financial literacy research current literature and future opportunities

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Financial literacy research : current literature and future opportunities.

The need for financial literacy has become increasingly significant with the deregulation of financial markets and the easier access to credit; the ready issue of credit cards; the rapid growth in marketing financial products and the Government’s encouragement for its citizens to take more self-responsibility for their retirement incomes. This paper reviews, compares and analyses studies conducted in Australia, the United States and the United Kingdom to determine areas of both commonality and inconsistency. As a result of this analysis, the paper presents recurrent themes that could be extended, together with potential new areas for financial literacy research.

• Conference key note
• Open access
• Published: 24 January 2019

Financial literacy and the need for financial education: evidence and implications

• Annamaria Lusardi 1  

Swiss Journal of Economics and Statistics volume  155 , Article number:  1 ( 2019 ) Cite this article

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1 Introduction

Throughout their lifetime, individuals today are more responsible for their personal finances than ever before. With life expectancies rising, pension and social welfare systems are being strained. In many countries, employer-sponsored defined benefit (DB) pension plans are swiftly giving way to private defined contribution (DC) plans, shifting the responsibility for retirement saving and investing from employers to employees. Individuals have also experienced changes in labor markets. Skills are becoming more critical, leading to divergence in wages between those with a college education, or higher, and those with lower levels of education. Simultaneously, financial markets are rapidly changing, with developments in technology and new and more complex financial products. From student loans to mortgages, credit cards, mutual funds, and annuities, the range of financial products people have to choose from is very different from what it was in the past, and decisions relating to these financial products have implications for individual well-being. Moreover, the exponential growth in financial technology (fintech) is revolutionizing the way people make payments, decide about their financial investments, and seek financial advice. In this context, it is important to understand how financially knowledgeable people are and to what extent their knowledge of finance affects their financial decision-making.

An essential indicator of people’s ability to make financial decisions is their level of financial literacy. The Organisation for Economic Co-operation and Development (OECD) aptly defines financial literacy as not only the knowledge and understanding of financial concepts and risks but also the skills, motivation, and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life. Thus, financial literacy refers to both knowledge and financial behavior, and this paper will analyze research on both topics.

As I describe in more detail below, findings around the world are sobering. Financial literacy is low even in advanced economies with well-developed financial markets. On average, about one third of the global population has familiarity with the basic concepts that underlie everyday financial decisions (Lusardi and Mitchell, 2011c ). The average hides gaping vulnerabilities of certain population subgroups and even lower knowledge of specific financial topics. Furthermore, there is evidence of a lack of confidence, particularly among women, and this has implications for how people approach and make financial decisions. In the following sections, I describe how we measure financial literacy, the levels of literacy we find around the world, the implications of those findings for financial decision-making, and how we can improve financial literacy.

2 How financially literate are people?

2.1 measuring financial literacy: the big three.

In the context of rapid changes and constant developments in the financial sector and the broader economy, it is important to understand whether people are equipped to effectively navigate the maze of financial decisions that they face every day. To provide the tools for better financial decision-making, one must assess not only what people know but also what they need to know, and then evaluate the gap between those things. There are a few fundamental concepts at the basis of most financial decision-making. These concepts are universal, applying to every context and economic environment. Three such concepts are (1) numeracy as it relates to the capacity to do interest rate calculations and understand interest compounding; (2) understanding of inflation; and (3) understanding of risk diversification. Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell ( 2008 , 2011b , 2011c ) have designed a standard set of questions around these concepts and implemented them in numerous surveys in the USA and around the world.

Four principles informed the design of these questions, as described in detail by Lusardi and Mitchell ( 2014 ). The first is simplicity : the questions should measure knowledge of the building blocks fundamental to decision-making in an intertemporal setting. The second is relevance : the questions should relate to concepts pertinent to peoples’ day-to-day financial decisions over the life cycle; moreover, they must capture general rather than context-specific ideas. Third is brevity : the number of questions must be few enough to secure widespread adoption; and fourth is capacity to differentiate , meaning that questions should differentiate financial knowledge in such a way as to permit comparisons across people. Each of these principles is important in the context of face-to-face, telephone, and online surveys.

Three basic questions (since dubbed the “Big Three”) to measure financial literacy have been fielded in many surveys in the USA, including the National Financial Capability Study (NFCS) and, more recently, the Survey of Consumer Finances (SCF), and in many national surveys around the world. They have also become the standard way to measure financial literacy in surveys used by the private sector. For example, the Aegon Center for Longevity and Retirement included the Big Three questions in the 2018 Aegon Retirement Readiness Survey, covering around 16,000 people in 15 countries. Both ING and Allianz, but also investment funds, and pension funds have used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table  1 .

2.2 Cross-country comparison

The first examination of financial literacy using the Big Three was possible due to a special module on financial literacy and retirement planning that Lusardi and Mitchell designed for the 2004 Health and Retirement Study (HRS), which is a survey of Americans over age 50. Astonishingly, the data showed that only half of older Americans—who presumably had made many financial decisions in their lives—could answer the two basic questions measuring understanding of interest rates and inflation (Lusardi and Mitchell, 2011b ). And just one third demonstrated understanding of these two concepts and answered the third question, measuring understanding of risk diversification, correctly. It is sobering that recent US surveys, such as the 2015 NFCS, the 2016 SCF, and the 2017 Survey of Household Economics and Financial Decisionmaking (SHED), show that financial knowledge has remained stubbornly low over time.

Over time, the Big Three have been added to other national surveys across countries and Lusardi and Mitchell have coordinated a project called Financial Literacy around the World (FLat World), which is an international comparison of financial literacy (Lusardi and Mitchell, 2011c ).

Findings from the FLat World project, which so far includes data from 15 countries, including Switzerland, highlight the urgent need to improve financial literacy (see Table  2 ). Across countries, financial literacy is at a crisis level, with the average rate of financial literacy, as measured by those answering correctly all three questions, at around 30%. Moreover, only around 50% of respondents in most countries are able to correctly answer the two financial literacy questions on interest rates and inflation correctly. A noteworthy point is that most countries included in the FLat World project have well-developed financial markets, which further highlights the cause for alarm over the demonstrated lack of the financial literacy. The fact that levels of financial literacy are so similar across countries with varying levels of economic development—indicating that in terms of financial knowledge, the world is indeed flat —shows that income levels or ubiquity of complex financial products do not by themselves equate to a more financially literate population.

Other noteworthy findings emerge in Table  2 . For instance, as expected, understanding of the effects of inflation (i.e., of real versus nominal values) among survey respondents is low in countries that have experienced deflation rather than inflation: in Japan, understanding of inflation is at 59%; in other countries, such as Germany, it is at 78% and, in the Netherlands, it is at 77%. Across countries, individuals have the lowest level of knowledge around the concept of risk, and the percentage of correct answers is particularly low when looking at knowledge of risk diversification. Here, we note the prevalence of “do not know” answers. While “do not know” responses hover around 15% on the topic of interest rates and 18% for inflation, about 30% of respondents—in some countries even more—are likely to respond “do not know” to the risk diversification question. In Switzerland, 74% answered the risk diversification question correctly and 13% reported not knowing the answer (compared to 3% and 4% responding “do not know” for the interest rates and inflation questions, respectively).

These findings are supported by many other surveys. For example, the 2014 Standard & Poor’s Global Financial Literacy Survey shows that, around the world, people know the least about risk and risk diversification (Klapper, Lusardi, and Van Oudheusden, 2015 ). Similarly, results from the 2016 Allianz survey, which collected evidence from ten European countries on money, financial literacy, and risk in the digital age, show very low-risk literacy in all countries covered by the survey. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial knowledge, less than 20% of respondents can answer three questions related to knowledge of risk and risk diversification (Allianz, 2017 ).

Other surveys show that the findings about financial literacy correlate in an expected way with other data. For example, performance on the mathematics and science sections of the OECD Program for International Student Assessment (PISA) correlates with performance on the Big Three and, specifically, on the question relating to interest rates. Similarly, respondents in Sweden, which has experienced pension privatization, performed better on the risk diversification question (at 68%), than did respondents in Russia and East Germany, where people have had less exposure to the stock market. For researchers studying financial knowledge and its effects, these findings hint to the fact that financial literacy could be the result of choice and not an exogenous variable.

To summarize, financial literacy is low across the world and higher national income levels do not equate to a more financially literate population. The design of the Big Three questions enables a global comparison and allows for a deeper understanding of financial literacy. This enhances the measure’s utility because it helps to identify general and specific vulnerabilities across countries and within population subgroups, as will be explained in the next section.

2.3 Who knows the least?

Low financial literacy on average is exacerbated by patterns of vulnerability among specific population subgroups. For instance, as reported in Lusardi and Mitchell ( 2014 ), even though educational attainment is positively correlated with financial literacy, it is not sufficient. Even well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. In the USA, less than 30% of respondents can correctly answer the Big Three by age 40, even though many consequential financial decisions are made well before that age (see Fig.  1 ). Similarly, in Switzerland, only 45% of those aged 35 or younger are able to correctly answer the Big Three questions. Footnote 1 And if people may learn from making financial decisions, that learning seems limited. As shown in Fig.  1 , many older individuals, who have already made decisions, cannot answer three basic financial literacy questions.

Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study

A gender gap in financial literacy is also present across countries. Women are less likely than men to answer questions correctly. The gap is present not only on the overall scale but also within each topic, across countries of different income levels, and at different ages. Women are also disproportionately more likely to indicate that they do not know the answer to specific questions (Fig.  2 ), highlighting overconfidence among men and awareness of lack of knowledge among women. Even in Finland, which is a relatively equal society in terms of gender, 44% of men compared to 27% of women answer all three questions correctly and 18% of women give at least one “do not know” response versus less than 10% of men (Kalmi and Ruuskanen, 2017 ). These figures further reflect the universality of the Big Three questions. As reported in Fig.  2 , “do not know” responses among women are prevalent not only in European countries, for example, Switzerland, but also in North America (represented in the figure by the USA, though similar findings are reported in Canada) and in Asia (represented in the figure by Japan). Those interested in learning more about the differences in financial literacy across demographics and other characteristics can consult Lusardi and Mitchell ( 2011c , 2014 ).

Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c ; Japan—Sekita, 2011 ; Switzerland—Brown and Graf, 2013

3 Does financial literacy matter?

A growing number of financial instruments have gained importance, including alternative financial services such as payday loans, pawnshops, and rent to own stores that charge very high interest rates. Simultaneously, in the changing economic landscape, people are increasingly responsible for personal financial planning and for investing and spending their resources throughout their lifetime. We have witnessed changes not only in the asset side of household balance sheets but also in the liability side. For example, in the USA, many people arrive close to retirement carrying a lot more debt than previous generations did (Lusardi, Mitchell, and Oggero, 2018 ). Overall, individuals are making substantially more financial decisions over their lifetime, living longer, and gaining access to a range of new financial products. These trends, combined with low financial literacy levels around the world and, particularly, among vulnerable population groups, indicate that elevating financial literacy must become a priority for policy makers.

There is ample evidence of the impact of financial literacy on people’s decisions and financial behavior. For example, financial literacy has been proven to affect both saving and investment behavior and debt management and borrowing practices. Empirically, financially savvy people are more likely to accumulate wealth (Lusardi and Mitchell, 2014 ). There are several explanations for why higher financial literacy translates into greater wealth. Several studies have documented that those who have higher financial literacy are more likely to plan for retirement, probably because they are more likely to appreciate the power of interest compounding and are better able to do calculations. According to the findings of the FLat World project, answering one additional financial question correctly is associated with a 3–4 percentage point greater probability of planning for retirement; this finding is seen in Germany, the USA, Japan, and Sweden. Financial literacy is found to have the strongest impact in the Netherlands, where knowing the right answer to one additional financial literacy question is associated with a 10 percentage point higher probability of planning (Mitchell and Lusardi, 2015 ). Empirically, planning is a very strong predictor of wealth; those who plan arrive close to retirement with two to three times the amount of wealth as those who do not plan (Lusardi and Mitchell, 2011b ).

Financial literacy is also associated with higher returns on investments and investment in more complex assets, such as stocks, which normally offer higher rates of return. This finding has important consequences for wealth; according to the simulation by Lusardi, Michaud, and Mitchell ( 2017 ), in the context of a life-cycle model of saving with many sources of uncertainty, from 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge. These results show that financial literacy is not a sideshow, but it plays a critical role in saving and wealth accumulation.

Financial literacy is also strongly correlated with a greater ability to cope with emergency expenses and weather income shocks. Those who are financially literate are more likely to report that they can come up with $2000 in 30 days or that they are able to cover an emergency expense of $400 with cash or savings (Hasler, Lusardi, and Oggero, 2018 ).

With regard to debt behavior, those who are more financially literate are less likely to have credit card debt and more likely to pay the full balance of their credit card each month rather than just paying the minimum due (Lusardi and Tufano, 2009 , 2015 ). Individuals with higher financial literacy levels also are more likely to refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods, e.g., payday loans, pawn shops, auto title loans, and refund anticipation loans (Lusardi and de Bassa Scheresberg, 2013 ).

Several studies have documented poor debt behavior and its link to financial literacy. Moore ( 2003 ) reported that the least financially literate are also more likely to have costly mortgages. Lusardi and Tufano ( 2015 ) showed that the least financially savvy incurred high transaction costs, paying higher fees and using high-cost borrowing methods. In their study, the less knowledgeable also reported excessive debt loads and an inability to judge their debt positions. Similarly, Mottola ( 2013 ) found that those with low financial literacy were more likely to engage in costly credit card behavior, and Utkus and Young ( 2011 ) concluded that the least literate were more likely to borrow against their 401(k) and pension accounts.

