Consumer Financial Capability and

Financial Satisfaction

Jing Jian Xiao, Cheng Chen & Fuzhong

Chen

Social Indicators Research

An International and Interdisciplinary
Journal for Quality-of-Life Measurement

ISSN 0303-8300

Soc Indic Res

DOI 10.1007/s11205-013-0414-8

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 Author's personal copy
Soc Indic Res
DOI 10.1007/s11205-013-0414-8

Consumer Financial Capability and Financial

Satisfaction

Jing Jian Xiao • Cheng Chen • Fuzhong Chen

Accepted: 29 July 2013

Ó Springer Science+Business Media Dordrecht 2013

Abstract The purpose of this study was to examine associations between consumer
financial capability and financial satisfaction. Consumer financial capability was measured
by three sets of variables, perceived financial capability, financial literacy, and financial
behavior. Using data from the 2009 US State-by-State Survey of Financial Capability, the
results indicated the positive association between perceived financial capability and
financial satisfaction. The findings suggested that desirable financial behavior increases
while risky financial behavior decreases financial satisfaction. Subjective financial literacy
was also found to contribute positively to financial satisfaction. The positive association
between objective financial literacy and financial satisfaction was found in bivariate
analyses but not in multivariate analyses. The results imply that to enhance consumer
financial well-being, consumer financial education programs should emphasize action
taking and encourage consumers to avoid risky financial behavior, engage in desirable
financial behavior, and improve financial self-efficacy.

Keywords Financial satisfaction
Financial capability
Financial literacy

Financial behavior
Financial knowledge

1 Introduction

Finance is an important life domain in the modern society. Financial satisfaction serves as
an important mediating factor between income and subjective well-being (Diener and

Cheng Chen and Fuzhong Chen are Ph.D. students at Renmin University of China and visiting scholars at
URI in 2013.

J. J. Xiao (&)
Department of Human Development and Family Studies, University of Rhode Island,
Transition Center, 2 Lower College Road, Kingston, RI 02881, USA
e-mail: xiao@uri.edu

C. Chen
F. Chen
School of Business, Renmin University of China, Beijing 100872, People’s Republic of China

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Biswas-Diener 2002). Many researchers examine contributions of life domain satisfac-

tions, including financial satisfaction, to quality of life (Michalos 2008). Like other domain
satisfactions, financial satisfaction contributes to life satisfaction (Bowling and Windsor
2001; Xiao et al. 2009). Some researchers even consider financial satisfaction as an
indicator of overall welfare or well-being (Van Praag 2004). Previous research on financial
satisfaction has focused on potential effects of different income measures (Hsieh 2004),
relative incomes (Vera-Toscano et al. 2006), household characteristics (Seghieri et al.
2006), financial circumstances such as holdings of assets and debts (Hansen et al. 2008),
working industry sectors (Ferrer-i-Carbonell and Gërxhani 2011), and perceived income
adequacy (Grable et al. 2012). Unlike previous research, this study focused on potential
effects of consumer financial capability on financial satisfaction.
In recent years, a social movement of promoting financial capability among consumers
is emerging first in developed countries and then in developing countries. In the US, the
movement is actively promoted by the President’s Advisory Council on Financial Capa-
bility (PACFC 2013). Many governmental and nongovernmental organizations work
together to promote financial literacy and capability among American consumers (Fox and
Bartholomae 2008). In Europe, many countries have national initiatives to measure and
improve consumer financial capability (see a description in Taylor 2011). In 2006, the UK
launched the national survey on financial capability (Atkinson et al. 2006), which was the
first of this type worldwide. Later, many countries followed suit and conducted similar
surveys; such as Austria (Fessler et al. 2007), Ireland (O’Donnell and Keeney 2009), the
US (FINRAIEF 2009), and Canada (Arrowsmith and Pignal 2010). The financial capability
movement is motivated by current socioeconomic trends that the government-managed
economic safety net is weakening, which requires more individual responsibility for long-
term economic security such as retirement security. For example, in the US, the traditional
retirement income source is the Social Security system, but now it will be underfunded in
the coming years. Company-sponsored pension systems are also changing from mainly
defined benefit retirement plans to mainly defined contribution retirement plans (Campbell
et al. 2011; Hanna and Chen 2008). These trends suggest that ordinary consumers should
worry about their long-term economic security and start to manage their retirement savings
in the early years of their working careers.
Financial capability refers to people’s ability to manage and take control of their
finances (Taylor 2011). Financial capability can be demonstrated by a certain level of
financial literacy and performance of desirable financial behaviors. Therefore, financial
literacy and financial behavior are closely related to financial capability. In the emerging
literature of financial capability, researchers have mainly used two types of measures for
financial capability—a set of financial behavior measures (Atkinson et al. 2006) and a mix
of behavior and outcome measures (Taylor 2011). Unlike previous research, this study
used three types of financial capability measures: self-perceived financial capability,
financial literacy, and financial behavior. With this approach, whether different measures
have differential impacts on financial satisfaction can be examined. This approach is more
comprehensive than previous research in terms of financial capability measures.
This study contributes to the literature of financial satisfaction by exploring the role of
financial capability, an important policy variable that can be used to help improve con-
sumer abilities to live a better life. This study also contributes to the literature of financial
capability by using a unique set of variables to represent the important construct of
financial capability and comparing the relative effects of these factors. This can be
informative for consumer policy makers and educators to develop effective consumer
financial education programs to help improve consumer financial well-being.

