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A STUDY ON INDIVIDUAL FINANCIAL LITERACY AND FINANCIAL
BEHAVIOUR
- Ms. Sudeshna T (Assistant Professor, Dept of Commerce, Ethiraj College for Women)
- Dr. Sujatha Balakrishnan (Associate Professor, Dept of Commerce, Ethiraj College for Women)
ABSTRACT
Financial literacy has been recognized as a key skill for individuals who are embedded in an
increasingly complex financial scenario. Financial literacy helps individuals make more
assertive and efficient decisions in the monetary context of their lives. This paper measures
the level of financial literacy of individuals and analyses the relationship between financial
literacy and financial behaviour. The results of the research show that individuals have a
reasonable level of financial literacy. On analysing financial behaviour of individuals it was
found most of them exhibited moderately positive financial behaviour. It is also observed
that financial literacy can enhance people’s skills and abilities to make more informed
choices and ultimately lead to a positive financial behaviour. Thus one can conclude that
increasing the level of financial education stimulates wise economic behaviour.
Key words: basic financial literacy, advanced financial literacy, financial behaviour.
INTRODUCTION
“Money is one form of power. But what is more powerful is financial education” -
Robert Kiyosaki
Financial Literacy is the ability to understand how money works in the world and take
an informed as well as a judicious decision with regard to all financial activities. A person
who is financially literate knows how to earn, manage and invest money. He is familiar with
financial products and applies his knowledge to make the best use of them. Recent
developments have made financial education and awareness increasingly important for
financial wellbeing.
The information available on consumer financial literacy shows that individuals
generally lack an adequate financial background or understanding to navigate today’s
complex market, but unfortunately they also generally believe that they are far more
financially literate than is really the case. The level of financial literacy tends to vary
according to education and income levels, but the evidence shows that highly educated
consumers with high incomes can be just as ignorant about financial issues as less educated,
lower income consumers.
The objective of this paper is to attempt to understand the level of financial literacy of
individuals. The relationship between financial literacy and financial behaviour is also
studied. Although several studies have been conducted in the subject of financial literacy but
not many have considered impact of financial literacy on financial behaviour. This paper
helps to fill this gap.
REVIEW OF LITERATURE
Studies by the OECD (2005) and Lusardi and Mitchell (2007) reviewed
international evidence on financial literacy and found that financial illiteracy is common in
many developed countries such as Australia, Japan, and Korea, as well as developed countries
in Europe. These findings are similar to those of Christelis, Jappelli, and Padula (2006) who
found that most respondents in Europe score low on financial literacy scales. Financial
Literacy and Behaviour Several studies showed that financial literacy is positively related to
self-beneficial financial behaviour. Hilgert, Hogarth, and Beverly (2003) added financial
behaviour and financial literacy questions to the nationwide Survey of Consumer Finances.
They formed a Financial Practices Index based upon behaviour in four variables: cash-flow
management, credit management, savings, and investment practices.
Padula (2006) who found that most respondents in Europe score low on financial
literacy scales. Financial Literacy and Behaviour Several studies showed that financial
literacy is positively related to self-beneficial financial behaviour. Hilgert, Hogarth, and
Beverly (2003) added financial behaviour and financial literacy questions to the nationwide
Survey of Consumer Finances. They formed a Financial Practices Index based upon
behaviour in four variables: cash-flow management, credit management, savings, and
investment practices. Comparing the results of this index with scores on the financial literacy
quiz, they found that those who were more financially literate had higher Financial Practices
Index scores, indicating that financial knowledge is related to financial behaviour.
Maarten van Rooij, Annamaria Lusardi, Rob Alessie: To understand financial
literacy and its relation to financial decision making it is essential to measure numeracy and
basic knowledge related to the working of inflation and interest rates as well as to measure
advanced financial knowledge related to financial market instruments like stocks, bonds and
mutual funds. The study showed that those who have low financial literacy are significantly
less likely to invest in stocks.
OBJECTIVES
The main objectives of the paper are as follows:
1. To measure the level of financial literacy. This is done by measuring both basic and
advanced financial literacy.