Young people also struggle with debt, in particular with student loans. According to Lusardi, de Bassa Scheresberg, and Oggero ( 2016 ), Millennials know little about their student loans and many do not attempt to calculate the payment amounts that will later be associated with the loans they take. When asked what they would do, if given the chance to revisit their student loan borrowing decisions, about half of Millennials indicate that they would make a different decision.

Finally, a recent report on Millennials in the USA (18- to 34-year-olds) noted the impact of financial technology (fintech) on the financial behavior of young individuals. New and rapidly expanding mobile payment options have made transactions easier, quicker, and more convenient. The average user of mobile payments apps and technology in the USA is a high-income, well-educated male who works full time and is likely to belong to an ethnic minority group. Overall, users of mobile payments are busy individuals who are financially active (holding more assets and incurring more debt). However, mobile payment users display expensive financial behaviors, such as spending more than they earn, using alternative financial services, and occasionally overdrawing their checking accounts. Additionally, mobile payment users display lower levels of financial literacy (Lusardi, de Bassa Scheresberg, and Avery, 2018 ). The rapid growth in fintech around the world juxtaposed with expensive financial behavior means that more attention must be paid to the impact of mobile payment use on financial behavior. Fintech is not a substitute for financial literacy.

4 The way forward for financial literacy and what works

Overall, financial literacy affects everything from day-to-day to long-term financial decisions, and this has implications for both individuals and society. Low levels of financial literacy across countries are correlated with ineffective spending and financial planning, and expensive borrowing and debt management. These low levels of financial literacy worldwide and their widespread implications necessitate urgent efforts. Results from various surveys and research show that the Big Three questions are useful not only in assessing aggregate financial literacy but also in identifying vulnerable population subgroups and areas of financial decision-making that need improvement. Thus, these findings are relevant for policy makers and practitioners. Financial illiteracy has implications not only for the decisions that people make for themselves but also for society. The rapid spread of mobile payment technology and alternative financial services combined with lack of financial literacy can exacerbate wealth inequality.

To be effective, financial literacy initiatives need to be large and scalable. Schools, workplaces, and community platforms provide unique opportunities to deliver financial education to large and often diverse segments of the population. Furthermore, stark vulnerabilities across countries make it clear that specific subgroups, such as women and young people, are ideal targets for financial literacy programs. Given women’s awareness of their lack of financial knowledge, as indicated via their “do not know” responses to the Big Three questions, they are likely to be more receptive to financial education.

The near-crisis levels of financial illiteracy, the adverse impact that it has on financial behavior, and the vulnerabilities of certain groups speak of the need for and importance of financial education. Financial education is a crucial foundation for raising financial literacy and informing the next generations of consumers, workers, and citizens. Many countries have seen efforts in recent years to implement and provide financial education in schools, colleges, and workplaces. However, the continuously low levels of financial literacy across the world indicate that a piece of the puzzle is missing. A key lesson is that when it comes to providing financial education, one size does not fit all. In addition to the potential for large-scale implementation, the main components of any financial literacy program should be tailored content, targeted at specific audiences. An effective financial education program efficiently identifies the needs of its audience, accurately targets vulnerable groups, has clear objectives, and relies on rigorous evaluation metrics.

Using measures like the Big Three questions, it is imperative to recognize vulnerable groups and their specific needs in program designs. Upon identification, the next step is to incorporate this knowledge into financial education programs and solutions.

School-based education can be transformational by preparing young people for important financial decisions. The OECD’s Programme for International Student Assessment (PISA), in both 2012 and 2015, found that, on average, only 10% of 15-year-olds achieved maximum proficiency on a five-point financial literacy scale. As of 2015, about one in five of students did not have even basic financial skills (see OECD, 2017 ). Rigorous financial education programs, coupled with teacher training and high school financial education requirements, are found to be correlated with fewer defaults and higher credit scores among young adults in the USA (Urban, Schmeiser, Collins, and Brown, 2018 ). It is important to target students and young adults in schools and colleges to provide them with the necessary tools to make sound financial decisions as they graduate and take on responsibilities, such as buying cars and houses, or starting retirement accounts. Given the rising cost of education and student loan debt and the need of young people to start contributing as early as possible to retirement accounts, the importance of financial education in school cannot be overstated.

There are three compelling reasons for having financial education in school. First, it is important to expose young people to the basic concepts underlying financial decision-making before they make important and consequential financial decisions. As noted in Fig.  1 , financial literacy is very low among the young and it does not seem to increase a lot with age/generations. Second, school provides access to financial literacy to groups who may not be exposed to it (or may not be equally exposed to it), for example, women. Third, it is important to reduce the costs of acquiring financial literacy, if we want to promote higher financial literacy both among individuals and among society.

There are compelling reasons to have personal finance courses in college as well. In the same way in which colleges and university offer courses in corporate finance to teach how to manage the finances of firms, so today individuals need the knowledge to manage their own finances over the lifetime, which in present discounted value often amount to large values and are made larger by private pension accounts.

Financial education can also be efficiently provided in workplaces. An effective financial education program targeted to adults recognizes the socioeconomic context of employees and offers interventions tailored to their specific needs. A case study conducted in 2013 with employees of the US Federal Reserve System showed that completing a financial literacy learning module led to significant changes in retirement planning behavior and better-performing investment portfolios (Clark, Lusardi, and Mitchell, 2017 ). It is also important to note the delivery method of these programs, especially when targeted to adults. For instance, video formats have a significantly higher impact on financial behavior than simple narratives, and instruction is most effective when it is kept brief and relevant (Heinberg et al., 2014 ).

The Big Three also show that it is particularly important to make people familiar with the concepts of risk and risk diversification. Programs devoted to teaching risk via, for example, visual tools have shown great promise (Lusardi et al., 2017 ). The complexity of some of these concepts and the costs of providing education in the workplace, coupled with the fact that many older individuals may not work or work in firms that do not offer such education, provide other reasons why financial education in school is so important.

Finally, it is important to provide financial education in the community, in places where people go to learn. A recent example is the International Federation of Finance Museums, an innovative global collaboration that promotes financial knowledge through museum exhibits and the exchange of resources. Museums can be places where to provide financial literacy both among the young and the old.

There are a variety of other ways in which financial education can be offered and also targeted to specific groups. However, there are few evaluations of the effectiveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported in the first part of this paper.

5 Concluding remarks

The lack of financial literacy, even in some of the world’s most well-developed financial markets, is of acute concern and needs immediate attention. The Big Three questions that were designed to measure financial literacy go a long way in identifying aggregate differences in financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby facilitating the development of tailored programs. Many such programs to provide financial education in schools and colleges, workplaces, and the larger community have taken existing evidence into account to create rigorous solutions. It is important to continue making strides in promoting financial literacy, by achieving scale and efficiency in future programs as well.

In August 2017, I was appointed Director of the Italian Financial Education Committee, tasked with designing and implementing the national strategy for financial literacy. I will be able to apply my research to policy and program initiatives in Italy to promote financial literacy: it is an essential skill in the twenty-first century, one that individuals need if they are to thrive economically in today’s society. As the research discussed in this paper well documents, financial literacy is like a global passport that allows individuals to make the most of the plethora of financial products available in the market and to make sound financial decisions. Financial literacy should be seen as a fundamental right and universal need, rather than the privilege of the relatively few consumers who have special access to financial knowledge or financial advice. In today’s world, financial literacy should be considered as important as basic literacy, i.e., the ability to read and write. Without it, individuals and societies cannot reach their full potential.

See Brown and Graf ( 2013 ).

Abbreviations

Defined benefit (refers to pension plan)

Defined contribution (refers to pension plan)

Financial Literacy around the World

National Financial Capability Study

Organisation for Economic Co-operation and Development

Programme for International Student Assessment

Survey of Consumer Finances

Survey of Household Economics and Financial Decisionmaking

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Acknowledgements

This paper represents a summary of the keynote address I gave to the 2018 Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants of the Annual Meeting for useful discussions and comments, and Raveesha Gupta for editorial support. All errors are my responsibility.

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Lusardi, A. Financial literacy and the need for financial education: evidence and implications. Swiss J Economics Statistics 155 , 1 (2019). https://doi.org/10.1186/s41937-019-0027-5

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Received : 22 October 2018

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Published : 24 January 2019

DOI : https://doi.org/10.1186/s41937-019-0027-5

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Financial literacy and financial education: An overview

Tim Kaiser and Annamaria Lusardi

Abstract : This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education.

Evaluating the Effects of a Low-Cost, Online Financial Education Program

Robert L. Clark, Chuanhao Lin, Annamaria Lusardi, Olivia S. Mitchell, and Andrea Sticha

Abstract: This paper provides evidence on how a low-cost, online, and scalable financial education program influences older participants’ financial knowledge. We tested the program using a field experiment that included short stories covering three fundamental financial education topics: compound interest, risk diversification, and inflation. Two surveys were administered eight months apart to measure the effects of those stories on participants’ short-term and longer-term knowledge and financial distress indicators. We show that the risk diversification story was the most effective at improving participants’ knowledge, in both the short and longer term. The compound interest and inflation stories significantly increased participants’ knowledge in the short term, but the gain in financial literacy declined over time.

ESG Knowledge and Interest: A study among Householders in 8 countries

Dave Fernandez, Carlo de Bassa Scheresberg, Andrea Hasler, and Annamaria Lusardi

Abstract: In this study, we surveyed over 16,000 respondents in eight countries to collect information on individuals’ preferences for sustainable investing, ownership of ESG investment products, as well as their level of financial literacy, investing sophistication and understanding of topics connected to ESG criteria. We find that interest in sustainable investing is popular among adults in the eight countries, especially among younger generations. However, actual ownership of ESG investments is still limited in most countries. Most importantly, many investors lack awareness about the sustainability profile of their investments and believe that lack of knowledge, experience, and transparency are the main barriers to ESG investing. When we assessed respondents’ knowledge of topics connected to ESG criteria and financial and investing concepts, we found that most respondents and investors lack the basic knowledge to make savvy investment decisions regarding ESG investing.

Millennials’ and Gen Z’s Money Management During COVID-19: Challenges and Opportunities

Hallie Davis and Andrea Hasler

November 2021

Abstract : The economic consequences of the COVID-19 pandemic have not been felt equally among individuals, with millennials and Gen Z among those hit hardest. We examine responses to a novel survey conducted in May 2021 to understand how the pandemic has influenced personal finances of individuals 40 and under. We find that the pandemic has had a large impact on individuals’ debt and financial anxiety. We also find that the main financial challenges and sources of anxiety differ by generation. Millennials are struggling with debt and debt management, whereas Gen Z struggles with uncertain income and unexpected expenses. While the pandemic has increased uncertainty and financial anxiety, it also provides an opportunity for financial education. Survey responses indicate that millennials and Gen Z are highly motivated to improve their financial literacy and savings.

Using Factor Analysis to Assess Financial Vulnerability in the United States

Andrea Hasler, Jialu Liu Streeter, and Olivia Valdes

January 2022

Abstract: This paper examines the complex nature of financial vulnerability in the United States through the adoption of factor analysis to identify the underlying constructs of financial security. Using data from the FINRA Foundation’s 2018 National Financial Capability Study (NFCS), we identify three underlying factors of financial vulnerability: (1) debt and cash flow management, (2) wealth building and planning, and (3) an understanding financial risks and financial literacy. A composite vulnerability index is created based on the three factors. Linear Probability Regression analyses are used to examine the association between sociodemographic characteristics (e.g., age, race/ethnicity, and income) and vulnerability scores.

Financial Literacy and Financial Behavior at Older Ages

Olivia S. Mitchell and Annamaria Lusardi

Abstract: Recent research has documented that people are increasingly entering old age holding more debt than ever before, and having done little or no retirement planning. This paper examines some of the reasons why older peoples’ financial behaviors depart from the predictions of the life cycle model, where the latter predicts that older persons would be at the peak of their wealth accumulation process, and manage their money so as not to run out of savings in retirement. Drawing on the rapidly-growing literature on financial literacy and financial behavior at older ages, we highlight findings on financial literacy patterns. We also document that “better” financial behaviors are strongly associated with greater financial literacy in later life. We close with some thoughts regarding limitations, policy implications, and next steps.

Fearless Woman: Financial Literacy and Stock Market Participation

Tabea Bucher-Koenen, Rob Alessie, Annamaria Lusardi, and Maarten van Rooij

Abstract: Women are less financially literate than men. It is unclear whether this gap reflects a lack of knowledge or, rather, a lack of confidence. Our survey experiment shows that women tend to disproportionately respond “do not know” to questions measuring financial knowledge, but when this response option is unavailable, they often choose the correct answer. We estimate a latent class model and predict the probability that respondents truly know the correct answers. We find that about one-third of the financial literacy gender gap can be explained by women’s lower confidence levels. Both financial knowledge and confidence explain stock market participation.

Click here for the highlights and key findings of this paper.

Click here for the NBER working paper.

Click here for the Centre for Economic Policy Research working paper.

Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice

Sandro Ambuehl, B. Douglas Bernheim, and Annamaria Lusardi

February 2021

We introduce a method for experimentally evaluating interventions designed to improve the quality of choices in settings where people imperfectly comprehend consequences. Among other virtues, our method yields an intuitive sufficient statistic for welfare that admits formal interpretations even when consumers suffer from biases outside the scope of analysis. We use it to study a financial education intervention, which we find improves the quality of decisions only when it incorporates practice and feedback, contrary to the implications of analyses based on conventional efficacy metrics. We trace the failures of conventional metrics to violations of assumptions that our method avoids.