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2 Previous Research and Hypotheses

2.1 Previous Research on Financial Satisfaction

Previous studies have examined the effects of income and other factors on financial sat-
isfaction. For instance, Hsieh (2004) used data from the General Social Surveys in the US
to examine the association between income and financial satisfaction of American elders
and found that different definitions of incomes had different effects on financial satisfac-
tion. Vera-Toscano et al. (2006), using data from a national survey in Spain, found that not
only income but also income expectation affected financial satisfaction. A study based on a
sample of American consumers found that perceived income adequacy was positively
associated with financial satisfaction (Grable et al. 2012). A Norwegian study of older
consumers found that financial circumstances, such as levels of assets and debts, affected
financial satisfaction (Hansen et al. 2008). A study conducted in a transitional economy,
Albania, revealed that workers in informal sectors were less financially satisfied than their
counterparts in formal sectors (Ferrer-i-Carbonell and Gërxhani 2011). Seghieri et al.
(2006), using data from nine European countries, found that the relationship between
income and financial satisfaction was positive up to a point and other variables, such as
differing household characteristics, explained 30 % of the variances regarding financial
satisfaction. Unlike existing studies that focused on effects of income, assets, debts, work,
and household characteristics, this study examined potential effects of consumer financial
capability on financial satisfaction. This fills out a research gap in the literature of financial
satisfaction.

2.2 Financial Capability and Financial Satisfaction

Financial satisfaction is considered as a subjective evaluation of financial status that is

closely related to subjective well-being (Vera-Toscano et al. 2006). If consumer financial
capability is an ability to effectively manage economic resources to achieve financial well-
being, the two factors should be correlated positively.
Financial capability is a relatively new concept emerged in the last decade. Several
researchers contributed to the conceptual development and empirical research of financial
capability. Kempson et al. (2005) identified three areas of financial capability that influence
behavior: (a) knowledge and understanding, (b) skills, and (c) confidence and attitudes. De
Meza et al. (2008) argued that variations in financial capability are more related to psy-
chological than informational differences. They listed several candidate biases that would
hinder the process in which sufficient information is transformed into goal-directed
behavior: mental accounting, information overload, status quo bias, procrastination, regret
and loss aversion.
The UK, on behalf of the Financial Services Authority (FSA), conducted the first ever
survey of financial capability among adults in 2006. This survey was used to describe the
distribution of financial capability and group differences of UK consumers (Atkinson et al.
2006). In that study, the researchers empirically identified five different domains of
financial capability: (1) managing money: making ends meet, i.e., having little problems
dealing with financial obligations; (2) managing money: keeping track, i.e., having an
overview of expenses; (3) planning ahead, i.e., being future oriented; (4) choosing prod-
ucts, i.e., deciding reasonably in financial matters; and (5) staying informed, i.e., seeking
information about financial products and the economy. All these measures were closely
related to desirable financial behaviors. Several other countries followed the similar

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definition of financial capability to conduct their own national surveys, such as Austria
(Fessler et al. 2007), Ireland (O’Donnell and Keeney 2009), the US (FINRAIEF 2009), and
Canada (Arrowsmith and Pignal 2010). This approach is considered the behavior oriented
approach.
Another approach to measure financial capability is to use a mix of behavior and
outcome variables. Taylor (2011) examined determinants of financial capability by using
data from the British Household Panel Survey. In his study, financial capability was
measured by both behavior and outcome variables. Specifically, seven variables were used
to form the financial capability measure (Taylor 2011, Table 1, p. 300): (1) ‘‘have had any
difficulties paying for your accommodation’’, (2) ‘‘have to borrow in order to meet housing
payments’’, (3) ‘‘have to make cutbacks in order to meet housing payments’’, (4) ‘‘found
yourself more than 2 months behind with your rent/mortgage’’, (5) ‘‘How well would you
say you yourself are managing financially these days’’, (6) ‘‘Would you say that you
yourself are better off, worse off or about the same financially than you were a year ago’’,
(7) ‘‘save any amount of your income’’. Among these variables, item 1, 2, 3, 4, and 6 can
be considered as measures of financial outcomes and item 5 and 7 as measures of financial
behaviors.
Unlike previous research, this study used separate measures to examine financial out-
come and financial capability. Financial satisfaction was used to measure financial out-
come. For financial capability, three sets of related variables, perceived financial
capability, financial literacy, and financial behavior were used. Perceived financial capa-
bility can be considered as financial self-efficacy. Self-efficacy is an important psycho-
logical factor that influences human behaviors. According to the author of this important
concept, ‘‘Perceived self-efficacy is concerned with judgments of how well one can exe-
cute courses of action required to deal with prospective situations’’ (Bandura 1982, p122).
Self-efficacy is incorporated to the theory of planned behavior as an important determinant
of human behavior, perceived control (Ajzen 1991). The concept is also used in the
transtheoretical model of behavior change (TTM) as an indicator measuring behavior
change progresses (Prochaska et al. 1992). In the domain of consumer finance, financial
self-efficacy is assumed as a proxy for the true financial capability that helps consumers
effectively manage their finances. Thus, the following hypothesis is proposed:
H1 Given economic resource and other control variables, perceived financial capability
is positively associated with financial satisfaction.

