Understanding the Link between Financial Literacy and Financial Behaviour: A Review

Abstract: Financial literacy serves as a cornerstone in the realm of personal finance, shielding against the adverse effects of financial instability. This dissertation delves into the intricate domain of financial literacy and its profound impact on household financial decision-making within developing countries. While financial difficulties often due to low income, it is imperative to recognize that errors in financial management, like inadequate planning or imprudent credit usage, exacerbate these challenges. Despite escalating awareness and implementation of financial literacy programs, a pervasive dearth of financial literacy persists, particularly in developing nations. This study critically evaluates the relationship between financial literacy, financial preferences, and household financial decisions concerning saving and debt management. The research unveils nuanced insights into this multifaceted relationship. Findings underscore the significant impact of financial literacy on saving decisions among consumers, elucidating its pivotal role in shaping prudent financial behaviour. However, the influence of financial literacy on debt management decisions seems to be less pronounced. Interventions, such as financial literacy workshops, show short-term efficacy, though long-term effectiveness remains subject to debate.

Moreover, the correlation between financial literacy and financial decisions varies significantly across socio-demographic strata, underscoring the necessity for tailored policy approaches. This dissertation emphasizes the imperative of addressing the financial literacy deficit in developing countries to empower households with informed financial decision-making capabilities. By leveraging the insights gleaned from this research, policymakers and stakeholders can craft targeted and efficient interventions aimed at fostering financial inclusion, stability, and consumer rights protection within specific demographic segments.