Household Financial Fragility during COVID-19: Rising Inequality and Unemployment Insurance Benefit Reductions

Daniel Schneider, Peter Tufano, and Annamaria Lusardi

December 2020

Abstract: We draw on new high-frequency survey data collected from repeated cross-sections of Americans between June and November 2020. These data capture rich measures of household financial fragility and employment status. We find evidence of a building “second wave” of negative shocks to household finances and of growing inequality in financial fragility by household income, educational attainment, and gender from August to November of 2020. Finally, using difference-in-difference models, we estimate that the expiration of the CARES Act’s Pandemic Unemployment Compensation benefits, which augmented unemployment insurance by $600 a week, significantly increased the financial fragility of unemployed workers in America.

Understanding Debt in the Older Population

Annamaria Lusardi, Olivia S. Mitchell, and Noemi Oggero

Abstract: Poor financial capability can erode well-being in later life. To explore debt and debt management among older Americans, age 51-61, we designed and analyzed a new module in the 2018 Health and Retirement Study along with information from the 2018 National Financial Capability Study. Even though this group should be at the peak of their retirement savings, it nevertheless carries debt due to student loans and unpaid medical bills; having children also contributes to carrying debt close to retirement. By contrast, the financially literate have more positive financial perceptions and behaviors. Specifically, being able to answer one additional financial literacy question correctly is associated with a higher probability of reporting an above average credit record and planning for retirement. Higher financial literacy is also linked to being less likely to carry excessive debt, being contacted by debt collectors, and carrying medical debt or student loans, even after accounting for a large range of demographics and other characteristics. Evidently, financial knowledge can help limit debt exposure at older ages.

Click here to see the January 2020 version of this working paper.

Stereotypes in Financial Literacy: Evidence from PISA

Laura Bottazzi and Annamaria Lusardi

November 2020

Abstract: We examine gender differences in financial literacy among high school students in Italy using data from the 2012 Programme for International Student Assessment (PISA). Gender differences in financial literacy are large among the young in Italy. They are present in all regions and are particularly severe in the South and the Islands. Combining the rich PISA data with a variety of other indicators, we provide a thorough analysis of the potential determinants of the gender gap in financial literacy. We find that parental background, in particular the role of mothers, matters for the financial knowledge of girls. Moreover, we show that the social and cultural environment in which girls and boys live plays a crucial role in explaining gender differences. We also show that history matters: Medieval commercial hubs and the nuclear family structure created conditions favorable to the transformation of the role of women in society, and shaped gender differences in financial literacy as well. We discuss the changes that are needed to close the gap in financial knowledge among the young.

The Stability and Predictive Power of Financial Literacy: Evidence from Longitudinal Data

Marco Angrisani, Jeremy Burke, Annamaria Lusardi, and Gary Mottola

Abstract: We administered the FINRA Foundation’s National Financial Capability Study questionnaire to members of the RAND American Life Panel (ALP) in 2012 and 2018. Using this unique, longitudinal data set, we investigate the evolution of financial literacy over time and shed light on the causal effect of financial knowledge on financial outcomes. Over a six-year observation period, financial literacy appears to be rather stable, with a slight tendency to decline at older ages. Moreover and importantly, financial literacy has significant predictive power for future financial outcomes, even after controlling for baseline outcomes and a wide set of demographics and individual characteristics that influence financial decision making. This estimated relationship is significantly stronger for older individuals, for women, and for those with lower income than for their counterparts in the study. Altogether, our findings suggest that differences in the stock of financial knowledge may lead to increasing inequality over the life course.

Financial Fragility during the COVID-19 Pandemic

Robert L. Clark, Annamaria Lusardi, and Olivia S. Mitchell

Abstract: Early in the COVID-19 pandemic, much of the US economy was closed to limit the virus’ spread, and several emergency interventions were implemented. Our analysis of older (45-75) respondents fielded in April-May of 2020 indicates that about one in five respondents was financially fragile and would have difficulty facing a mid-size emergency expense. Some subgroups were at particular risk of facing financial difficulties, especially younger respondents, those with larger families, Hispanics, and the low income. Moreover, the more financially literate were better able to handle such shocks, indicating that knowledge can provide some additional protection during a pandemic.

This paper was published by the American Economic Association in May 2021, Volume 111. Click here  to access the published paper.

Financial Education Affects Financial Knowledge and Downstream Behaviors

Tim Kaiser, Annamaria Lusardi, Lukas Menkhoff, and Carly Urban

Abstract: We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains and are at least three times as large as the average effect documented in earlier work. These results are robust to the method used, restricting the sample to papers published in top economics journals, including only studies with adequate power, and accounting for publication selection bias in the literature. We conclude with a discussion of the cost-effectiveness of financial education interventions.

Attitudes Toward Debt and Debt Behavior

Johan Almenberg, Annamaria Lusardi, Jenny Säve-Söderbergh, and Roine Vestman

Abstract: We introduce a novel survey measure of attitude toward debt. Matching our survey results with panel data on Swedish household balance sheets from registry data, we show that our debt attitude measure helps explain individual variation in indebtedness as well as debt build-up and spending behavior in the period 2004–2007. As an explanatory variable, debt attitude compares well to a number of other determinants of debt, including education, risk-taking, and financial literacy. We also provide evidence that suggests that debt attitude is passed down along family lines and has a cultural element.

Forthcoming in The Scandinavian Journal of Economics. Click  here  to see the July 2019 version of this working paper. Click  here to see the July 2018 version of this working paper.

Financial Well-Being of the Millennial Generation: An In-Depth Analysis of its Drivers and Implications

Annamaria Lusardi

November 2019

Abstract: This research highlights the importance of designing and offering financial education programs that will optimally meet the needs and address the concerns of this diverse population. To improve financial well-being, programs should be tailored to the financial situation of their participants.

Abstract: We introduce a novel survey measure of attitude toward debt. Matching our survey results with panel data on Swedish household balance sheets from registry data, we show that our debt attitude measure helps explain individual variation in indebtedness as well as debt build-up and consumption behavior in the period 2004–2007. As an explanatory variable, debt attitude compares well to a number of other determinants of debt, including education, risk-taking, and financial literacy. We also provide evidence that debt attitude is passed down along family lines and has a cultural element.

Click here to see the July 2018 version of this working paper.

Debt Close to Retirement and Its Implications for Retirement Well-being

Abstract: We analyze debt and debt management of Americans nearing retirement age, and we show that older people have numerous financial obligations that can lead to financial distress. Drawing on the 2015 National Financial Capability Study and an extensive literature review, we find that lack of financial literacy, lack of information, and behavioral biases help explain the prevalence of debt later in life. Our evidence also indicates that debt at older ages can negatively influence retirement well-being.

Click here to see the report.

Click here to see the November 2020 published version of this paper.

Defined Contribution Plans and the Challenge of Financial Illiteracy

Jill E. Fisch, Annamaria Lusardi, and Andrea Hasler

Abstract: Retirement investing in the United States has changed dramatically. The classic defined-benefit (DB) plan has largely been replaced by the defined-contribution (DC) plan. With the latter, individual employees’ decisions about how much to save for retirement and how to invest those savings determine the benefits available upon retirement. We analyze data from the 2015 National Financial Capability Study to show that people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan are poorly equipped to make sound investment decisions. Specifically, they suffer from higher levels of financial illiteracy than other investors. This lack of financial literacy is critical both because of the financial consequences of poor financial decisions and because of a legal structure that relies on participant choice to limit the fiduciary obligations of the employer with respect to the structure and options provided by the retirement plan. In response to this concern, we propose mandated employer-provided financial education to address limited employee financial literacy. We identify and discuss three requirements that a financial education program should incorporate – a self-assessment, minimum substantive components, and timing. Formalizing the employer role in evaluating and increasing financial literacy among plan participants is a key step in providing retirement plan participants with the resources necessary to manage important decisions regarding retirement planning and, ultimately, for enhancing the financial security of American workers.

This paper was published by the Cornell Law Review in May 2020, Volume 105 , Issue 3 & Issue 4. Click here to access the published paper.

Click here to see the summary of the paper at the Harvard Law School Forum on Corporate Governance and Financial Regulation .

Financial Fragility Among Middle-Income Households: Evidence Beyond Asset Building

Andrea Hasler and Annamaria Lusardi

Abstract:  Several years after the financial crisis, financial fragility is not only pervasive in the U.S economy but also prevalent among middle-income households. This highlights the need to consider more than asset levels in order to understand household financial resilience. In this paper, we explore the determinants of financial fragility for American households in the middle-income bracket (earning $50–$75K annually) using data from the 2015 National Financial Capability Study. We analyze the socioeconomic characteristics and balance sheets of these households with focus on their debt management and expenses. According to our empirical analysis, three main factors impact financial fragility of middle-income households: family size, debt burden, and financial literacy. First, because a portion of household financial resources are committed to children, family size plays an important role in financial fragility. Second, middle-income households have a lot of debt, and the data shows that debt increases with income. While middle-income households do own assets, they are highly leveraged. In addition, they are using high-cost borrowing methods to cope with emergency expenses. Third, financial literacy is very low among financially fragile middle-income households, which is potentially problematic when there are assets and debt to manage. Moreover, we find that financial fragility has long-term consequences, as financially fragile households are much less likely to plan for retirement.

Financial Fraud among Older Americans: Evidence and Implications

Marguerite DeLiema, Martha Deevy, Annamaria Lusardi, and Olivia S. Mitchell

Abstract: The consequences of poor financial capability at older ages are serious and include making mistakes with credit, spending retirement assets too quickly, and being defrauded by financial predators. Because older persons are at or past the peak of their wealth accumulation, they are often the targets of fraud. Our project analyzes a module we developed and fielded in the 2016 Health and Retirement Study (HRS). Using this dataset, we evaluate the incidence and risk factors for investment fraud, prize/lottery scams, and account misuse, using regression analysis. Relatively few HRS respondents mentioned any single form of fraud over the prior five years, but nearly 5% reported at least one form of investment fraud, 4 % recounted prize/lottery fraud, and 30% indicated that others had used/attempted to use their accounts without permission. There were few risk factors consistently associated with such victimization in the older population. Fraud is a complex phenomenon and no single factor uniquely predicts victimization. The incidence of fraud could be reduced by educating consumers about various types of fraud and by increasing awareness among financial service professionals.

Financial Fragility in the U.S.: Evidence and Implications

Andrea Hasler, Annamaria Lusardi, and Noemi Oggero

Abstract: This project examines financial fragility in the United States, which is measured as individuals’ ability to cope with unexpected expenses. Using data from the 2015 National Financial Capability Study and the 2015 Survey of Household Economics and Decisionmaking, we identify subgroups of the U.S. population that are most financially fragile. We observe widespread fragility across the entire population – more than one third of Americans are financially fragile. Several years after the financial crisis, financial fragility is not only pervasive, but many middle-income households also suffer from the inability to deal with shocks. Our measure captures several factors that contribute to financial fragility, including lack of assets and indebtedness. The quantitative findings are also supported by qualitative data from focus group interviews. We explore the long-term implications of being financially fragile and its effects on retirement planning – individuals who are fragile in the short term may end up being financially insecure in the long term as well. Our findings point to the need to incentivize short-term savings in a way that is complementary to the institutionalized mechanisms of saving for retirement and other long-term goals. Focus groups also complement our empirical findings regarding the need and benefits of improving financial literacy to make individuals less financially fragile.

A Method for Evaluating the Quality of Financial Decision Making, with an Application to Financial Education

November 2017

Abstract: We introduce a method for measuring the quality of financial decisions built around a notion of financial competence, which gauges the alignment between consumers choices and those they would make if they properly understood their opportunities. We prove our measure admits a formal welfare interpretation even when consumers suffer from additional decision-making flaws, known and unknown, outside the scope of analysis. An application illuminates the pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education: they affect behavior through unintended mechanisms, and hence may not improve decisions even when they perform well according to conventional metrics.

Click here to see the August 2016 version of this working paper.

Click here to see the June 2015 version of this working paper.

Debt and Financial Vulnerability on the Verge of Retirement

Abstract: We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity to shield themselves against shocks. We show that recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments.

ENTREPRENEURSHIP AMONG BABY BOOMERS: RECENT EVIDENCE FROM THE HEALTH AND RETIREMENT STUDY

Annamaria Lusardi, Dimitris Christelis, and Carlo de Bassa Scheresberg

September 2016

Abstract: We study entrepreneurship among Baby Boomers using data from the US Health and Retirement Study (HRS). Using two different definitions of entrepreneurship (being self-employed and being a business owner), we compare entrepreneurs to non-entrepreneurs and entrepreneurs who were age 52–65 in the 2012 HRS to their counterparts (i.e., those age 52–65) in the 1998 HRS. We find that entrepreneurs are systematically different from the rest of the population; specifically, they are more highly educated, healthier, wealthier, and more likely to be white and male. When we compare the cohort of Baby Boomer entrepreneurs surveyed in 2012 to entrepreneurs in the same age range in 1998, we find that Baby Boomer entrepreneurs are older, are less likely to be white, have a higher level of education, have fewer children and grandchildren, and are in poorer physical health. Finally, using partial identification methods, we find some evidence for a positive causal impact of wealth on business ownership, but only for the highest levels of wealth.