2.3 Financial Literacy and Financial Satisfaction

Financial literacy is an important component of financial capability. According to the

standard economic theory, consumers are fully informed and can make rational choices in
long-term financial planning to maximize their utilities over life cycle stages. However,
empirical research indicates that consumers are not fully informed and cannot make
rational choices even when the information is available (Campbell et al. 2011; De Meza
et al. 2008).
The low level of financial literacy was documented by many researchers in the US
(Bernheim 1998; Hilgert et al. 2003; Lusardi 2010; Mandell 2008) and other countries
(OECD 2005). Many financial education programs were developed to help improve con-
sumer financial literacy (Fox and Bartholomae 2008; PACFC 2013). An explicit
assumption among researchers is that financial literacy is positively associated with
financial capability, which in turn results in financial satisfaction.

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Table 1 Descriptive statistics of

Unweighted Weighted
categorical variables
(N = 26,900) (N = 26,681)
(N = 26,900)
Gender
Male (%) 53.1 51.2
Female 46.9 48.8
Age
18–34 29.0 30.4
35–64 56.6 50.5
65? 14.4 15.1
Ethnicity
White 75.9 68.9
Non-white 24.1 31.1
Martial status
Married 56.9 54.1
Not married 43.1 45.9
Having dependent children
Yes 39.9 38.7
No 60.1 61.3
Education
High school graduate or lower 25.8 31.8
Some college 35.2 42.2
College graduate or higher 39.0 26.0
Work status
Working 57.2 54.6
Not working 42.8 45.4
Income
\$15,000–$34,999 36.2 39.7
$35,000–$74,999 35.5 35.2
$75,000 or more 28.2 25.1
Experience income drop 39.2 40.0
Have investments 37.2 34.7
Have 401 k account 47.0 43.4
Own home 62.5 59.2
Have mortgage 42.7 39.2
Have auto loan 36.4 34.2
Have credit card 78.0 76.3

Financial literacy can be measured both objectively and subjectively. The subjective
measure refers to consumer self-assessment of their knowledge level regarding a life
domain. The objective measure usually is a knowledge quiz with questions regarding a
specific life domain. The two types of knowledge may have differential impacts on
behavior and capability (Ellen 1994; Raju et al. 1995). In this paper, financial literacy and
financial knowledge were used in an interchangeable way even though there are minor
differences between the two terms. Previous research showed that both types of knowledge

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have positive impacts on financial behavior but magnitudes of the effects are differential
(Robb and Woodyard 2011; Xiao et al. 2011). Thus, different types of financial knowledge
may also have differential impacts on financial satisfaction. Based on the above discussion,
the following are proposed:
H2 Given economic resource and other control variables, subjective financial knowledge
is positively associated with financial satisfaction.
H3 Given economic resource and other control variables, objective financial knowledge
is positively associated with financial satisfaction.

2.4 Financial Behavior and Financial Satisfaction

Financial behaviors refer to human behaviors relevant to money management (Xiao 2008).
In the context of financial capability, higher financial capability is associated with more
desirable financial behaviors and fewer risky financial behaviors. As mentioned before,
some researchers used desirable financial behaviors as proxy variables for financial
capability (e.g., Atkinson et al. 2006). Common financial behaviors include behaviors
related to spending, borrowing, and saving. Financial behaviors should demonstrate con-
sumer financial capability. Higher financial capability should be associated with desirable
or positive financial behaviors. Desirable financial behavior should result in financial well-
being. Financial behaviors that cause negative consequences and hurt financial well-being
are undesirable, labeled risky or negative behaviors. Previous research indicated financial
behaviors are associated with financial outcomes (Dew and Xiao 2011; Xiao et al. 2009).
Therefore, the following hypotheses are proposed:
H4 Given economic resource and other control variables, desirable financial behavior is
positively associated with financial satisfaction.
H5 Given economic resource and other control variables, risky financial behavior is
negatively associated with financial satisfaction.