2. To measure financial behavior.
3. To analyze the relationship between financial literacy and financial behavior.
DATA AND METHODOLOGY
For the purpose of the study convenience sampling was followed and 100 responses were
collected. The study uses questionnaire method of data collection. The questionnaire
consisted of three parts: the first part covers demographic information, the second part aims
at measuring the level of financial literacy and the third part aims to analyze the financial
behavior of the respondents. Cronbach’s alpha test was administered to assess the reliability
of the questionnaire. The result of the reliability coefficient (alpha) was 0.730.
ANALYSIS AND RESULTS
Overall literacy
To test the level of literacy of the respondents, 20 questions were asked to assess their
knowledge on various concepts like simple interest, compounding, time value of money,
inflation, credit purchase, savings interest, diversification, stock markets, bonds, debentures,
mutual funds and loan financing. For each of the questions three options (Yes / No / Don’t
know) were given to the respondents. The answers given by the respondents were evaluated
for each of the questions and categorized into ‘correct answers’, ‘incorrect answers’ and
‘don’t know’
An item wise analysis was conducted for each of the questions on knowledge. More
than 80% of the respondents were well aware about the concept of simple interest, inflation,
stock price fluctuations, credit cards and savings account interest as they have answered the
questions on the above concepts correctly. The respondents had a reasonably good score of
for concepts such as stock market functions, mutual fund, stock & bond risk factors,
diversification and loan financing by answering them correctly. It is observed that most don’t
have knowledge about bond / debenture prices and credit purchasing power.
To obtain an overall score on financial literacy for each respondent, the ‘correct’answers
given by the respondents for each of the question is considered. It can be summarized that
the overall mean score of the respondents for ‘correct’ answer was 14.43 and SD was 4.02.
The minimum score was 2 and maximum was 20. It is found that 64% of the respondents
have a fairly reasonable overall financial literacy score as they have answered more than two
thirds of the questions correctly. 3% of the respondents have answered less than one third of
the questions correctly and have a low overall financial literacy and 33% of the respondents
have moderate financial literacy as they have answered 7 to 13 questions correctly.
For a deeper analysis the questions were categorized into two groups (basic literacy and
advanced literacy). The first group consists of questions which capture people’s capacity to
handle basic financial literacy concepts such as simple interest, compounding, time value of
money, inflation, credit purchase and savings interest. The second group is intended to
capture sophisticated or advanced financial literacy concepts such as risk / return, difference
between stocks and bonds, functioning of the stock market, relationship between bond prices
and interest rates, working of mutual funds, risk diversification and loan financing.
Basic literacy
The mean score of the respondents for basic literacy was 5.97 and SD was 1.50. 75%
of the respondents have a score higher than the mean value. This shows that majority of the
respondents are well aware of basic literacy concepts. Further the respondents were grouped
into three categories – those with low, moderate and high level of knowledge. It is observed
that 68% of the respondents fall into the ‘high’ category and have answered 6 or more
questions correctly from a total of 8. 31% of the respondents fall in the moderate segment by
having given 3 to 5 correct answers and just 1% of the respondents fall in the low basic
literacy segment with a maximum score of just 2 correct answers.
With respect to individual questions on basic literacy more than 80% of the people have
got questions on simple interest, inflation, credit cards and savings interest rate correct.
However only 44% were aware of the concept of how credit purchase affects purchasing
power. 60% to 70% of them were well informed about time value of money.
Advanced literacy
Mean score of the respondents for advanced literacy is 8.46 with a SD of 2.95. Questions
on stock markets, bonds, debentures, mutual funds, diversification and loan financing were
asked to test the level of advanced literacy among respondents.
A similar analysis as that of basic literacy was performed and the scores of the
respondents in this group were also categorized into low, moderate and high level. The
results show that 58% of the respondents fall into the high category and have answered 9 or
more out of 12 questions correctly. 29% of the respondents are in the moderate literacy level
by giving between 5 to 8 correct answers. 13% of the respondents belong to the low
advanced literacy segment.
In the advanced literacy segment for 7 out of 12 questions more than 75% of the
respondents gave correct answers. A large number of respondents were not aware of bond
prices as only 35% gave the ‘correct’ answer. For the question on comparison between stocks
& bonds and stocks & mutual funds, number of respondents who opted ‘don’t know’ is
higher than those who gave the wrong answer.