Older Women’s Labor Market Attachment, Retirement Planning, and Household Debt

Annamaria Lusardi and Olivia S. Mitchell

August 2016

Abstract:  The goal of this paper is to ascertain whether older women’s current and anticipated future labor force patterns have changed over time, and if so, to evaluate the factors associated with longer work lives and plans to continue work at older ages. Using data from both the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS), we show that older women’s current and intended future labor force attachment patterns are changing over time. Specifically, compared to our 1992 HRS baseline, more recent cohorts of women in their 50’s and 60’s are more likely to plan to work longer. When we explore the reasons for delayed retirement among older women, factors include education, more marital disruption, and fewer children than prior cohorts. But household finances also play a key role, in that older women today have more debt than previously and are more financially fragile than in the past. The NFCS data show that factors associated with retirement planning include having more education and greater financial literacy. Those who report excessive amounts of debt and are financially fragile are the least financially literate, had more dependent children, and experienced income shocks. Thus shocks do play a role in older women’s debt status, but it is not enough to have resources: people also need the capacity to manage those resources if they are to stay out of debt as they head into retirement.

The Effect of Financial Education on the Quality of Decision Making

Abstract:  We introduce a method for measuring the quality of financial decision making built around a notion of financial competence , which gauges the alignment between individuals’ choices and those they would make if they properly understood their opportunities. We use it to document the potential pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education. Motivational rhetoric can render the effects of such interventions indiscriminate even when people appear to understand and internalize the targeted concepts. Conventional methods of evaluation involving financial literacy, self-reported decision strategies, and directional effects on choices do not reliably detect these deficiencies.

Click here to see the original version of this working paper. 

Click here to see the online appendix. 

HOW FINANCIALLY LITERATE ARE WOMEN? AN OVERVIEW AND NEW INSIGHTS

Tabea Bucher-Koenen, Annamaria Lusardi, Rob J. M. Alessie, and Maarten C. J. van Rooij

February 2016

Abstract: We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—also know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. The gender differences are present for very basic as well as more advanced measures of financial literacy and financial sophistication. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.

Click here for the version to be published in the Journal of Consumer Affairs .

Financial Literacy Skills for the 21st Century: Evidence from PISA

Colston Warne Lecture | September 2015

Foreward:  I am delighted to be asked to give the Colston Warne Lecture at the American Council on Consumer Interests annual conference. What I want to cover in this lecture is what I consider to be one of the most important topics for consumers: financial literacy. This topic is particularly important for the young and, in this lecture, I will describe the findings from the first international survey on financial literacy among high school students: the Programme for International Student Assessment (PISA). I am honored to chair the financial literacy expert group that designed the financial literacy assessment in PISA. Our journey to design that assessment included meetings in many countries and lasted for several years. It is one of the works I have enjoyed the most. I hope the findings from PISA will be a catalyst for changes in education policies, including adding financial literacy to school curricula.

Click here for the version published in the  Journal of Consumer Affairs.

Click here to see the PowerPoint presentation that accompanied this lecture.

EMPLOYEE FINANCIAL LITERACY AND RETIREMENT BEHAVIOR: A CASE STUDY

Robert Clark, Annamaria Lusardi, and Olivia S. Mitchell

August 2015

Abstract:  This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the system’s defined contribution (DC) plan. We have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.

Click here for the version to be published in Economic Inquiry .

USING A LIFE CYCLE MODEL TO EVALUATE FINANCIAL LITERACY PROGRAM EFFECTIVENESS

Annamaria Lusardi, Pierre-Carl Michaud, and Olivia S. Mitchell

Abstract:  Prior studies disagree regarding the effectiveness of financial literacy programs, especially those offered in the workplace. To explain such measurement differences in evaluation and outcomes, we employ a stochastic life cycle model with endogenous financial knowledge accumulation to investigate how financial education programs optimally shape key economic outcomes. This approach permits us to measure how such programs shape wealth accumulation, financial knowledge, and participation in sophisticated assets (e.g. stocks) across heterogeneous consumers. We then apply conventional program evaluation econometric techniques to simulated data, distinguishing selection and treatment effects. We show that the more effective programs provide follow-up in order to sustain the knowledge acquired by employees via the program; in such an instance, financial education delivered to employees around the age of 40 can raise savings at retirement by close to 10%. By contrast, one-time education programs do produce short-term but few long-term effects. We also measure how accounting for selection affects estimates of program effectiveness on those who participate. Comparisons of participants and non-participants can be misleading, even using a difference-in-difference strategy. Random program assignment is needed to evaluate program effects on those who participate.

Click here for the version published in the October 2020 issue of the Economics of Education Review.

Sandro Ambuehl, B. Douglas Bernheim, Annamaria Lusardi

Abstract: We introduce the concept of financial competence, a measure of how closely individuals’ choices align with those they would make if they properly understood their opportunity sets. The concept is firmly rooted in the principles of choice-based behavioral welfare analysis and avoids the types of paternalistic judgments that pervade policy discussions. We document the importance of assessing financial competence by demonstrating experimentally that an educational intervention can appear highly successful according to conventional outcome measures while failing to improve the quality of financial decision making. We trace the mechanisms behind these seemingly divergent findings.

Click here to see the updated version of this working paper .

Financial Knowledge and 401(k) Investment Performance: A Case Study

Abstract:  We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared to their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18 percentage points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared to their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the Financial Literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or nonsystematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.

Click here for the version published in the Journal of Pension Economics and Finance. 

BANKRUPTCY RATES AMONG NFL PLAYERS WITH SHORT-LIVED INCOME SPIKES

Kyle Carlson, Joshua Kim, Annamaria Lusardi, and Colin F. Camerer

Abstract:  One of the central predictions of the life-cycle hypothesis is that individuals smooth consumption over their economic life cycle; thus, they save when income is high, in order to provide for when income is likely to be low, such as after retirement. We test this prediction in a group of people—players in the National Football League (NFL)—whose income profile does not just gradually rise then fall, as it does for most workers, but rather has a very large spike lasting only a few years. We collected data on all players drafted by NFL teams from 1996 to 2003. Given the difficulty of directly measuring consumption of NFL players, we test whether they have adequate savings by counting how many retired NFL players file for bankruptcy. Contrary to the lifecycle model predictions, we find that initial bankruptcy filings begin very soon after retirement and continue at a substantial rate through at least the first 12 years of retirement. Moreover, bankruptcy rates are not affected by a players total earnings or career length. Having played for a long time and been well-paid does not provide much protection against the risk of going bankrupt.

Click here for the version published in the American  Economic Review .

Financial Literacy and Economic Outcomes: Evidence and Policy Implications

January 2015

Abstract: This paper reviews what we have learned about financial literacy and its relationship to financial decision-making around the world. Using three simple questions, we have surveyed people in many countries to determine whether they have the fundamental knowledge of finance needed to function as effective economic decision makers. We show that levels of financial literacy are low not only in the United States but also in many other countries, including those with well-developed financial markets. Moreover, financial illiteracy is particularly acute for some demographic groups, especially women and the less-educated. These findings are important since financial literacy is linked to borrowing, saving, and spending patterns. We also offer new evidence on financial literacy among high school students drawing on the newly-released Programme for International Student Assessment implemented in 18 countries. Last, we discuss the implications of this research for policy.

Click here for the version published in the Journal of Retirement .

December 2014

Abstract:  We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. In addition, women give themselves lower scores on financial literacy self-assessments than men. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—know little about concepts relevant for day-to-day financial decisions. Even women in favorable economic conditions are less financially knowledgeable than men. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. As a result, improving women’s financial literacy is key to helping them prepare for retirement and promoting their financial security.

Click here to see the updated version of this working paper.

FINANCIAL EDUCATION, FINANCIAL COMPETENCE, AND CONSUMER WELFARE

October 2014

Abstract:  We introduce the concept of financial competence, a measure of the extent to which individuals’ financial choices align with those they would make if they properly understood their opportunity sets. Unlike existing measures of the quality of financial decision making, the concept is firmly rooted in the principles of choice-based behavioral welfare analysis; it also avoids the types of paternalistic judgments that are common in policy discussions. We document the importance of assessing financial competence by demonstrating, through an example, that an educational intervention can appear highly successful according to conventional outcome measures while failing to improve the quality of financial decision making. Specifically, we study a simple intervention concerning compound interest that significantly improves performance on a test of conceptual knowledge (which subjects report operationalizing in their decisions), and appears to counteract exponential growth bias. However, financial competence (welfare) does not improve. We trace the mechanisms that account for these seemingly divergent findings.

Document Appendix

OPTIMAL FINANCIAL KNOWLEDGE AND WEALTH INEQUALITY

Abstract:  Using a stochastic life cycle model with endogenous financial knowledge accumulation, we show that financial knowledge is a key determinant of wealth inequality. The mechanism we posit is that financial knowledge enables individuals to better allocate resources over their lifetimes in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have the most to gain from investing in financial knowledge. As a result, making financial knowledge accumulation endogeneous amplifies differences in accumulated retirement wealth over the life cycle. According to our estimates, from 30 to 40 percent of wealth inequality can be accounted for by financial knowledge.

FINANCIAL LITERACY AND RETIREMENT PLANNING IN CANADA

David Boisclair, Annamaria Lusardi, and Pierre-Carl Michaud

Abstract:  Financial literacy and Canadians’ capacity to plan for retirement is of primary importance for the policy debate over pension system reform in Canada. In this paper, we draw on internationally comparable survey evidence on financial literacy and retirement planning in Canada to investigate how financially literate Canadians are and who does plan for retirement. We find that 42 percent of respondents are able to correctly answer three simple questions measuring knowledge of interest compounding, inflation, and risk diversification. This is consistent with evidence from other countries, and Canadians perform relatively well in comparison to Americans but worse than individuals in other countries, such as Germany. Among Canadian respondents, the young and the old, women, minorities, and those with lower educational attainment do worse, a pattern that has been consistently found in other countries as well. Retirement planning is strongly associated with financial literacy; those who responded correctly to all three financial literacy questions are 10 percentage points more likely to have retirement savings.

Click here for the version to be published in the Journal of Pension Economics and Finance .

VISUAL TOOLS AND NARRATIVES: NEW WAYS TO IMPROVE FINANCIAL LITERACY

Annamaria Lusardi, Anya Savikhin Samek, Arie Kapteyn, Lewis Glinert, Angela Hung, and Aileen Heinberg

Abstract:  In this paper, we developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative. The programs were designed to inform people about risk diversification, an essential concept for financial decision making. The effectiveness of these programs was evaluated using the RAND American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial literacy and self-efficacy. All of the programs were found to be effective at increasing self-efficacy, and several improved financial literacy, providing new evidence for the value of programs designed to help individuals make financial decisions. The video was more effective at improving financial literacy scores than the written narrative, highlighting the power of online media in financial education.

FIVE STEPS TO PLANNING SUCCESS: EXPERIMENTAL EVIDENCE FROM U.S. HOUSEHOLDS

Aileen Heinberg, Angela Hung, Arie Kapteyn, Annamaria Lusardi, Anya Savikhin Samek, and Joanne Yoong

Abstract:  In this paper, we design and field a low-cost, easily-replicable financial education program called “Five Steps,” covering five basic financial planning concepts that relate to retirement. We conduct a field experiment to evaluate the overall impact of “Five Steps” on a probability sample of the American population. In different treatment arms, we quantify the relative impact of delivering the program through video and narrative formats. Our results show that short videos and narratives (each takes about three minutes) have sizable short-run effects on objective measures of respondent knowledge. Moreover, keeping informational content relatively constant, format has significant effects on other psychological levers of behavioral change: effects on motivation and self-efficacy are significantly higher when videos are used, which ultimately influences knowledge acquisition. Follow-up tests of respondents’ knowledge approximately eight months after the interventions suggest that between one-quarter and one-third of the knowledge gain and about one-fifth of the self-efficacy gains persist. Thus, this simple program has effects both in the short run and medium run.

Click here for the version published in the Oxford Review of Economic Policy.

FINANCIAL KNOWLEDGE AND 401(K) INVESTMENT PERFORMANCE

Abstract:  Using a unique new data set linking administrative data on investment performance and financial knowledge, we examine whether investors who are more financially knowledgeable earn more on their retirement plan investments, compared to their less sophisticated counterparts. We find that risk-adjusted annual expected returns are 130 basis points higher for the most financially knowledgeable employees, and those scoring higher on our Financial Knowledge Index have slightly more volatile portfolios while they do no better diversifying their portfolios than their peers. Overall, financial knowledge does appear to help people invest more profitably; this may provide a rationale for efforts to enhance financial knowledge in the population at large.

DEBT AND DEBT MANAGEMENT AMONG OLDER ADULTS

September 2013

Abstract:  Many individuals lack the financial know-how to manage the complex new financial products increasingly available in the financial marketplace. How people borrow and manage debt has become of increasing policy maker concern, given recent evidence on Americans’ over-indebtedness. As a consequence, some have suggested that older persons today are much more likely to enter retirement age in debt compared to decades past. Our new paper seeks to empirically evaluate the factors associated with older individuals’ debt and debt management practices, and whether (and how) these patterns have changed significantly over time.