3 Method

3.1 Data

The FINRA Investor Education Foundation in the US commissioned the 2009 National
Financial Capability Study that consisted of three linked surveys: (1) National Survey: A
nationally projectable telephone survey of 1,488 American adults; (2) State-by-State
Survey: A state-by-state online survey of approximately 28,146 American adults (roughly
500 per state, plus the District of Columbia); (3) Military Survey: An online survey of 800
military service members and spouses (FINRAIEF 2009). The surveys asked many
questions about the respondents’ financial satisfaction, financial capability, financial lit-
eracy, financial behavior, and demographic and socioeconomic characteristics. All data
sets and codebooks are available from the website of FINRA Investor Education Foun-
dation. In this study, data from the state-by-state survey was used. The dataset included a
weight variable that was used to produce descriptive statistics representative of the national
population. The weight variable was developed to match the Census distribution of the
following variables, age by gender, ethnicity, education and Census Division (For more
details, see: http://www.usfinancialcapability.org/downloads.php). For sample selection,

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only respondents who provided specific numeral answers for several scale questions, such
as financial satisfaction, financial capability, and subjective financial knowledge were
included, and respondents who checked ‘‘don’t know’’ or ‘‘prefer not to say’’ for these
questions were excluded. Final sample size used in this study was 26,900.

3.2 Variables

The dependent variable was financial satisfaction, measured by a 10-point scale.

Respondents were asked ‘‘Overall, thinking of your assets, debts and savings, how satisfied
are you with your current personal financial condition?’’ Responses ranged from 1 (not at
all satisfied) to 10 (extremely satisfied).
Independent variables included financial capability, financial literacy, financial behav-
ior, and control variables. Perceived financial capability was measured with a 7-point
scale. The question was worded, ‘‘How strongly do you agree or disagree with the fol-
lowing statement? I AM GOOD AT DEALING WITH DAY-TO-DAY FINANCIAL
MATTERS, SUCH AS CHECKING ACCOUNTS, CREDIT AND DEBIT CARDS, AND
TRACKING EXPENSES?’’ (uppercase words in the sentence were used in the original
survey). Responses ranged from 1 (strongly disagree) to 7 (strongly agree).
Financial literacy was measured by two sets of variables, subjective knowledge and
objective knowledge. Subjective knowledge was measured by one 7-point scale with the
question ‘‘On a scale from 1 to 7, where 1 means very low and 7 means very high, how
would you assess your overall financial knowledge?’’ Another set of variables measured
objective knowledge. In the survey, five financial literacy questions were about interest
rate, inflation, bond price, mortgage and stock, respectively. If the respondent provided a
correct answer, the variable was coded 1, 0 otherwise. An index of objective knowledge
was also created by counting the number of correct answers and the value of this variable
ranged from 0 to 5.
Financial behavior was measured by two sets of variables. One set was about desirable
financial behaviors, and the other was about risky financial behaviors. In the survey, 14
behavior variables were identified as desirable or positive financial behaviors: having an
emergency fund, an education fund, a 529 plan (a tax sheltering education saving plan),
ever calculated the retirement need, requested the credit report, requested the credit score,
compared professionals for financial advices, checked professionals for financial advices,
contributed to 401 k account (a tax-sheltering retirement saving plan), compared mortgage
offers, compared credit card offers, compared auto loan offers, rebalanced the 401 k
account, and kept up with economic and financial news. Except for the variable ‘‘keeping
up with the news’’, all the variables were recoded to binary variables, with 1 as having
performed the activity and 0 otherwise. For the economic and financial news question, the
survey asked if the respondents agree or disagree with the statement ‘‘I regularly keep up
with economic and financial news.’’ A 7-point scale was used ranging from 1 (strongly
disagree) to 7 (strongly agree). The variable was recoded as 1 if the answer was 5 or higher,
otherwise 0. Also, an index of positive financial behaviors was created by counting the
number of these behaviors, and the value of this index variable ranged from 0 to 14.
Nine risky or negative financial behavior variables in the survey were identified and
recoded to binary variables with 1 meaning having performed the behavior and 0 other-
wise. These variables were: having spent more than income, overdrawn from checking
account, taken a 401 k loan, kept a balance in credit card, made minimum credit card
payment, been late in credit card payment, used credit card over the limit, used credit
card’s cash advance, and been late in mortgage payment. Also, an index of risky financial

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behaviors was created by counting the number of these behaviors, with the value ranged
from 0 to 9.
Following the practices of previous research on financial satisfaction (Ferrer-i-Carbo-
nell and Gërxhani 2011; Grable et al. 2012; Hansen et al. 2008; Hsieh 2004; Seghieri et al.
2006; Vera-Toscano et al. 2006), several demographic and socioeconomic variables were
included as control variables. These were gender, age (three categories, 18–34, 35–64,
65?), race (white vs. nonwhite), whether being married, whether having dependent chil-
dren, education (three categories, high school graduate or lower, some college, college
graduate or higher), whether working, family income (three categories,\$15,000–$34,999,
$35,000–$74,999, $75,000 or more), whether experienced a large income drop in the past
12 months, and home owner status. The control variables also included whether having
investments, 401 k account, a mortgage, an auto loan, and credit card. These were binary
variables with 1 as holding the account and 0 otherwise. These account status variables
were used because several behavior variables in the study were relevant to these accounts.
Perceived math ability was also used as a control variable with a 7-point scale in which a
higher number indicates a stronger math ability. Previous research showed that cognitive
abilities including math abilities increase financial market participation (Cole and Shastry
2009) and this may affect financial satisfaction.

