CHAPTER – III

THEORETICAL FRAMEWORK OF
FINANCIAL LITERACY AND
FINANCIAL WELL-BEING
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CHAPTER - III

THEORETICAL FRAMEWORK OF FINANCIAL LITERACY

AND FINANCIAL WELL-BEING

3.1 Introduction

Financial literacy and Financial Education have gained prominent positions

in the global policy agenda. It is now universally recognized as a core component
for the financial empowerment of an individual and for the overall stability of the
financial system (Adele Atkinson and Floor Messy, OECD 2017). Individuals are
faced with the challenge to make well informed financial choices in an era where the
markets are sophisticated and risky. In recent years the concept of financial literacy
has assumed great importance as financial markets have become more complex, and
one has to successfully navigate through it in order to achieve financial stability
(Pallavi Seth et al). Financial literacy ventures beyond providing financial
information and advice. The focus on financial literacy is primarily on the
individual, who generally would have limited resources and skills to comprehend the
complexities of financial dealing with financial intermediaries on a day to day basis.
(RBI Publication Draft Report). In order to enjoy a successful financial life, one
requires a high level of know-how and stamina. Financial literacy would serve as an
excellent remedy to achieve this state of financial bliss. Financial literary has
become pertinent for both developed and developing countries. In a country like
India, which has a diverse social and economic profile financial literacy becomes
particularly relevant (Pallavi Seth et al). Financial literacy enables an individual to
plan ahead of time and helps to deal with unexpected financial emergencies in one’s
life cycle.

Individuals have a responsibility and need to understand basic economic

concepts, market principles, instruments, organizations and regulations. Financial
literacy will equip a person with at least the basic required knowledge to solve the
complexity of the financial system. Every individual in his life time is required to
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earn for their livelihood, save money, make investments, provide for the family,
keep track of funds through budgeting, set financial goals, create a portfolio and
save for retirement. No human is exempted from this financial life cycle, and the
most effective way to successfully wade through this continuous process is by
acquiring substantial financial literacy.

However if a person remains financially illiterate, it would result in adverse

effects not only to the individual, but also for the society and the economy at large.

Figure 3.1 Life Course – Need for Financial Literacy

3.2 Financial Literacy – Definitions

Different researchers and organizations have defined financial literacy in

many different ways. Though research in financial literacy has gained prominence
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over the years, there is only little consistency in the way it is defined, as several
authors address the topic differently, assigning different flavours to it (Hung, Parker
& Yoong 2009).

The following table provides an overview of various definitions given by

different authors.

Table 3.1 : Conceptual definitions of financial literacy

Source Conceptual Definition

FINRA (2003) “The understanding ordinary investors have of market
principles, instruments, organizations and regulations”
Moore (2003) “Individuals are considered financially literate if they
are competent and can demonstrate they have used
knowledge they have learned. Financial literacy cannot
be measured directly so proxies must be used. Literacy
is obtained through practical experience and active
integration of knowledge. As people become more
sophisticated and it is conjectured that this may also
mean that an individual may be more competent”.
National council of “Familiarity with basic economic principles,
Economic Education knowledge about the U.S. economy, and understanding
(NCEED) (2005) of some key economic terms”.
Mandell (2007) “The ability to evaluate the new and complex financial
instruments and make informed judgments in both
choice of instruments and extent of use that would be
in their own best long-run interests”
Lusardi and Mitehell (Familiarity) with “the most basic economic concepts
(2007) needed to make sensible saving and investment
decisions”
Lusardi and Tufano Focus on debt literacy, a component of financial
(2008) literacy, defining it as “the ability to make simple
decisions regarding debt contracts, in particular how
one applies basic knowledge about interest
compounding, measured in the context of everyday
financial choices”
ANZ Bank (2008), drawn “The ability to make informed judgment and to take
from Schagen (2007) effective decisions regarding the use and management
of money”
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Source Conceptual Definition

Lusardi (2008a, 2008b) “Knowledge of basic financial concepts, such as the
working of interest compounding, the difference
between nominal and real values, and the basics of risk
diversification”
The OECD INFE (2011) “A combination of awareness, knowledge, skill,
attitude and behaviour necessary to make sound
financial decisions and ultimately achieve individual
financial wellbeing.”
National Financial “Developed by the Processing the skills and
Educators council. knowledge on financial matters to confidently take
effective action that best fulfils an individual’s
personal, family and global community goals.”
Kin et al, 2010 “basic knowledge necessary for people to survive in
the modern society”
Bowen, 2002 “capability to understand key financial concepts
necessary to function in the normal American society”
Emmons, 2005 “ability to manage the situation of cash and payment,
knowledge about opening a saving account and
obtaining credit, basic understanding of health and life
insurance, ability to compare offers and plan for future
financial needs”
jumpstart Coalition, 2007, “ability to use knowledge and manage financial
cited by Huston, 2010 resources for a good financial well-being throughout
the whole life”
ANZ,2005 “ability to make informed judgment and effectively
take decision concerning money”
Remund, 2010 “measure of the degree to which a person understands
key financial concepts and has the necessary ability
and confidence to manage own finances through short
term decisions and long term planning, taking into
consideration the economic events and changing
conditions”
Table source: Angela A Hung, Andrew M Parker, Joanne K Yoong, (2009).
Defining and measuring financial literacy RAND labour and population working
paper series.
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On summarizing the above definitions, it can be said that knowledge on