FINANCIAL LITERACY AND HIGH-COST BORROWING IN THE UNITED STATES

Annamaria Lusardi and Carlo de Bassa Scheresberg

January 2013

Abstract:  In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods. Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years. Moreover, many young adults engage in high-cost borrowing: 34 percent of young respondents (age 18–34) and 43 percent of young respondents with a high school degree have used one of these methods. Using well-tested questions to measure financial literacy, we document that most high-cost borrowers display very low levels of financial literacy, i.e., they lack numeracy and do not possess knowledge of basic financial concepts. Most important, we find that those who are more financially literate are much less likely to have engaged in high-cost borrowing. Our empirical work shows that it is not only the shocks inflicted by the financial crisis or the structure of the financial system that explains why so many individuals have made use of high-cost borrowing methods; the level of financial literacy also plays a role.

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Building up financial literacy and financial resilience

• Published: 31 July 2020
• Volume 20 , pages 181–187, ( 2021 )

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• Annamaria Lusardi 1 , 2 ,
• Andrea Hasler 3 &
• Paul J. Yakoboski 4  

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This article uses data from the 2020 TIAA Institute-GFLEC Personal Finance (P-Fin) Index to show that many American families were financially fragile well before the COVID-19 pandemic hit the U.S. economy. Financial fragility is particularly severe among specific demographic groups, such as African-Americans and those with low income. The article also shows that financial fragility is strongly linked to financial literacy and that many Americans are ill-equipped to deal with the financial decisions needed to navigate through a financial crisis. Suggestions are provided to deal with personal finance decisions in times of emergency.

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In January 2020, the unemployment rate in the United States was as low as 3.6 percent, and the stock market was reaching record highs. Mild concerns about cases of an unknown virus notwithstanding, the economy was firing on all cylinders. It was amidst this backdrop that the Global Financial Literacy Excellence Center (GFLEC) and the TIAA Institute conducted the 2020 Personal Finance (P-Fin) Index, an annual survey to assess knowledge and understanding which enable sound financial decision making and effective management of personal finances. A long term project that started in 2017, the P-Fin Index measures financial literacy with 28 questions covering eight functional areas, from earning, consuming, saving, investing, and borrowing/managing debt, to insuring, comprehending risk, and go-to information sources. The survey also collects demographic data, as well as indicators of financial wellness, providing insights into the state of Americans’ personal finances. The results of the survey offer several suggestions to assess the potential effects of the current economic crisis. In the next section, we describe those findings and how they can be used to help families become more financially resilient.

1 Financial literacy and preparedness before the COVID-19 crisis

A primary takeaway from the P-Fin Index data is that financial literacy in the United States is quite low. Footnote 1 In 2017, respondents answered an average of 49 percent of the financial literacy questions correctly. Financial literacy has improved only slightly since then, with respondents answering 52 percent of the questions correctly in 2020, which is still a failing grade. Unfortunately, comprehending risk and insuring are the functional areas where knowledge is lowest, which is what matters most in a time of economic turmoil. While respondents could answer 64 percent of the borrowing questions correctly, they correctly answered only 47 percent of the insuring questions and an abysmal 37 percent of the questions on risk. Without a good financial knowledge foundation, it can be difficult to make sound financial decisions in ordinary times. In extraordinary times like the current ones, where risk and uncertainty are amplified, it is even more difficult. As Fig. 1 shows, while knowledge in some topics improved slightly over time, it is not the case for the area where the knowledge is lowest, i.e., comprehending risk.

Source 2020 TIAA Institute-GFLEC Personal Finance Index

Financial Literacy by Functional Area in 2017 and 2020.

Also troublesome is the fact that financial literacy tends to be lower among females, lower-income individuals, the unemployed or disabled, the young, and the less educated. Unfortunately, many of these groups are often hit the hardest by economic crises, and lower levels of financial literacy may exacerbate these impacts.

Low financial literacy heading into the pandemic is only part of the picture. The P-Fin Index also indicated that a substantial proportion of the population was already financially vulnerable, even when the economy was doing well. We turn next to indicators of financial fragility and financial resilience, terms that were coined right after the financial crisis of 2007–2008. Footnote 2 To measure whether a respondent is financially fragile, we included the following question in the survey: How confident are you that you could come up with $2,000 if an unexpected need arose within the next month? The possible answers to this question are : I am certain I could come up with the full $2,000; I could probably come up with $2,000; I could probably not come up with $2,000; I am certain I could not come up with $2,000; Don’t know . The wording of this question is designed to assess whether respondents could manage a medium-size financial shock. Note that the question does not ask if respondents have $2,000 in cash in the bank; respondents are asked whether they could “come up” with such an amount, or, in other words, whether they can access resources in time of need. If respondents answer that they “could probably not” or “certainly not” come up with the money, we classified them as financially fragile. In January 2020, we found that 27 percent of respondents were financially fragile (Fig. 2 ). If such a sizeable proportion of Americans had low confidence in their ability to access $2,000 when the economy was strong, it should come as no surprise that so many families are under financial distress after losing their paychecks. Without a buffer stock of savings or access to funds, many Americans will have a difficult time navigating through the current crisis.

Financial Health of Americans in 2020.

Other indicators of financial resilience point in the same direction (see Fig. 2 ). Well before the pandemic hit the economy, one third of respondents in the P-Fin Index reported that they found it very or somewhat difficult to make ends meet. Similarly, 31 percent of respondents felt their debt payments prevent them from adequately addressing other financial priorities, and 38 percent reported that they do not save regularly for retirement. These statistics suggest that even with full employment, a large proportion of Americans was under financial stress and/or unable to save. Being furloughed or laid off during the pandemic will push many families over the edge.

Yet again, disadvantaged groups are more at risk to be financially fragile. According to the 2020 P-Fin Index, about half of African-Americans and almost one third of women were considered financially fragile, compared to only 21 percent of white respondents and 23 percent of men, confirming previous findings from P-Fin data focusing on African-Americans. Footnote 3 Those with less education and lower incomes were also at higher risk of being financially fragile. These are precisely the groups that have been hit the hardest by the COVID-19 crisis. Focusing on these groups is an urgent priority, if we are to mitigate the effects of this crisis.

The 2020 P-Fin Index data shows that financial resilience is strongly associated with financial literacy (see Fig. 3 ). While only about one in five of the least financially literate respondents (those who answered less than 26 percent of the P-Fin questions correctly) claimed that they could come up with $2,000 in one month, over three fourths of the most financially literate (those who answered 76 percent or more of the P-Fin questions correctly) were able to face such a shock. Similarly, increased financial literacy is associated with a lower likelihood of feeling constrained by debt. Less than one third of the least financially literate respondents were unconstrained by their debt, compared to two thirds of the most financially literate respondents.

Financial Resilience by Financial Literacy in 2020.

Financial literacy is also correlated with planning for the future, as the financially literate are more likely to save and plan for retirement (see Fig. 3 ). Just one third of the least financially literate non-retirees regularly save for retirement (vs. 83 percent of the most financially literate non-retirees), and only one fifth of them have tried to determine how much they need to save for retirement (vs. 60 percent of the most financially literate non-retirees).

Previous studies show that the relationship between financial literacy and financial outcomes tends to hold even after controlling for confounding variables, such as income and education. Footnote 4 Thus, the data shows us that with the economy at full employment, those with less financial knowledge are already at risk of falling into financial distress and this can have consequences both in the short term and the long term.

Today, of course, the health and personal finances of Americans have been ravaged by COVID-19. The official unemployment rate soared to 14.7 percent in April, the highest since the Great Depression; the unemployment rate has declined somewhat in subsequent months but remains above 10 percent. The economic fallout of the pandemic has exposed and exacerbated the financial fragility of millions of Americans, as many find that their precautionary savings are insufficient to cover their bills in the absence of a paycheck. This is a painful situation but not a surprising one considering the proportion of people that demonstrated a lack of financial resilience before the crisis.

As a society, we now know that we will need to better prepare for the next crisis. An important step in building a more resilient society is to make financial literacy a reality for all. Financial literacy programs should also diversify content to include understanding and managing risk, as well as developing financial resiliency. Direct financial assistance from the government is clearly part of the solution to this crisis, but in today’s economy, people are expected to make many financial decisions affecting their finances now and far into the future. The cost of widespread financially illiteracy to individuals and society is simply too high for us to choose not to invest in financial education.

2 A resource hub to manage personal finances in times of a crisis

Given these findings and the difficulty in managing finances during a pandemic, providing financial advice could offer some help. Guided by the data collected via the P-Fin Index since 2017, GFLEC has built a resource hub for people seeking information and financial advice during this crisis. It is available here: https://gflec.org/education/financialresilience/ , and it provides ten suggestions for managing money during this pandemic as well as links to government, nonprofit, and media articles to help people through these turbulent times. The resources included can help users, for example, to create a budget, learn how to rebuild savings, monitor their credit, manage debt, and use online technology to make financial decisions.

Also included is a wealth of information on government policies enacted in response to the pandemic, including stimulus checks, lower interest rates, and forbearance options. Each of the suggestions is shown as a snapshot in Fig. 4 , and the resources provided are being updated on a regular basis. It is our hope that these resources and strategies will provide some help and information for people who are overwhelmed by the economic fallout of this crisis and do not know where to turn for assistance.

GFLEC Financial Resilience Hub

For details about the survey and the findings, see Yakoboski et al. ( 2020 ).

See Lusardi et al. ( 2011 ).

See Yakoboski et al. ( 2019 ).

See Lusardi and Mitchell ( 2014 ).

Lusardi A, Mitchell O (2014) The economic importance of financial literacy: theory and evidence. J Econ Lit 52(1):5–44

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Lusardi A, Schneider D, Tufano P (2011) Financially fragile households: evidence and implications. Brookings Papers on Economic Activity, Spring 2011, pp 83–134

Yakoboski P, Lusardi A, Hasler A (2019) Financial literacy and wellness among African Americans. New insights from the Personal Finance (P-Fin) Index. TIAA Institute and the Global Financial Literacy Excellence Center Special Report (October 2019)

Yakoboski P, Lusardi A, Hasler A (2020) The 2020 TIAA Institute-GFLEC Personal Finance Index. Many Do Not Know What They Do and Do Not Know. TIAA Institute and the Global Financial Literacy Excellence Center Special Report (April 2020)

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Acknowledgements

We thank Nikhil Yagnik for excellent research assistance. All errors are our own. The TIAA Institute-GFLEC Personal Finance Index is not a publicly available dataset.

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Lusardi, A., Hasler, A. & Yakoboski, P.J. Building up financial literacy and financial resilience. Mind Soc 20 , 181–187 (2021). https://doi.org/10.1007/s11299-020-00246-0

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Impact of financial literacy on financial well-being: a mediational role of financial self-efficacy

Umer mushtaq lone.

1 Research Scholar, Department of Management Studies, University of Kashmir, Jammu and Kashmir, Hazaratbal, Srinagar, 190006 India

Suhail Ahmad Bhat

2 Department of Management Studies, University of Kashmir, Jammu and Kashmir, Hazaratbal, Srinagar, 190006 India

The purpose of this paper is to explore the impact of financial literacy on financial well-being among the business school faculties. Both the variables (financial literacy and financial well-being) are operationalized as multi-dimensional constructs to undertake the study. Moreover, the paper also endeavored to examine the mediating role of financial self-efficacy between financial literacy and financial well-being. The paper adopts a survey by questionnaire method to gather data from 203 business school faculty members through the simple random sampling (SRS) technique. Confirmatory factor analysis was used for scale validation, and structural equation modeling was used for hypotheses testing. Mediation was tested using percentile bootstrap with a 95% confidence interval. The study found a significantly positive impact of financial literacy as well as its dimensions on financial self-efficacy and financial well-being. It was also found that financial self-efficacy partially mediates the effect of financial literacy on financial well-being. Measurement of the constructs was done on subjective measures, and the study is limited to business school faculties only. The present research findings could be employed in crafting educational programs for business schools. These programs shall guide such institutions in imparting the knowledge and skills among students regarding their personal finances in terms of savings and retirement planning. The study was focused on the business school faculties of the Jammu and Kashmir region, who are less exposed to the financial literacy programs due to factors like frequent lockdown and internet shutdowns. Moreover, it is generally witnessed that salaried class people in Jammu and Kashmir pay less attention to long-term financial planning for retirement, which makes the present study more relevant. Therefore, this study will prove beneficial to all the employees, especially the business school faculties, to understand the importance of financial literacy and its subsequent effect on financial well-being.

Introduction

Personal financial decisions and money management have been highly valued in the present economic scenario (Sinha et al. 2021 ). The instability of the global economy has given rise to diverse and complex financial products, which has brought in new challenges thereby forcing people to face these complex financial decisions (Philippas and Avdoulas 2020 ). As a result, the importance of personal financial management skills has amplified and, as such, has caught the attention of academia and policymakers more recently. Moreover, employees face numerous financial challenges ranging from overwhelming financial information, products, and services to financial responsibility (van Rooij et al. 2011 ; Agarwalla et al. 2012 ). Further, on account of complex financial products as well as structural reforms in social protection and pension schemes, people are forced to assume greater responsibilities to make difficult financial decisions for securing their own financial well-being (van Rooij et al. 2011 ). Also, with an increasing number of working-class approaching retirement and most importantly, a changing focus on individual responsibility for personal finances, financial literacy has evolved into a necessary skill that everyone must possess in everyday life (van Rooij et al. 2011 ). Consequently, this has led to the diminishing role of governments and other employers in managing finances on behalf of employees (Agarwalla et al. 2012 ). Additionally, the recent global financial crisis has underscored the implication of financial literacy and the need to be financially educated to make reasoned financial decisions. Further, financial literacy gives rise to the financial attitude, which results in financial well-being (Philippas and Avdoulas 2020 ).