3.3 Data Analyses

The weight variable ‘‘wgt_n2’’ was developed by the data set owner to represent the
national population. Both unweighted and weighted samples were used for producing
descriptive statistics. The unweighted sample was used for bivariate and multivariate
analyses. For preliminary analyses, a series of bivariate analyses between financial capa-
bility variables and financial satisfaction were conducted. To test the hypotheses, a series
of multiple OLS regressions were conducted in which financial satisfaction was the
dependent variable and financial capability-related variables and control variables were
independent variables.

4 Results

4.1 Descriptive Statistics of the Sample

Table 1 presents descriptive statistics of both unweighted and weighted samples. Statistics
based on the weighted sample were representative of the national population. Among the
weighted sample, 51.2 % were males, 50.5 % aged 35–64, 68.9 % whites, 54.1 % married,
61.3 % not having dependent children, and 54.6 % were working. Also among the sample,
42.2 % had some college education, 39.7 % income under $35,000, and 40.0 % experi-
enced a large income drop in the last year. For asset-related characteristics, 34.7 % had
investments, 43.4 % had 401 k plans, and 59.2 % owned homes. For debt-related char-
acteristics, 39.2 % had mortgage loans, 34.2 % auto loans, and 76.3 % had credit card.
Table 2 presents descriptive statistics of continuous variables. Based on the weighted
sample, the average perceived financial satisfaction score was 4.51 on the 10-point scale.
For the following variables, measured by 7-point scales, the average score for perceived
financial capability was 5.61, subjective knowledge 5.00, and perceived math ability 5.59.
For financial literacy variables, the question about the interest rate had the highest
correct answer rate, 79 %. The correct answer rate for the question about mortgage was

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Table 2 Descriptive statistics of

Unweighted Weighted
continuous variables
(N = 26,900) (N = 26,681)
Mean (SD) Mean (SD)

Financial satisfaction (1–10) 4.55 (2.72) 4.51 (2.74)

Perceived math ability (1–7) 5.64 (1.67) 5.59 (1.69)
Financial capability (1–7) 5.65 (1.61) 5.61 (1.63)
Subjective knowledge (1–7) 5.00 (1.28) 5.00 (1.29)
Objective knowledge (0–5) 3.18 (1.38) 3.06 (1.41)
Positive behavior (0–14) 3.70 (2.60) 3.50 (2.55)
Negative behavior (0–9) 1.69 (1.88) 1.68 (1.88)
Financial literacy
Q1 about interest .81 (.39) .79 (.41)
Q2 about inflation .69 (.46) .66 (.47)
Q3 about bond .30 (.46) .28 (.45)
Q4 about mortgage .80 (.40) .77 (.42)
Q5 about stock .58 (.49) .55 (.50)
Positive behavior
Have emergency fund .37 (.48) .36 (.48)
Have education fund .13 (.34) .12 (.33)
Have 529 plan .04 (.21) .04 (.19)
Calculate retirement need .34 (.47) .31 (.46)
Request credit report .45 (.50) .43 (.50)
Request credit score .43 (.50) .42 (.49)
Compare professionals .26 (.44) .25 (.44)
Check professionals .08 (.27) .08 (.26)
Contribute to 401 k account .31 (.46) .28 (.45)
Compare mortgage offers .11 (.31) .10 (.30)
Compare credit card offers .25 (.43) .24 (.43)
Compare auto loan offers .16 (.37) .15 (.36)
Rebalance 401 k account .14 (.35) .13 (.33)
Read financial news .60 (.49) .60 (.49)
Negative behavior
Spend more than income .20 (.40) .20 (.40)
Overdraw checking account .24 (.43) .24 (.43)
Take 401 k loan .04 (.20) .04 (.19)
Keep balance in credit card .43 (.50) .42 (.49)
Make minimum credit card payment .30 (.46) .29 (.46)
Late in credit card payment .19 (.40) .19 (.39)
Use credit card over limit .11 (.32) .12 (.32)
Use credit card’s cash advance .09 (.29) .10 (.29)
Late in mortgage payment .08 (.28) .08 (.27)

77 %, inflation 66 % and stock 55 %. The question about bond price had the lowest rate of
correct answer, 28 %, which is similar to the findings using the national data set (FIN-
RAIEF 2009). The average score of the index of objective knowledge was 3.06 out of a
perfect score of 5.

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Table 2 also presents descriptive statistics of individual desirable and risky financial
behaviors. Some desirable financial behaviors were performed by few consumers. For
example, only 4 % of the sample had a 529 plan and 8 % checked professionals when they
sought financial advice. Some risky behaviors were performed by a significant number of
consumers: 42 % of the sample kept a balance in credit cards, and 29 % made only
minimum payment to credit card bills. The average score of desirable financial behavior
index was 3.50 out of a perfect score of 14. The average score of risky financial behavior
index was 1.68 out of a perfect score of 9.

