Risk Tolerance and Goals-Based Savings Behavior of Households: The Role of Financial Literacy

This study uses a national dataset to examine the association among risk tolerance, financial literacy, and goals-based savings behavior of households. The results indicate that three out of five households do not have any emergency funds set aside, and about half the households have not calculated how much money they will need for retirement. However, both financial literacy and risk tolerance are associated with goals-based savings behavior, such as saving for emergencies, and planning for retirement among households. Although risk tolerance appears to be an important factor in the savings and investment decisions of households, the findings of this study provide further evidence regarding the role of financial literacy in improving household financial capability. Implications for policy makers, scholars, and researchers in the area of behavioral economics and household finance are included.