financial matters emerges as the most common variable in measuring financial
literacy. Most researchers opine that by analyzing the financial knowledge and skill
of a person the level of financial literacy can be estimated. The focus is primarily on
managing money, while few authors include the element of confidence and
diversification in measuring financial literacy. However the OECD defines financial
literacy by taking into account various dimensions such as financial knowledge,
financial attitude and financial behaviour. This definition encompasses all concepts
put forth by various others researchers with regard to financial literacy, hence the
OECD definition can be considered more in depth a concept in understanding
financial literacy. Therefore the present study adopts the definition given by OECD
INFE and the research is structured based on this operational definition.

Figure : 3.2 Financial Literacy Dimensions

3.3 Financial Knowledge

Financial knowledge emerges as the most common and most notable

dimension of financial literacy. Huston (2010) and Potrich, Vieira and Kirch (2014)
found that close to 47%, i.e., almost half of the studies on financial literacy used
‘financial knowledge’ and ‘financial literacy’ inter-changeably. Huston (2010)
proposed that financial literacy could be conceptualized as having two dimensions:
understanding personal financial knowledge (theory) and using personal finance
knowledge (application) (Sabri, Mohamed Fazli Fazli, 2011). However financial
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knowledge is an integral component of financial literacy, but not identical to

financial literacy (Huston, 2010). According to Chaulagain (2015) financial
knowledge is the first dimension in financial literacy and financial education
contributes a great deal to enhance financial knowledge.

Most problems remain unsolved due to the lack of knowledge to tackle it.
Pamarthy (2012) opines that deprivation of financial knowledge is the cause for
most personal financial problems. Sally Bagwell et al (2014) defines knowledge as
‘awareness required to effectively access financial markets and information sources,
and to make good financial decisions appropriate to an individual’s situation. It
includes understanding financial products, concepts and services as well as people’s
understanding of their own financial situation”. Barbara Kiviat and Jonathan
Morduch (2012) classify knowledge into three cagetories :

(i) Explicit knowledge means collection of existing financial

information, that can be accessed and articulated.

(ii) Heuristic knowledge is derived from experiences undergone

individually and collectively

(iii) Soft knowledge describes social understanding and wherewithal.

Acquiring financial knowledge will enable individuals to understand

financial concepts and solve simple numerical problems that involve concepts such
as simple interest, compounding, interest rates, loan types, inflation etc. Tasks such
as interpreting bank statements or understanding the breakup of a bill will become
simple if a person has basic financial knowledge.

Comprehending various financial products and services would be relatively

easy for those who have adequate financial knowledge. Important decisions like
savings, investments, pensions, mortgages, tackling debt etc. can be less confusing
and more accessible due to financial knowledge. One important reason a person
needs to have financial knowledge is to be able to protect themselves from financial
frauds and keep their money safe.
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Financial knowledge also results in understanding of one’s own financial

situation. In order to plan for the future and have a balanced financial situation, a
person needs to first identify their financial difficulties and make an estimate of their
incomes and outflows. Future life events and their implications need to be charted
out e.g., getting married, starting a family, having a child, planning for retirement,
saving for a holiday, having a back up for health emergencies etc. On doing so, one
can update himself on the required financial knowledge relevant at that particular
phase of life and successfully balance his financial position.

Hung, Parker and Yoong (2009) express that financial knowledge includes
perceived knowledge, actual knowledge and financial skill.

Financial knowledge can enhance financial skill. Skills such as applying

numeracy, problem solving, communication of the financial problem, digital literacy
etc. can be strengthened due to financial knowledge. Hogarth and Hilgert (2002) and
Hilgert, Hogarth, and Beverly (2003) researched and found that individuals who are
financially knowledgeable are more likely to behave in financially responsible ways.
Financial knowledge acts as a base work to contribute to positive financial attitude
and behaviour. Literature on psychology suggests that knowledge acts as a
moderator between attitude and behaviour (Eagly and Chaiken 1993).