4.2 Results of Bivariate Analyses

Table 3 presents correlations between financial satisfaction and financial capability-

related variables. Most correlations were expected except for the correlation between
positive and negative financial behaviors. The correlation was expected to be negative,
but the results showed a positive correlation, which implied that numbers of positive
and negative financial behaviors increase together. A series of one-way ANOVA
between financial satisfaction and individual literacy and behavior variables were
conducted, and the results were expected. The correct answer for a financial literacy
question was associated with a higher level of financial satisfaction. Positive financial
behaviors were associated with higher financial satisfaction while negative financial
behaviors were associated with lower financial satisfaction. These results are not shown
in this paper but available upon request.
Five charts were created to show how the dependent variable, financial satisfaction,
varied along with financial capability-related variables. Several interesting patterns are
shown. In Fig. 1, perceived financial capability shows a U shape. Respondents who
checked 3 on the financial capability scale scored the lowest in financial satisfaction, but
the trend was positive, in which the higher the financial capability, the higher the financial
satisfaction.
Figures 2 and 3 show the association between financial satisfaction and two knowledge
variables. The figures suggest that subjective knowledge seems more influential on
financial satisfaction than objective knowledge since the curve of subjective knowledge is
much steeper than that of objective knowledge.

Table 3 The correlations between financial satisfaction and financial capability-related variables
Financial Financial Subjective Objective Positive
satisfaction capability knowledge knowledge behavior

Financial .218
capability
Subjective .349 .385
knowledge
Objective .122 .194 .252
knowledge
Positive .293 .238 .353 .345
behavior
Negative -.312 -.171 -.103 -.031 .022
behavior
N = 26,900. The unweighted sample is used. All results are at the 1 % level of significance (2-tailed)

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 Table 4 Results of OLS regressions on financial satisfaction (N = 26,900)
Model 1 Model 2 Model 3 Model 4

Variable B b p B b p B b p B b p

(Constant) 3.558 .000 2.985 .000 1.865 .000 2.593 .000

Age under 35 .532 .089 .000 .549 .092 .000 .505 .084 .000 .460 .077 .000
Age over 64 .538 .069 .000 .512 .066 .000 .451 .058 .000 .407 .053 .000
Male .184 .034 .000 .235 .043 .000 .210 .039 .000 .158 .029 .000
White -.091 -.014 .008 -.105 -.016 .002 -.020 -.003 .555 -.087 -.014 .007
Married .237 .043 .000 .223 .041 .000 .202 .037 .000 .150 .027 .000
Have dependent children -.267 -.048 .000 -.242 -.044 .000 -.259 -.047 .000 -.184 -.033 .000
High school or lower .215 .035 .000 .210 .034 .000 .175 .028 .000 .165 .027 .000
College graduate or higher .144 .026 .000 .145 .026 .000 .153 .027 .000 .048 .009 .136
Working -.044 -.008 .194 -.027 -.005 .424 -.033 -.006 .301 .002 .000 .939
Income under $35,000 -.599 -.106 .000 -.585 -.103 .000 -.576 -.102 .000 -.521 -.092 .000
Consumer Financial Capability and Financial Satisfaction

Income over $74,999 .620 .103 .000 .616 .102 .000 .593 .098 .000 .380 .063 .000
Experience income drop -1.463 -.263 .000 -1.423 -.256 .000 -1.403 -.252 .000 -1.198 -.215 .000
Have investment .883 .157 .000 .847 .151 .000 .756 .134 .000 .499 .089 .000
Have 401 k plan -.034 -.006 .343 -.038 -.007 .289 .002 .000 .964 -.087 -.016 .010
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Own home .990 .176 .000 .949 .169 .000 .832 .148 .000 .645 .115 .000
Have mortgage -.723 -.132 .000 -.701 -.128 .000 -.646 -.118 .000 -.434 -.079 .000
Have auto loan -.434 -.077 .000 -.419 -.074 .000 -.406 -.072 .000 -.249 -.044 .000
Have credit card .476 .073 .000 .423 .065 .000 .358 .055 .000 .927 .141 .000
Math ability .073 .045 .000 -.035 -.022 .001 -.069 -.043 .000 -.046 -.028 .000
Financial capability .213 .127 .000 .118 .070 .000 .029 .017 .005
Subjective knowledge .485 .228 .000 .413 .194 .000
Objective knowledge -.148 -.076 .000 -.175 -.089 .000
Positive behavior .122 .117 .000

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 Table 4 continued

Model 1 Model 2 Model 3 Model 4

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Variable B b p B b p B b p B b p

Negative behavior -.368 -.255 .000

F 523 525 582 684
P .000 .000 .000 .000
R2 .270 .281 .323 .379
R2 change .270 .011 .042 .056
p of R2 change .000 .000 .000 .000
Reference categories are age 35–64, some college, and income of $35,000–$74,999. The unweighted sample is used
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J. J. Xiao et al.
 Author's personal copy
Consumer Financial Capability and Financial Satisfaction

Fig. 1 Financial Satisfaction by 6.0000

Financial Capability. Note

Financial Satisfaction
calculated by the authors with 5.21
5.0000
data from the 2009 US State-By- 4.56
State Survey of Financial 4.0000 3.95
Capability 3.81 3.79
3.45
3.24
3.0000