In the light of the above perspective, an individual who is financially literate can plan, borrow, invest, spend more wisely and take risk mitigation measures (Attridge 2009 ; Atkinson and Messy 2012 ; Moulton et al. 2013 ; Grohmann et al. 2014 ; Lusardi and Mitchell 2017 ). In other words, a financially literate people are able to make sound financial decisions which are critical for financial well-being. Pahlevan Sharif et al. ( 2020 ) argued that financial literacy is required for successful financial resource management to achieve financial well-being. Chijwani ( 2014 ) supporting the previous studies state that a low degree of financial literacy has the potential to result in poor financial decisions that will adversely affect the financial condition of people. In this context, financial challenges, like personal bankruptcies, health issues, early retirement, job losses, debt repayment stress, and failing to meet savings targets, will be dealt more efficiently and smoothly by those persons who are financially prepared compared to those who are ill-prepared. Thus, financially prepared persons will achieve more financial well-being than financially ill-prepared (Kamakia et al. 2017 ).

Given the significance of financial literacy in the overall improvement of financial well-being, there is scarce research in the extant literature across the discipline (Bruggen et al . 2017 ). In this context, the present study is an attempt to expand the existing literature more broadly by considering the business school faculties. Therefore, two different approaches can be used to understand the changing dynamics of an association between financial literacy and financial well-being. First, a direct relationship between financial literacy and financial well-being can be investigated. Second, the relationship between the two can be understood indirectly through financial self-efficacy. Because of its increased predictive potential, financial self-efficacy influences individual tasks or decisions directly when it is domain-specific and to perceive favorable results indirectly that people frequently expect (Noor et al. 2020 ). Moreover, individually desired behavior can be attained and controlled based on financial self-efficacy in order to achieve a specific result (Bandura 1977 , 2005 ). As a result, it is critical to have knowledge and confidence in order to make decisions (Danes and Haberman 2007 ). Further, individuals with appropriate financial knowledge and information are also self-assured in their ability to complete successful deals (Noor et al. 2020 ). In this context, financial self-efficacy (in terms of behavioral skills) can play a vital role as an intervening factor in the relationship between financial literacy and financial well-being. Business school faculty is considered financially more aware and literate; thus, they feel more confident in their ability to make sound personal finance decisions, which in turn may lead to improved financial well-being. However, there is very little empirical evidence to back this proposition. Therefore, the present study intends to fill this gap by investigating the mediating role of financial self-efficacy in the relationship between financial literacy and financial well-being among business school faculty. The target population of the present study included business school faculties of the Jammu and Kashmir region. It is noteworthy that Jammu and Kashmir is an erstwhile state of India, which was recently downgraded to a Union Territory (UT) status post the dilution of Article 370 of the Indian Constitution in August, 2019. The borders of the UT of Jammu and Kashmir to the east are bounded with the Union Territory of Ladakh and to the South with the states of Himachal Pradesh and Punjab. Moreover, borders of Jammu and Kashmir to the southwest are bounded with Pakistan and to the northwest with the Pakistan-administered part of Kashmir. The UT of Jammu and Kashmir is fundamentally and greatly service-based economy and to some extent agriculture-oriented. Thus, analyzing the relationship between financial literacy and financial well-being is more relevant especially in the business school faculty group. This is fundamentally because this population segment is less exposed to the financial literacy programs due to certain factors such as frequent lockdown and internet shutdowns. Moreover, it is generally witnessed that salaried class people in Jammu and Kashmir pay less attention to long-term financial planning for retirement which makes the present study more relevant (Gopalakrishnan et al. 2017 ). Further, they rely on their savings mostly in their bank accounts and usually do not take loan from the banks. Also, they have less exposure to the investment avenues like retirement funds, pension funds, stock market investment or mutual fund investments compared to the rest of India. Finally, on account of the recent decision by the Government of India to change the status of Jammu and Kashmir from state to union territory, more centrally sponsored schemes are now available in Jammu and Kashmir. Thus, business school faculties based on their background, area of specialization and knowledge, they have been preferred over other population groups of the Jammu and Kashmir region. Therefore, this study shall prove beneficial to all the employees especially the business school faculties to understand the importance of financial literacy and its impact on their financial well-being.

Theoretical background and literature

There is a large body of existing literature that links financial literacy with financial well-being. Hogarth ( 2006 ) and Shim et al. ( 2009 ) have established that financial literacy, financial fragility and financial behavior have an impact on financial well-being. Moreover, financial literacy fosters a positive financial attitude leading to financial well-being. These studies have established that financial literacy has a strong positive influence on financial well-being. Confirming the results of previous studies, Joo and Grable ( 2004 ) observe that increased levels of financial literacy result in financial contentment and eventually financial well-being. Xiao et al. ( 2014 ) opine that people possessing higher financial literacy are more financially satisfied. Similarly, Ali et al. ( 2015 ) postulate that financial literacy is the significant determinant of financial satisfaction which helps people in planning their spending and saving patterns. Likewise, Chu et al. ( 2017 ) state that the households that are more financially literate enjoy higher financial well-being as measured in terms of positive investment returns. Hilgert and  et al . ( 2003 ) suggest that financial management skills have a strong association with financial literacy. As a result, it is not surprising that retirement planning and the growth in retirement money is a primary pathway through which financial literacy influences financial well-being. People in many countries around the world are expected to assess and organize their savings to ensure that they have sufficient funds to cover for their old age and do not outlast their wealth. In order to do that, one must possess the working knowledge of basics of mathematical finance. In this context, the studies by Lusardi and Mitchell ( 2005 , 2007 ) have used basic mathematical finance concepts to evaluate whether an individual’s financial literacy influence his retirement planning and consequently his financial well-being. These authors have clearly established a significant positive impact of financial literacy on financial well-being. The study of Agnew et al. ( 2012 ) corroborating the views established by these results states that people with less financial understanding are more inclined to draw out from their pension funds. These findings have been confirmed by several other studies including Alessie et al. ( 2011 ), Fornero and Monticone ( 2011 ), Klapper and Panos ( 2011 ), and Sekita ( 2011 ).

Similarly, there are other strands of extant literature which have linked financial literacy to other dimensions of financial well-being. Studies like Stango and Zinman ( 2009 ), Behrman et al. ( 2012 ), van Rooij et al. ( 2012 ), Chu et al. ( 2017 ) have demonstrated that higher wealth accumulation is a result of higher financial literacy, which in turn results in the financial well-being of an individual. Studies like Lusardi and Tufano ( 2009 ), Santos and Abreu ( 2013 ), Tsai et al. ( 2016 ) have established that lower levels of financial literacy often result in excessive debt loads, credit problems, bankruptcy and over-indebtedness which eventually affects financial well-being negatively. Moreover, Scheresberg ( 2013 ) and Lusardi et al. ( 2011 ) have found that increased levels of financial knowledge lead to more precautionary savings and a greater ability to deal with financial emergencies. As a result, people feel more secure and thus achieve financial well-being. Additionally, several other studies have linked financial literacy to the financial costs of households. In this context, studies like Moore ( 2003 ), Lusardi and Tufano ( 2009 ), Gerardi et al. ( 2010 ), Mottola ( 2013 ), and Lusardi and Scheresberg ( 2013 ) have demonstrated that higher borrowing and mortgage costs, higher credit card costs, and increased mortgage defaults result from lower levels of financial literacy. All these financial costs and mortgage defaults are detrimental to financial well-being.

In addition to the above discussions, Bruggen et al . ( 2017 ) have observed that increased financial literacy leads to financial self-efficacy, and that is an essential factor for financial well-being. These authors identify financial self-efficacy as being able to control one’s finance which reflects an individual’s skill and ability to influence his/her financial matters. So, financial self-efficacy can be understood as the confidence of an individual stemming from his/her financial knowledge which eventually results in financial well-being. However, there is scanty literature available pertaining to this relationship, and it is even non-existent when viewed from the perspective of business school faculties. So, the present study will empirically analyze how the relationship between financial literacy and financial well-being is being mediated by financial self-efficacy.

On the basis of the above-discussed literature, the present study identifies financial preparedness for emergency, current money management stress and perceived financial security as constructs of financial well-being (endogenous variable), financial self-efficacy as intervening or mediating variable and financial awareness, financial experience and financial skill as constructs of financial literacy (exogenous variable).

Financial well-being

Financial well-being is conceptualized as the belief in one’s ability to maintain current and predicted ideal living standards as well as financial freedom (Bruggen et al . 2017 ). Moreover, CFPB 1 defines financial well-being as “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.” Therefore, a person who is financially insecure leads a precarious life, which has an impact on his economic mobility and as a result, a trivial financial issue might quickly escalate into a long-term financial limitation (Gennetian and Shafir 2015 ). The comprehensive study by Bruggen et al . ( 2017 ) presents the multifaceted, complex and dynamic construct framework of financial well-being, which calls for further investigation into different perspectives. However, on the basis of the extant literature and need of the present study, the following three constructs have been identified and analyzed vis-à-vis financial literacy and financial self-efficacy. In the following sub-sections, the identified constructs of financial well-being are operationalized in the light of existing literature.

Financial preparedness for emergency

Financial preparedness for an emergency is conceptualized as an individual’s state of being financially prepared to deal with a financial shock that may hinder him or her from carrying out routine activities (Abrantes-Braga and Veludo-de-Oliveira 2019 ). Therefore, people who have financial stability and the security of meeting their financial obligations are more likely to experience more financial well-being in such a situation (Hagerty and Veenhoven 2003 ). The concept of financial well-being suggests that individuals must have the ability to withstand a financial interruption in order to attain financial well-being (Consumer Financial Protection Bureau, 2015) 2 . The concept of ‘financial preparedness for emergency’ captures this perspective of financial well-being and is likely to act as a driver for financial well-being. The previously stated concept of financial preparedness for an emergency is similar to what Bruggen et al . ( 2017 ) call “stimulating financially sound behavior.”

Current money management stress

Current money management stress is conceptualized as feelings of stress or worry about one's financial situation and inability to effectively manage money in order to meet financial obligations and live the desired life (Netemeyer et al. 2018 ). Despite the fact that the majority of research studies reveal a negligible relationship between income and financial well-being (Ng and Diener 2014 ), however, there is a growing body of research linking current money management stress and financial well-being (Brown et al. 2005 ; Johnson and Krueger 2006 ; Ruberton et al. 2016 ). In this context, Netemeyer et al. ( 2018 ) establish a negative relationship between the two. Therefore, people with enough cash in hand for meeting current requirements are most likely to have satisfied life (Ruberton et al. 2016 ). Similarly, Brown et al. ( 2005 ) observe that current money management stress in terms of excessive indebtedness results in psychological distress, a finding similar to the observation made by Rubertson et al . ( 2016 ).

Perceived financial security

Perceived financial security is understood as the individuals’ subjective appraisal of their economic resources and situations (Haines et al. 2009 ). It involves beliefs about having a financially secure future and achieving financial objectives (Netemeyer et al. 2018 ). Individual perceptions of economic problems and strains have been identified as one of the most severe chronic stresses that people face on a daily basis (Lynch et al. 2010 ; Kahn and Pearlin 2006 ). Therefore, perceived financial security captures the individuals’ level of satisfaction regarding their financial security. In this context, Netemeyer et al. ( 2018 ), while analyzing the causes and effects of perceived financial well-being, find perceived financial security one of the critical causes. The study establishes a positive relationship between the two. People who save/invest responsibly for future needs are significantly more satisfied than people with the same amount of income who save/invest less (Chancellor and Lyubomirsky 2011 ).

Financial literacy

Financial literacy is defined in this study as the understanding of basic economic and financial concepts required for the proper management of financial resources in order to achieve financial well-being (Hung et al. 2009 ). Financial well-being, on the other hand, as defined previously, is the belief in one’s ability to maintain current and predicted ideal living standards as well as financial freedom (Bruggen et al . 2017 ). In this context, financial literacy is believed to have a significant effect on people's financial well-being since financially literate people are more inclined to handle their personal resources, develop effective ways to save, invest and accumulate wealth over time (Nejad and Javid 2018 ). Therefore, people with proper financial knowledge have the potential to make reasonable financial decisions which will lead to the achievement of financial well-being. It can be inferred that as people gain more and more financial literacy, they tend to save and invest more and may even become more skillful about making daily financial choices (Lusardi and Mitchell 2007 ; Lusardi and Tufano 2008 ). Consequently, they achieve financial self-efficacy which eventually results in higher financial well-being (Netemeyer et al. 2018 ). On the basis of the review of extant literature and also the need for the present study, the following three constructs of financial literacy have been found to be more relevant. The following subsections present their conceptualization, their links with financial well-being and financial self-efficacy.

Financial awareness

Financial awareness is conceptualized as the general understanding of budgeting, knowledge about financial products and services offered by financial institutions, and basic concepts of finance to manage one’s personal finance and achieve his/her financial goals (Beal and Delpachitra 2003 ; Nga et al. 2010 ; Remund 2010 ; Chowdhry and Dholakia 2020). Financial awareness, as part of financial literacy, is an essential component of financial stability since it influences financial knowledge, which in turn drives decision-making (Mason and Wilson 2000 ; Khan 2015 ; Priyadharshini 2015 ). The antecedents of financial awareness in terms of both general awareness and product awareness have been ascribed to demographic factors (Nga et al. 2010 ). So, financially aware people will make reasoned financial decisions which will boost their confidence or financial self-efficacy and eventually feel more satisfied, i.e., higher level of financial well-being (van Rooij et al. 2012 ; Khan 2015 ; Priyadharshini 2015 ). Moreover, Guiso and Jappelli ( 2005 ) state that individuals that lack financial awareness limits financial knowledge related to financial products and services which ultimately influences decision-making and investment in financial markets. So, people with no or limited financial awareness will result in low financial self-efficacy and thus a low level of financial well-being. Based on the above-discussed literature, the following hypothesis is formulated:

Financial awareness has a significantly positive impact on financial self-efficacy.