Investing in financial knowledge in essential as it can result in cost effective

financial planning and behaviour and help shape complex financial situations into
manageable ones. (Annamaria Lusardi and Olivia S.Mitchell 2010).

Financial knowledge could lead to positive financial behaviour. Lusardi and

Mitchell (2007a, 2007b, 2007c, 2008, 2009, 2011) after extensive research suggest
that ability to understand financial concepts i.e. those who have basic financial
knowledge are known to plan for retirement and are more likely to plan and to
succeed in their planning in financial matters and accumulate more wealth.
Bernheim and Garrett (2003) show that those individuals who receive financial
education in school or work place save more than individuals who are not exposed
to such education.
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Annamaria Lusardi and Olivia S.Mitchell (2005) designed the questions for
financial knowledge for the US HRS survey based or four key principles: simplicity,
relevance, brevity and capacity to differentiate.

A high level of financial knowledge combined with good financial skills,

lowers the cost of gathering and processing information and encourages stock
market investments.

Financial education helps reducing dispersion in wealth; thereby helping to

reduce income inequality (Cagetti and De Nardi 2006).

Calvet et al (2007) and Van Rooji et al (2007) found that individuals with
low levels of financial knowledge do not invest in risky assets. This in turn could
lead to under diversification resulting in lower long term returns.

Shim, Barber, Card, Xiao and Scrido (2009) argue that financial knowledge
significantly contributes to financial behaviour of a person. Lusardi (2012) states
that numeracy and financial knowledge are important life time skills of an
individual that are closely related to financial decision making and financial
behaviour. Financial knowledge helps in financial skill building, Beverly, Hogarth
and Hilgert (2003). Financial knowledge and skill together can result in desirable
financial attitude and behaviour.

Lusardi and Mitchell (2006), Van Rooji, Lusardi, and Alessie (2007) used
two sets of questions to test for economic knowledge. The first set of questions
records a person’s ability to handle basic financial literacy concepts such as
numeracy or simple interest, compound interest, inflation, time value of money and
money illusion. The second set of questions is intended to capture sophisticated
financial literacy - in other words advanced financial literacy concepts. The
questions seek to measure knowledge on concepts such as stock market functioning,
knowledge of mutual funds, interest rate calculations, bond pricings, long period
returns, comparison between stocks and mutual funds, stocks and bonds, volatility,
and risk diversification.
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Alkinson. A and F. Messy (2012) used 8 questions on concepts like division,

time value of money, interest paid on a loan, calculation of interest plus principal,
compound interest, risk return, inflation and diversification in their (OECD 2012)
and (G20 OECD/INFE 2017) surveys.

In addition to these concepts questions on credit purchased, purchasing

power, and usage of credit card were used by Sabri, Mohamed Fazli Fazli (2011) to
assess the financial knowledge of an individual. (Gallery et al 2011) developed three
domains of financial literacy namely general financial matters such as understanding
compounding, general investment matters such as understanding diversification, and
specific financial methods such as understanding relative risk and returns on
investment options. Mugenda (1990), used numerous variables such as cash
management, asset growth, retirement and estate planning to measure financial
knowledge. The financial knowledge and behaviour survey (2013) supported by
ANZ in New Zealand investigated and found that individuals who scored high on
four knowledge factors such as numeracy, understanding budgeting, saving and
planning, understanding minimizing costs and home loans, were likely to exhibit
positive financial behaviours.

The present study takes into account a vast majority of financial concepts
used to measure the financial knowledge of individuals based on the extensive
review of literature. The study uses 20 statements on concepts such as simple
interest, compounding, inflation , time value of money, stocks, bonds, mutual funds,
credit cards, loan financing , diversification and interest rate comparison to evaluate
the basic and advanced financial knowledge of the respondents.

3.4 Self assessment of financial knowledge & financial knowledge over /

under Confidence

Financial literacy has been defined and measured in many ways. To take a
healthy financial decision an individual should have the required financial
knowledge, the confidence and the ability to execute their knowledge
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(Nguyen T et al 2017). Most researchers measure financial literacy by

administering a test to respondents to evaluate the individual’s knowledge on
various financial concepts like interest calculation, compounding, time value of
money, bonds stocks, and diversification. (Pudlo & Gavurova 2012). However many
economists and researchers prefer to use subjective measures to study financial
behaviour such as perceptive of life satisfaction, and well-being (Kahneman &
Krueger 2006) risk atttiude (Leonord 2012) .

In order to arrive at the subjective financial knowledge measure, individuals

are asked to rate themselves on a scale of one to five with one being not
knowledgeable and five being very knowledgeable about how they perceive
themselves to be knowledgeable on financial matters. This self assessment score
given by the individual for himself is considered as the subjective measure for
financial knowledge or financial literacy. Relationship between perceived financial
knowledge or subjective financial knowledge and financial behaviour was found by
Glova and Gavarova 2012). Van Rooji et al 2012 also found that those with good
levels of perceived financial knowledge were more likely to plan and save for
retirement. Henager & Mauldin (2015) found that perceived financial knowledge is
a story indicator of savings behaviour similar to Robb & Woodyard 2011.