2.0000

1.0000

.0000
1.00 2.00 3.00 4.00 5.00 6.00 7.00
Financial Capability

Fig. 2 Financial Satisfaction 7.0000

by Subjective Financial
Financial Satisfaction

Knowledge. Note calculated 6.0000 5.92

by the authors with data 5.44
5.0000
from the 2009 US 4.55
State-By-State Survey 4.0000
of Financial Capability 3.68
3.0000 2.98
2.38
2.0000 2.13

1.0000

.0000
1.00 2.00 3.00 4.00 5.00 6.00 7.00
Subjective Financial Knowledge

6.0000
Financial Satisfaction

5.0000 5.24
4.69
4.20 4.19 4.19 4.31
4.0000

3.0000

2.0000

1.0000

.0000
.00 1.00 2.00 3.00 4.00 5.00
Objective Financial Knowledge

Fig. 3 Financial Satisfaction by Objective Financial Knowledge. Note calculated by the authors with data
from the 2009 US State-By-State Survey of Financial Capability

Figures 4 and 5 demonstrate patterns of financial satisfaction and two behavior vari-
ables. They show clear patterns suggesting that positive financial behaviors increased
financial satisfaction and negative behaviors decreased it, even though the high ends of the
curves reversed the trend a little. The reversing trend may be caused by small sizes of the

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9.0000
8.0000 8.05

Financial Satisfaction
7.53
7.0000 7.00
6.0000 6.176.446.47
5.81
5.49
5.0000 5.18
4.714.99
4.0000 4.204.32
3.72
3.0000 3.19
2.0000
1.0000
.0000
.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
Desirable Financial Behavior

Fig. 4 Financial Satisfaction by Positive Financial Behavior. Note calculated by the authors with data from
the 2009 US State-By-State Survey of Financial Capability

Fig. 5 Financial Satisfaction by 6.0000

5.54
Financial Satisfaction

Negative Financial Behavior.

Note calculated by the authors 5.0000
4.62
with data from the 2009 US 4.20
4.0000 3.85 3.82
State-By-State Survey of 3.49
Financial Capability 3.0000 3.09
2.74 2.81 2.61
2.0000

1.0000

.0000
.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
Negative Financial Behavior

subgroups. For positive financial behaviors, only 1 observation scored 14, and for negative
financial behaviors, only 22 observations scored 9.

4.3 Results of Multiple OLS Regressions

A series of multiple OLS linear regressions on financial satisfaction were conducted (Table 4).
In model 1, only control variables were entered. In model 2, perceived financial capability
was added. In model 3, two financial knowledge variables were entered. In model 4, two
financial behavior variables were entered. Most results were expected. In model 1, all
control variables showed significant effects except for working status and having a 401 k
plan. These variables explained 27 % of the variance. When perceived financial capability
was entered in model 2, the R2 change, .011, was significant. The financial capability
variable showed a significant positive effect with the estimated coefficient of .213, con-
sistent with H1. In model 3, when the two financial knowledge variables were entered, the
R2 change, .042, was again significant. The effect of subjective knowledge was expected,
consistent with H2 but the effect of objective knowledge showed a negative sign, against
H3. Additional analyses were conducted to explore possible explanations (see more dis-
cussion later in this paper). In model 4, when the two financial behavior variables were
entered, the R2 change was .056, significant again. The effects of both financial behavior

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Consumer Financial Capability and Financial Satisfaction

variables were expected as hypothesized in H4 and H5. Comparing standardized coeffi-

cient estimates of the two behavior variables, the effect magnitude of risky behavior index
was twice greater than that of desirable behavior index (-.255 vs. .117), implying risky
behaviors may have greater impacts on financial satisfaction than those of desirable
behaviors, controlling for other factors. After comparing relative impacts (standardized
coefficient estimates) of five financial capability variables on financial satisfaction, the
effect magnitude of risky financial behavior index was found to be the largest and that
of perceived financial capability was the smallest. To conduct a robust test, as suggested
by a reviewer, a smaller random sample (4 % of the main sample, N = 1144) was
selected to repeat the regressions and similar results were obtained (results available upon
request).
To explore why objective knowledge showed a negative effect, additional analyses were
conducted by first entering three variables in the regression model: financial capability,
subjective knowledge, and objective knowledge; all three variables showed positive effects
on financial satisfaction. Then other variables were added, one by one, to see which
variable caused the change in the direction of objective knowledge variable. After a series
of regressions, when several variables, such as income, education, index of positive
behavior, having investments, home ownership, and credit card ownership, were entered in
the model separately in each regression, the effect of objective knowledge changed its
positive effect to a negative one. These findings may be related to the connoisseur effect
(Michalos 2008) in well-being studies, which states that people who know more are less
satisfied. This unexpected finding needs further research to clarify the mechanism between
these variables.

