Financial Awareness and its Role in Financial Behavior

Abstract

Financial awareness is a crucial factor in predicting financial behavior. However, its roles are under-explored. This paper seeks to investigate financial awareness at the national and state levels through time. Also investigated are its role in determining financial behavior and outcomes and how to improve the financial awareness of households. Specifically, this paper develops an innovative search-based financial awareness index in education planning, credit management and retirement planning based on the search volume index (SVI) from Google Trends. I found a significant time-series and cross-sectional heterogeneity in financial awareness among the general population. Using the developed financial awareness index, I confirm that a higher level of financial awareness predicts higher balances in 529 saving plans, lower credit card delinquency rates and more savings in IRAs. Finally, I find that public education through the media could potentially be a crucial method to influence the population's financial awareness.

Keywords: household saving, personal finance, retirement plans, behavioral economics, financial literacy

JEL Classification: D14, J32, D91, G53