Financial experience

Financial experience is understood as the experience of owning a financial product or sharing the experience of the same with others and is believed to improve financial literacy (Dewi et al. 2020 ). Moreover, financial experience is conceptualized as the engagement or participation in financial education programs that influence and improve financial literacy and eventually the financial behavior (Frijns et al. 2014 ). So, financial experience invariably induces an individual’s motivation to become financially literate (Frijns et al. 2014 ). Moreover, Mandell ( 2008 ) states that financial literacy programs in high schools which incorporate stock market games have resulted in a considerable increase in financial literacy scores of 6–8 percent. This is because stock market games are considered as experimental learning giving controlled exposure to markets without the fear of financial loss in real terms (Frijns et al. 2014 ). Further, financial experience and behavior have an impact on an individual's degree of financial knowledge, which leads to financial competency (Moore 2003 ). So, people with a great degree of financial competency by default develop financial self-efficacy which improves their financial well-being. On the basis of above discussion, the following hypothesis is proposed:

Financial experience has a significantly positive impact on financial self-efficacy.

Financial skill

Financial skill is conceptualized as the numerical and cognitive abilities of individuals, which may encourage them to analyze information, gain new skills, and even search the market for what is available (Lusardi 2012 ; Mitchell and Lusardi 2015 ). Moreover, Priyadharshini ( 2015 ) states that financial skills refer to the individuals’ ability to make information-based decisions to minimize the chances of entrapping themselves in financial complications. Further, people possessing financial skills help them to avail services like internet and mobile banking which eventually aid in the management of personal finances (Nejad and Javid 2018 ). Also, individuals relying on financial skills are less likely to contact customer services to resolve their issues (Nejad and Javid 2018 ). This indicates that financially literate people in terms of possessing necessary financial skills, make informed and effective financial decisions (Starcek and Trunk 2013 ; Lusardi and Mitchell 2017 ). Additionally, one of the underlying causes of the global financial crisis was the lack of basic financial skills in terms of the inability of understanding credit, complex financial products or investment instruments or the utilization of the existing banking system (Lusardi and Mitchell 2011 ). Further, budgeting, saving, borrowing, and investing are the four pre-requisites of financial literacy, which emphasize the importance of the capacity to apply knowledge and skills to manage money (Remund 2010 ). In this context, possessing necessary financial skills makes an individual gain financial self-efficacy which helps him/her eventually improve his/her financial well-being. On the basis of the literature discussed above, the following hypotheses are proposed:

Financial skill has a significantly positive impact on financial self-efficacy.

Financial literacy has a significantly positive impact on financial self-efficacy.

Financial self-efficacy

Financial self-efficacy is conceptualized as the confidence of an individual in his/her ability to acquire information for making effective financial decisions (Netemeyer et al. 2018 ). Therefore, the greater one's belief in one's financial capacity, the more favorable future results accumulate (Hadar et al. 2013 ; Bruggen et al . 2017 ). Moreover, financial self-efficacy helps in avoiding adverse financial behavior, and consequently, the financial anxiety accompanying that behavior (Hadar et al. 2013 ). Also, financial self-efficacy is believed to reinforce responses to challenging present events by making individuals to remain motivated to face obstacles (Kammeyer-Mueller et al. 2009 ). Therefore, financial self-efficacy should have positive association with the financial well-being. Further, it is believed that financial self-efficacy evokes a behavior to be disciplined to achieve long-term financial goals (Chen et al. 2001 ; Chowdhry and Dholakia 2016 ). Additionally, people with a high degree of financial self-efficacy have a belief that the financial decisions taken based on financial knowledge will eventually help them to secure their financial future (Netemeyer et al. 2018 ). This will resultantly enhance their perceived financial security level and will nurture their financial well-being. Based on the discussion of existing literature, the following hypotheses have been proposed:

Financial Self-efficacy has a significantly positive impact on financial well-being.

Self-efficacy mediates the impact of financial literacy on financial well-being.

Proposed model

The conceptual model has been developed on the basis of above-discussed literature pertaining to financial well-being and its various determinants. The present study has put forward a model that contains seven constructs in which financial well-being is depicted as endogenous variable (measured with three constructs, namely financial preparedness for emergency, current money management stress and perceived financial security). Financial literacy is exogenous variable (measured with three constructs, namely financial awareness, financial experience and financial skill) and financial self-efficacy represents a mediating variable measured with a single construct (Fig.  1 ). Both financial literacy and financial well-being are second order latent constructs developed from their dimensions. Overall impact of the second-order financial literacy construct as well as the individual impact of its latent constructs was observed in the financial self-efficacy. However, financial well-being was observed as second-order latent construct only.

Conceptual model

Materials and methods

The items measuring the various constructs have been adopted from previous research studies in the areas of financial literacy, financial self-efficacy, and financial well-being. Financial literacy is expressed in terms of three sub-dimensions viz., financial awareness, financial experience and financial skill and the items measuring these dimensions were borrowed from prior research studies of van Rooij et al. ( 2011 ) and Dewi et al. ( 2020 ). Financial self-efficacy is a unidimensional construct, and the items measuring it have been derived from the research studies of Mindra et al. ( 2017 ) and Losada-Otalora and Alkire ( 2019 ). Lastly, financial well-being is also expressed in terms of three dimensions viz., financial preparedness for an emergency, current money management stress, and perceived financial security. The items measuring these dimensions have been adopted from the research studies of Gutter and Copur ( 2011 ), Howell et al. ( 2013 ), Chatterjee et al. ( 2019 ), Abrantes-Braga and Veludo-de-Oliveira ( 2019 ). The scale items measuring different constructs undertaken in the study are shown in the Appendix I. Some of the scale items have been modified slightly in order to suit the requirements of the present study. The responses from the respondents were collected on a five-point Likert-type scale ranging from 1 (strongly disagree) to 5 (strongly agree).

Target population, sampling process, and data collection

The target population for the study comprises business school faculties of the Jammu and Kashmir region which approximately constitute 300 faculty members (both contractual and permanent). The business school faculties have mostly been selected from higher educational institutions (running post-graduate courses) and universities in the region. The underlying reason for the selection of business school faculties as the target population stems from the fact that they are believed to possess a basic knowledge about personal finance compared to other faculties in specific and to the overall population in general. The data collection from respondents was conducted via an online survey. There are two primary reasons for adopting an online survey. Firstly, on account of the COVID-19 pandemic, all educational institutions were closed and thus offline mode could not be availed. Secondly, the online mode is considered as the efficient and most acceptable approach to data collection (Hsiao et al. 2010 ; Lin and Wang 2015 ). The study used various different digital platforms such as messenger (like WhatsApp etc.) and e-mailing services to approach the respondents by constructing an online questionnaire. The questionnaire-link was sent to the respective respondent using above-mentioned digital platforms. The contact details of the respondents were obtained from the official websites of the different institutions, friends, acquaintances and peers (in case digital address was not available).

Further, to draw a required sample from the population, an itemized sampling procedure was used. In this procedure, 5–10 respondents are enough for each item in the questionnaire to avoid sampling error (Hinkin 1995 ; Hair et al. 1998 ). Subsequently, the current questionnaire has 30 items; therefore, a sample of 150–300 is adequate for the study. Since the current study has used simple random sampling, therefore, an effort was made to reach the maximum population and a total of 203 responses were recorded which forms around 67% of the ideal sample size under itemized sampling criteria.

Sample characteristics

Table ​ Table1 1 presents the sample characteristics in terms of the socio-demographic features of respondents. It is presented in the table that female respondents account for the highest percentage (72.4%) and male respondents account for the lowest percentage (27.6%). Age is categorized into three groups viz., 25–35, 36–45, 46–55 and above 56 (Table ​ (Table1). 1 ). So, in terms of age group, the highest percentage of responses is observed for the respondents falling in the group range of 25–35 (63.1%) and the lowest percentage of responses is observed in the case of respondents falling in the category above 56 (3.9%). Further, specialization acts as the course-teaching specialization of the respondents categorized into five areas viz., finance, human resource, information technology, marketing and tourism. The respondents possessing marketing specialization account for the highest responses (42.4%) and the lowest responses are observed in the case of respondents having human resource specialization (8.8%). Moreover, income has been taken as economic variable categorized into five groups viz., 25,000 – 50,000; 50,000 – 1,00,000; 1,00,000 – 1,50,000; 1,50,000 – 2,00,000 and above 2,00,000 (Table ​ (Table1). 1 ). The respondents in the monthly income group of 25,000 – 50,000 account for the highest percentage of responses (51.7%) and the lowest percentage is observed for the respondents falling in the monthly income range of 1,50,000 – 2,00,000.

Sample profile (N = 203)

Pilot study

Face validity and content validity of the questionnaire were evaluated during the pilot study, which initially consisted of 30 items measuring seven constructs. Face validity and content validity were evaluated by seeking feedback from research experts, personal finance experts, and psychometric experts regarding order, content, wording, sentence structure and layout of the questionnaire (Malhotra, 2010). The questionnaire was revised in light of various suggestions received from the experts. The expert evaluation of the questionnaire resulted in the omission of three items namely FA6, FE11 and CMMS28. Inputs regarding the content of the questionnaire were also collected from respondents, resulting in minor changes in few questions. After the qualitative evaluation, empirical testing of the questionnaire was carried out by drawing a sample of 63 respondents from the population. Respondents were approached through online mode only by sending email/instant messages that contain a link to a questionnaire. In order to validate the instrument, confirmatory factor analysis (CFA) was conducted on the data set. CFA results are discussed in the next section.

Data analysis

Confirmatory factor analysis (cfa).

A measurement model was developed in AMOS 22 and CFA was applied to the pilot study data of 63 respondents to evaluate its reliability and validity. CFA results were gauged on the basis of model fit indices, standardized CFA loadings, composite reliability, average variance extracted and discriminant validity (Hair et al. 1998 ). MLE (maximum likelihood estimation) has been employed to conduct CFA for the 7 constructs designated in the study. The initial model fit indices were observed to be χ 2 /df = 1.88; CFI = 0.842; RMR = 0.096; RMSEA = 0.094 (Hair et al. 2003 ). These model fit indices were slightly out of the acceptable range because of the poor loading of some items (below the threshold of 0.70). The items FA1, FE7, FPE23, CMMS31, and PFS35 were dropped on the ground of factor loading below the standard threshold of 0.70 (Byrne 2006 ). These items were successively removed from the CFA model, and model fitness was rechecked at each dropout. It took five iterations to clean the CFA model from items with poor loadings. The model fit indices after dropping all the poorly loaded items were found to be χ 2 /df = 1.72 (χ 2  = 527.54 & df = 303); CFI = 0.922; RMR = 0.090; RMSEA = 0.074 (appended as footnote to Table ​ Table2 2 ).

Results of confirmatory factor analysis and reliability/validity estimates

AVE- Average Variance Extracted, MSV- Maximum Shared Squared Variance, CR- Composite Reliability; The figures diagonally represent the square root of AVE;

Model fit indices include: Chi-square/df = 1.72; CFI = 0.922; RMR = 0.090; RMSEA = 0.074; Source: AMOS Output

The reliability and validity of the constructs were determined through composite reliability (CR), convergent validity and discriminant validity. CR was employed to determine the internal consistency, and its value was found to be above the acceptable threshold of 0.70 for all the 7 constructs as shown in Table ​ Table2 2 (Nunnally and Bernstein 1994 ). Convergent validity was established through AVE, which was found to be above the acceptable limit of 0.50 for all constructs (Table ​ (Table2). 2 ). Discriminant validity was determined by using Fornell–Larcker’s criterion (Fornell and Larcker 1981 ; Bagozzi and Yi 1988 ), which depicts that correlation among the different pairs of constructs should be lower than square root of AVE (Hair et al. 2010 ). The results of discriminant validity are presented in Table ​ Table2. 2 . It is depicted from the Table that the inter-construct correlation coefficient of all the constructs is below the square root of AVE (diagonally in bold figures), thus providing evidence for DV (Hair et al. 2010 ).

Results and discussion

The proposed research framework has been gauged by developing a structural model in AMOS graphics and was subsequently performed on the final data set of 203 through the MLE approach. To accomplish the objective of the study and test the various hypotheses, two structural models were developed. In the first structural model, financial literacy was treated as a higher-order latent construct (consisting of 3 dimensions, namely financial experience, financial awareness, and financial skill) and its impact was determined on financial self-efficacy and financial well-being (Fig.  2 ). The model fit indices of the first structural model were found to be in the acceptable ranges indicating that data fits the model (χ 2 /df = 1.56 (χ 2  = 495.5 & df = 316); CFI = 0.910; RMR = 0.069; RMSEA = 0.053). In the second structural model, impact of the dimensions of financial literacy (financial awareness, financial experience and financial skill) was directly determined on financial self-efficacy and financial well-being (Fig.  3 ). The model fit indices of the second structural model were found to be in the acceptable ranges indicating that data fits the model (χ 2 /df = 1.57 (χ 2  = 494 & df = 314); CFI = 0.910; RMR = 0.068; RMSEA = 0.053).

