine factors affecting success of spending and managing money of the students by using multiple regression analysis. This study concluded that the students were not financial literate and had little knowledge about basic financial concepts.

The study carried out by Danışman, Sezer, and Gümüş (2015) aimed to determine the financial literacy level of the college students in Turkey and raise awareness of students who would shape the future. A survey study was performed with 390 students of the School of Economics and Administrative Sciences on the assumption that they would represent the college students in Turkey.

Although financial literacy levels of students of the School of Economics were expected to be above the average, frequency of their advanced financial literacy levels were low therefore it was seen that they had only basic finance knowledge. Another study carried out on students of the School of Economics in 2015 was carried out by Alkaya and Yağlı in Nevşehir Hacı Bektaşi Veli University. This study concluded that there was a relationship between financial attitude and financial behaviour. They found out that the students exhibited positive financial attitudes and behaviors but were inadequate in terms of financial knowledge.


The budget is a quantitative and financial document written in terms of a defined policy cycle to be implemented for the duration decided to achieve. It is the process of creating a program followed in achieving this goal by comparing a set target with actual results. Budgeting is a crucial concept so that individuals can maintain their lives economically. The budget shows how successful the individual is in money management.

They should plan their expenses and not waste their money unconsciously. In addition, they should have a fund source in case of possible immediate and unexpected situations they may face in life. Those having adequate financial knowledge correctly and effectively can fulfil this requirement. According to Atkinson, and Messy (2012), the financial literacy is combination of awareness, knowledge, ability, attitude and behaviors required in order to make right financial decisions and achieve individual well-fare.

In the literature, there are limited national and international studies investigating effects of the financial literacy level on budgeting behaviour. Studies have increased in recent years. Lusardi (2008) examined savings behaviors of American household in her study and asserted that financial education programs and financial advice not only affected savings of individuals for retirement but also increased other special savings in case of sudden loses or children’s education that would help them.

In line with findings of this study, majority of American citizens lacked of financial literacy and especially those not receiving education, women and Afro-Americans had low financial literacy. Beckman’s study finding a positive relationship between household savings and financial literacy, significant positive effect of the financial literacy was revealed.

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