FINANCIAL BEHAVIOUR
In this section a set of 22 questions on a 5 point scale is used to study the financial
behaviour of the individual. A It is found that 25% of the respondents have low or negative
financial behaviour, 48.2% of the respondents show moderately positive financial behaviour
and 26.8% of them exhibit highly desirable behaviour.
Financial behaviour includes elements such as managing personal expenses, debt
management, long term planning, emergency and risk management and advice seeking.
Behaviour Factors Mean SD
Debt management 19.23 4.70
Personal financial management 22.63 4.61
Long term planning 24.07 7.04
Emergency and risk planning 10.92 2.87
Advice seeking 10.49 2.69
Overall behavior 87.33 19.16
Debt Management: It considers dimensions such as payment of bills like rent, insurance
premium, electricity, credit card etc. Short term loans taken in the past few years and
repayment of loan on time is also taken into account while evaluating debt management.
Personal financial management: It considers dimensions such as drafting a monthly budget,
buying things after careful consideration and identifying needs and wants separately.
Long term planning: It considers dimensions such as retirement planning, long term saving
and long term investments.
Emergency and risk planning: To exhibit positive financial behaviour one needs to set aside
emergency fund and be adequately covered by insurance. This factor analyses emergency
and risk planning behaviour of the respondents.
Advice seeking: It is considered important to be updated on financial information from
various sources like newspapers, TV, friends and financial consultants. This factor studies the
financial behaviour of the respondents with respect to advice seeking.
Financial literacy and financial behaviour
This section aims to study the relationship between the level of literacy (knowledge) and
financial behaviour. Pearson’s correlation test is used to determine the relationship between
the basic literacy, advanced literacy, overall literacy and financial behaviour. The results
show that the correlation coefficient between overall literacy and overall financial behaviour
is 0.717 which indicates 71.7% positive relationship between overall literacy and overall
behaviour and this is significant at 1% level. The correlation coefficient between advanced
literacy and behaviour indicates 66.6% positive relationship between the two variables and
correlation between basic literacy score and behaviour is 67.9% positive at 1% level. It is
clear from the above analysis that the level of literacy has a positive relationship with
financial behaviour.
CORRELATION
Debt
Management
Personal
Finance
Long Term
Planning
Emergency
and Risk
Advice
Seeking
Overall
Behaviour
Basic Knowledge .661(**) .629(**) .556(**) .575(**) .533(**) .679(**)
Advanced Knowledge .670(**) .588(**) .547(**) .565(**) .529(**) .666(**)
Overall Knowledge .712(**) .646(**) .588(**) .608(**) .567(**) .717(**)
** Correlation is significant at the 0.01 level (2-tailed).
MULTIPLE REGRESSION ANLAYSIS
Variables
Unstandardized
Coefficients SE of B
Standardized
Coefficients t Sig.
(Constant) 10.137 1.319 8.529 .000
Basic Literacy .312 .261 .387 1.964 .030
Advanced Literacy .493 .132 .422 3.726 .000
Dependent Variable: Financial Behaviour
These results are further validated by performing a regression analysis. The
dependent variable is financial behaviour and the independent variables are basic and
advanced literacy. Based on the standardized coefficient it can be inferred that advanced
literacy (0.422) is the most important factor influencing wellbeing followed by basic literacy
(0.387)
CONCLUSION AND DISCUSSION
This paper attempts to evaluate the level of financial literacy (knowledge) and bring out its
impact on financial wellbeing.
The major findings of this study are that most of the respondents (64%) have a
reasonable level of financial literacy. This is a positive sign. It is found that 80% of the
respondents are well aware of basic literacy concepts such as simple interest, inflation, credit
cards and savings interest rate. Only 56% of the respondents are well aware of advanced
literacy concepts such as long period returns, stock price fluctuations, risk / return on stocks /
bonds and diversification. Respondents are quite unaware with basic financial concept such
as compounding, time value of money and credit purchase and advanced financial concepts
such as functioning of the stock market, bond prices, mutual fund and loan financing.
Majority of the respondents have a moderately positive behaviour. In dimensions such as
debt management, personal finance, long term planning, emergency & risk and advice
seeking behaviour positive financial behaviour is observed.
With respect to the relationship between financial literacy and financial behaviour it may be
concluded that the result show a positive relationship between basic and advance financial
literacy and financial behaviour.
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