(SEM – I). Model fit indices include: Chi-square/df = 1.56; CFI = 0.910; RMR = 0.069; RMSEA = 0.053; Source: AMOS Output

(SEM – II). Model fit indices include: Chi-square/df = 1.57; CFI = 0.910; RMR = 0.068; RMSEA = 0.053; Source: AMOS Output

The SEM results (of both the structural models) presented in Table ​ Table3 3 show standardized path estimates, critical ratios and R 2 estimates. It is depicted from the table that financial literacy has a significant impact on financial self-efficacy. Thus, hypothesis H1 is supported with standardized regression estimates (SRE) of 0.71 (critical ratio of 4.47 significant at 0.05). Further, the results illustrate that the R 2 of 0.50 (shown in brackets in Fig.  2 ) indicates that financial literacy explains 50 percent of the variance in financial self-efficacy. Table ​ Table3 3 results reveal that financial awareness, financial experience and financial skill significantly impact financial self-efficacy. Therefore, hypotheses H1a, H1b and H1c are supported with SRE of 0.25 (critical ratio of 2.69), 0.24 (critical ratio of 2.42); and 0.28 (critical ratio of 3.09), respectively. From the SEM results, it is observed that financial awareness has the highest effect among the three constructs of financial literacy. The underlying reason for such highest effect stems from the fact that unless an individual becomes aware of personal financial matters, it is difficult to have proper knowledge about such things and, as such, will not be able to develop relevant skills. Moreover, financial skill is seen to have a higher effect than financial experience vis-à-vis financial self-efficacy, which points to the fact that more skillful people feel more confident compared to those who only have financial experience. This means that financial experience acts only as an impetus for financially literate people (Frijins et al . 2014 ). However, developing skills out of such experience is more important because it is a financial skill that ultimately facilitates one’s sail into increased confidence (Nejad and Javed 2018 ). Therefore, individuals with greater financial skills are more likely to make effective financial decisions (Starcek and Trunk 2013 ; Lusardi and Mitchell 2017 ). This indicates that business school faculties that possess higher financial knowledge in terms of financial awareness, financial experience and financial skill are more likely to feel confident about that and, as such, achieve higher financial self-efficacy.

Results of SEM

* Indicates significant at 0.05; FL- Financial Literacy; FSE- Financial Self-efficacy; FA- Financial Awareness; FE- Financial Experience; FS- Financial Skill; FWB- Financial Well-being Source: AMOS Output

The results further reveal that R-square value of 0.32 (shown in brackets in Fig.  3 ) indicates that financial awareness, financial experience and financial skill explain 32 percent of the variance in financial self-efficacy. Further Table ​ Table3 3 illustrates that financial self-efficacy has a significant impact on financial well-being. Thus, hypothesis H2 is supported with an SRE of 0.82 (critical ratio of 5.83). This is explained by the fact that people with higher financial self-efficacy elicit a response to self-discipline, which helps to overcome challenges and eventually accomplishes long-term financial goals (Kammeyer-Mueller et al. 2009 ; Chen et al. 2001 ; Chowdhry and Dholakia 2016 ). Moreover, financial self-efficacy induces a strong belief in an individual regarding financial decisions, when based on sound financial knowledge, will help to secure future financially (Netemeyer et al. 2018 ). Consequently, an improvement is evidenced in one’s perceived financial security which gets manifested into improved financial well-being. In this context, business school faculties who have attained greater financial self-efficacy feel more motivated and are able to make sound personal finance decisions like retirement planning, cash management, debt management. Such people are more satisfied and result in their increased financial well-being. It is noteworthy that financial well-being becomes more important when an individual belonging to the Jammu and Kashmir region is facing numerous challenges which threaten his well-being. The challenges in the form of political and security situation in the said region have been volatile on account of hostilities between three nuclear-armed countries including India, Pakistan and China. The results further reveal that R-square value 0.68 (shown in brackets in Fig.  3 ) indicates that financial self-efficacy explains 68 percent of the variance in financial well-being.

Mediation analysis

Mediation hypothesis H3 was tested by employing one of the empirical approaches given by Nitzl et al. ( 2016 ). According to this approach, mediation analysis is performed using percentile bootstrap confidence interval method (with 3000 bootstraps resample) to obtain standardized direct, indirect and total effects at 95 percent CI in AMOS (Preacher and Hayes 2008 ; Hayes and Scharkow 2013 ). The results obtained are shown in Table ​ Table4 4 which reveal that the direct relationship between financial literacy & financial well-being and financial self-efficacy & financial well-being is significant. However, in the presence of financial self-efficacy (mediator), the direct effects are still significant and the ratio of indirect to total effects is less than 50 percent. These results provide strong support to our predicted relationship between financial literacy and financial well-being both directly and indirectly through the mediation effect of financial self-efficacy. From the results, it is deciphered that financial literacy is an underlying cause of financial well-being as the highest direct effect estimate was reported. These findings are consistent with the findings of Lusardi and Mitchell ( 2007 ) and Lusardi and Mitchell ( 2008 ). Thus, an individual’s financial knowledge does not alone guarantee him improved financial well-being; instead, an induced behavior manifested in greater self-belief about managing personal finances is also evidenced (Netemeyer et al. 2018 ). It is important to note that the overall sample population of business school faculties (which include finance, marketing, human resource, information technology and tourism) validate the results. One possible and important reason for such validation seems to be that nowadays faculties undergo FDPs (faculty development programs) wherein not only subject-related issues are discussed rather issues pertaining to personal finance are also highlighted. Thus, on the basis of direct, indirect and total effects, given in Table ​ Table4, 4 , hypothesis H3 is partially supported.

Mediation analysis results

* Indicates significant at 0.05; FL- Financial Literacy; FWB- Financial Well-being; FSE- Financial Self-efficacy Source: AMOS Output

Contribution and implications

The present study contributes to existing research on determinants of financial well-being in multiple ways. While the prior research works focused on the students, women, and other salaried class people, this study is exclusively related to business school faculties, virtually non-existent in the literature. Moreover, the present study analyzes the impact of financial literacy on the financial well-being of business school faculties through a mediator, i.e., financial self-efficacy. Financial self-efficacy is seen to develop self-assuredness in an individual which can enhance personal finance management skills. In addition to financial literacy, financial self-efficacy plays an important role in magnifying the financial well-being of an individual. This finding has not received much attention in the existing literature. Finally, the present study employs subjective measures for all the constructs instead of objective measures. The underlying reason for such a choice was necessitated by the fact that subjective measures address the inherent limitations of objective measures. They provide insight into how the individuals perceive financial literacy, financial self-efficacy and perceived impact on financial well-being from an individual’s perspective.

The findings of the study have implications for policymakers, educational institution administrators, financial analysts, financial planners, and most importantly the business school faculties themselves. The findings could be employed to develop financial education programs that will help business school faculties to impart the knowledge and skills to manage their personal finances in terms of savings and retirement planning and thus improve their overall financial well-being. Moreover, people with low levels of financial literacy are most vulnerable to online frauds, internet phishing scams and financial cybercrimes. All such activities are aimed at credit card thefts, capturing user credentials and gaining illegal access to bank accounts of individuals. So, business school faculties can disseminate the financial knowledge to other people, who can become financially literate, which can help them to protect themselves from such frauds. Additionally, students who are the beneficiaries of the educational loans have little experience in servicing such loans properly. The dissemination of financial knowledge from business school faculties to students has the potential to become a life-long pursuit for financial education. Thus, students, by virtue of being financially literate, can develop personal financial management skills which can increase their financial well-being.

The mediating role of financial self-efficacy has been partially established in the study which also holds important implications for managers and policymakers. Individuals that possess a greater sense of self-assuredness in their personal finance management skills are more likely to deal with any financial hardships as a ‘challenge to be mastered, rather than threats to be avoided.’ In this context, individuals that have a greater sense of self-belief in their capabilities have more appetite for taking risks and have stronger likelihood of making stock market investments or taking loans. However, those individuals that are low on financial self-efficacy exhibit financially risk-averse behavior and are more likely to go for a savings account. Apart from financial literacy that has an important implication for managers and policymakers for financial programs, financial self-efficacy in itself has an important role in personal finance behavior. The managers and policymakers can use the results related to mediating role of financial self-efficacy to devise their strategies and policies for better outcomes.

Limitations and directions for future research

There are certain limitations of the present study which deserve attention and could potentially become areas for future research. First, the survey sample is restricted to business school faculties of the Jammu and Kashmir region only; thus, future researchers need to be cautious while generalizing the results of this study. Moreover, the business schools operate in an environment where there is constant threat to their personal well-being, which emanates from the political and security instability of the region. In order to increase the generalizability of the current theme, more coverage to the sample should be given beyond business school faculties by considering other adult population. As depicted from the R-square results, financial self-efficacy and financial well-being is only 32 and 68 percent explained by financial literacy, respectively. Therefore, there is scope for more factors that could explain financial self-efficacy and financial well-being of an individual. Finally, the present has used financial self-efficacy as a unidimensional construct. Thus, future research could identify more dimensions for financial self-efficacy so that policies to improve financial well-being could be more effectively designed and implemented.

In an economic environment characterized by rapid changes with increased financial uncertainty, the ability to make effective and sound personal financial decisions has gained importance. An individual who is financially more literate has the ability to spend wisely and plan to secure future financial needs to attain improved financial well-being. In this context, the present study attempted to evaluate the impact of financial literacy on financial well-being. Although several studies have been conducted across different sections of the society including adults, students and other salaried class people. However, studies on business school faculties are non-existent in the extant literature and, as such, make the contribution of the present study more vital and relevant. The study has used structure equation modelling (SEM) to test the proposed hypotheses. The SEM results reveal that business school faculties that are financially literate in terms of financial awareness, financial experience and financial skill are more likely to have financial self-efficacy which helps in improving their financial well-being. Further, the results of mediation analysis depict that financial self-efficacy partially mediates the impact of financial literacy on financial well-being. It is deciphered from the findings of the present study that people not only from finance backgrounds have shown positive results regarding financial well-being but people from other disciplines also have given a positive response. Also, the present is more relevant in the context of the Jammu and Kashmir region as people belonging to this region always have a looming threat to their well-being. Such threat particularly emanates from political and security instability on account of hostilities between the nuclear-armed countries surrounding the region.

Biographies

is a full-time Ph. D scholar at the Department of Management Studies, University of Kashmir, Srinagar, (India). His research interests include corporate finance, investment management, asset pricing, market efficiency, financial economics, risk management, accounting and personal finance. He can be reached at: [email protected].

Dr Suhail Ahmad Bhat

is a faculty at the Department of Management Studies, University of Kashmir, Srinagar. His research interests include e-consumer behaviour, green marketing, social marketing, sustainable development, personal finance, CRM and different facets of CRM in the service industry. He has published papers in national and international journals such as International Journal of Bank Marketing, Vikalpa, Decision, Global Knowledge, Memory and Communication, Vision, International Journal of Tourism Cities, FIIB Business Review, Pacific Business Review International, Abhigyan, and Productivity. Dr Suhail is the corresponding author and can be reached at: [email protected]

• FA1- I am aware of the interest rates being charged by banks and other financial institutions.
• FA2- I am familiar with the fundamentals of personal finance management.
• FA3- I often make a list before shopping.
• FA4- I always compare financial products before making a decision.
• FA5- I often gather information related to financial issues.
• FA6- I am always willing to discuss financial issues.
• FE7- I always hold emergency savings.
• FE8- I always maintain financial records.
• FE9- I have an experience in managing personal assets.
• FE10- I have an investing experience in stock market.
• FE11- I plan how I will spend and invest my money.

Financial Skills

• FS12- I evaluate personal financial statement on regular basis.
• FS13- I manage risks through purchasing insurance.
• FS14- I regularly evaluate my debt position.
• FS15- I always try to diversify my investments.
• SE16- I am confident in my ability to manage my funds.
• SE17- I can plan for the future from the money saved in my bank.
• SE18- I possess the potential to take/raise loan from the bank.
• SE19- I use financial skills efficiently to manage my financial goals.
• FPE20- If I lose my job today, I will be able to cover my expenses until I find a new one.
• FPE21- I regularly manage to save some money from my income.
• FPE22- I have been able to save enough money to secure my future life.
• FPE23- I believe I would never have desirable things in my life due to my bad financial condition.
• FPE24- I consider credit limits as extra cash (as cash buffer) whenever I plan my budget.
• CMMS25- My finances have complete power over my life.
• CMMS26- Whenever I think I am in charge of my finances, something happens to throw me off track.
• CMMS27- I am not able to enjoy life on account of being too much preoccupied with my money.
• CMMS28- I am frequently concerned about my personal finances in general.
• CMMS29- I am worried about meeting my normal monthly living expenses.
• CMMS30- I have moderate level of financial stress today.
• CMMS31- I am satisfied with my current financial situation.
• PFS32- I frequently borrow money to pay off my debts.
• PFS33- I plan to secure my future financially.
• PFS34- The financial goals that have set will be accomplished.
• PFS35- I am not worried about my current financial situation.

Declarations

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

1 https://files.consumerfinance.gov/f/documents/201705_cfpb_financial-well-being-scale-technical-report.pdf.

2 https://files.consumerfinance.gov/f/201511_cfpb_report_fiscal-year-2015.pdf.

Publisher's Note

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Contributor Information

Umer Mushtaq Lone, Email: ni.ude.kou@enolqathsumremu .

Suhail Ahmad Bhat, Email: ni.ca.ytisrevinurimhsak@liahusdamha .

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