Revalidating Fernandes, Lynch, and Netemeyer’s 2014 financial literacy scale in response to ongoing legislative and behavioral changes

Measures of financial literacy are widely used in academic research and also underpin a wide range of governmental policy interventions around the world. Fernandes, Lynch, and Netemeyer created a valid and reliable financial literacy questionnaire in “Financial literacy, financial education, and downstream financial behaviors” which has been widely used and frequently cited. However, we find that ongoing changes to legislation regarding the age at which individuals must start withdrawing from their retirement plans in the US (401k and IRA) have invalidated one of its questions as originally proposed (Question 8). This undermines the validity of the measure and will lead to incorrect usage and misleading inferences if the questionnaire is not updated. We recommend that future researchers exclude this question. We conducted Item Response Theory and comparative analyses across five different datasets covering multiple time points and N=4,959 participants to confirm that the scale remains reliable and measures the same construct without this item. The invalidated question is also specific to the US, and its removal increases the international scope of the measure. We discuss the remaining limitations of this, and similar, financial literacy questionnaires. Despite its limitations, the shorter version of the questionnaire remains a valid scale for measuring financial literacy with an emphasis in investing behavior, with international applicability. Researchers and policy-makers should be aware of the issues raised here when measuring financial literacy or making comparisons across time and across different jurisdictions.