5 Discussion

In this study, associations between consumer financial capability and financial satisfaction
were examined with a large dataset collected in all states in the US. Financial capability
was measured by three sets of variables: perceived financial capability, financial knowl-
edge, and financial behavior. Results indicate that consumer perceived financial capability
was positively associated with financial satisfaction. Desirable financial behaviors
increased financial satisfaction while risky financial behaviors decreased it. Subjective
financial knowledge enhanced financial satisfaction. Objective knowledge was positively
associated financial satisfaction in bivariate analyses but the positive association did not
show in the multiple regression models when other financial capability and control vari-
ables were included. The results also suggest that risky financial behavior, desirable
financial behavior and subjective financial knowledge have stronger effects on financial
satisfaction than perceived financial capability. This study fills a research gap in the
literature of financial satisfaction by examining potential effects of consumer financial
capability on financial satisfaction.
Consumer financial capability has drawn the attention of consumer policy makers and
educators in recent years in many countries. This study is the first to examine its associ-
ation with financial satisfaction. Conceptually, consumer financial capability suggests
consumers utilize relevant financial knowledge and perform desirable consumer behaviors
to enhance and improve their financial well-being. In this context, financial literacy and
financial behavior are two important components of financial capability. Previous empir-
ical research on this topic has used two primary approaches, the behavior oriented
approach that uses desirable financial behaviors to represent financial capability (Atkinson

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et al. 2006) and the mix of behavior and outcome approach (Taylor 2011) that utilizes both
behavior and outcome variables to measure financial capability. Unlike previous research,
this study used separate measures for behavior and outcome variables. The outcome
variable was measured by financial satisfaction. Financial capability was measured by
three sets of variables: perceived financial capability, financial literacy, and financial
behavior. In addition, this study used two types of financial literacy variables and two types
of financial behavior variables. All of these are new contributions to the literature of
financial capability. Perceived financial capability can be considered a proxy for real
financial capability, which can be considered as financial self-efficacy. This is derived from
a major psychological concept of self-efficacy (a measure of one’s own ability to complete
tasks and reach goals; Bandura 1982). This study presents direct evidence that perceived
financial capability is positively associated with financial satisfaction even though its effect
strength is weaker than two financial behavior variables and the subjective knowledge
variable.
Results of this study document the positive association of desirable financial behavior
and negative association of risky financial behavior with financial satisfaction, which is in
line with previous research (Xiao et al. 2009). Based on the results, the effect magnitude of
risky behavior is twice that of desirable behavior, which suggests engaging in risky
financial behavior has greater costs than benefits brought by engaging in desirable financial
behavior. To improve financial well-being, avoiding risky behaviors is more important
compared to engaging in positive financial behavior. These findings have implications for
consumer financial education. Effective financial education programs can emphasize costs
of risky financial behaviors to make consumers aware of negative consequences of these
behaviors and then consciously avert them.
The findings of this study also show that subjective financial knowledge is positively
associated with financial satisfaction. Consumers who perceive themselves as having higher
financial knowledge rate themselves higher in financial satisfaction. The effect of objective
knowledge is complicated. Bivariate analyses showed that all measures of objective financial
knowledge were positively associated with financial satisfaction. However, when control
variables and other financial capability variables were entered in the model, the positive
effect of objective financial knowledge became negative. Additional analyses showed that
for the whole sample, the majority of the respondents had a high level of objective knowledge
but a low level of financial satisfaction, which may be the reason for the change in direction.
The actual mechanism of the association between the two variables needs further research to
explore. For consumer educators, financial education programs may need to focus more on
raising perceived level of financial knowledge. Previous research shows that objective and
subjective knowledge may have differential effects on financial behaviors (Robb and
Woodyard 2011; Xiao et al. 2011). This study indicates that two types of knowledge vari-
ables may also have differential effects on financial satisfaction.
In this study, financial satisfaction is used to measure financial well-being of consumers.
It was hypothesized that consumer financial capability contributes to financial well-being.
All financial capability variables except for objective financial knowledge confirmed the
hypotheses that higher financial capability is associated with higher financial satisfaction.
To help consumers improve and enhance their financial well-being, consumer educators
could develop education programs to emphasize avoiding risky financial behaviors and
engaging in desirable financial behaviors. As suggested by consumer economics
researchers and experts (PACFC 2013; Xiao et al. 2004), effective financial education
programs should not only deliver knowledge but also encourage action. Financial educa-
tion programs should also focus on improving consumer financial capability by increasing

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consumer confidence in money management and giving consumers needed education when
they need them. Consumer educators also need to teach consumers how to best use relevant
financial information to achieve their long-term financial well-being.
Limitations of this study should be acknowledged. First, the dataset is a cross-sectional
one. To investigate the causality between financial capability and financial satisfaction,
longitudinal data sets should be used. Second, financial capability was measured by three
variables: perceived financial capability, financial literacy, and financial behavior. It is
unclear how much perceived financial capability represents real financial capability. Also
there may be other variables that can be used to measure financial capability in a more
direct way. Third, this study used data from only the US. Data from other developed and
developing countries can be used to repeat the study to enhance understanding of this
important topic in various socioeconomic contexts. These limitations can be considered as
research directions for the future.

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