Therefore in a study of assessing financial literacy it is essential to consider

how respondents feel about their financial knowledge. People may not be able to
judge their actual financial knowledge and base their decision on how much they
think they know. If they think they know more than they actually do, it means that
the person is exhibiting a tendency towards overconfidence. (Marc M. Kramer
2014).

Over confidence reflects the tendency to overestimate one’s ability to

successfully perform a given task. It is a trait found commonly among people in all
professions’ and areas. While confidence is a beneficial trait, over confidence is
often detrimental. Confidence suggests a realistic trust in ones abilities, while
overconfidence implies an overly optimistic assessment of one’s knowledge.
Overconfidence is considered as a behavioural bias in finance.
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The mis-calibration type of overconfidence means, an overestimation of the

precision of one’s own knowledge. This means that people set too narrow
confidence intervals for knowledge questions. (Marc. M. Kramer 2014).

To assess the financial knowledge over confidence in a study on financial

literacy, the researcher has to regress the measure of self assessed literacy
(Subjective measure) on the measured financial knowledge index (Objective
measure).The residual if any is taken as the over confidence measure. In simple
terms if an individual has rated himself high while self assessing his level of
financial knowledge, but however has scored less in his assessment level, on
evaluation of his actual knowledge using a test method, such a person is termed as
‘Overconfident’. On the other hand if the person has rated himself in a modest way,
but actually scored high on evaluation of his actual test score, he is termed ‘under
confident’.

Both over confidence and under confidence impact financial decision

making. Guiso and Japelli 2006 found that men were less willing to delegate their
portfolio decisions, which relates to higher level of confidence in financial matters.
Marc.M Kramer (2014) found that higher degree of over confidence relates to lower
demand for advice. Tian Xia, Z.Wang and K.Li (2014) argued that over confidence
was positively correlated with stock market participation and under confidence was
negatively correlated with stock market participation. M.Gentile, N.Linciano and
P.Soccorso (2016) found the demand for financial advice to be positively correlated
to financial knowledge and negatively correlated to overconfidence. (Van
Gaudekker 2014) opined that over confident individuals were most at risk to make
costly mistakes. (Barber & Odean 2000) show that males exhibit investment
behaviour that can be attributed to over confidence.

Guiso and Japelli (2006) suggest that over confident investors are more
likely to collect financial information directly as they believe it would be of better
quality than to rely on financial advisors, banks or brokers. As a result it was found
that overconfident investors performed less. (Von Gaudekker 2014) found
overconfident investors, were neither financially literate nor availed financial advice
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and incurred losses from insufficient diversification. Therefore it can be said that,
financial confidence, perceived or subjective financial knowledge and
overconfidence plays a significant role in financial decisions and financial literacy
assessment.

The present study also makes an attempt to measure over confidence/under

confidence of the respondents. The study also analyses if various demographic
variables are associated with an individual’s financial knowledge over
confidence/under confidence.

3.5 Financial Attitude

Attitudes and preferences are considered as important elements of financial

literacy. Being disciplined is important in all aspects of life. A disciplined attitude
will go a long way in preventing complications that may arise in a person’s life.
Sally Bagwell et al (2014) defines attitude as “an expression underlying beliefs that
may influence behaviour intention. They include financial attitudes as well as more
general attitudes that a person has about himself”

Ramesh Prasad, Chaulgain (2017) states that financial attitude is contextual

dynamic and ever-changing. He opines that attitude may be positive or negative,
however sometimes a person may also be indifferent. Carpena, Cole, Shapiro and
Zia (2011) opine that financial attitude is the perspective towards financial market
and benefits.

Sally Bagwell et al (2014) opine that “a healthy attitude to receiving money

advice includes an element of independence, and the ability to treat advice
critically.” Louw, Fouche and Oberhdzer (2013) argue that financial knowledge
develops positive financial attitude. In turn good financial knowledge combined
with positive attitude can lead to good financial behaviour and ultimately result in
financial well-being of an individual. On the other hand Atkinson. A and F. Messy
(2012) argue that negative financial attitude would result in undesirable financial
behaviour and may inversely contribute to financial well-being. Mohamed .E
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Ebrahim and Fatima R. Alquaydi (2013) opine that financial attitude refers to
personal temperament towards financial matters.

Financial attitudes shape the way people spend, save and use money
(Furnham 1984). Financial attitude may be considered as a psychological tendency a
person may possess while assessing various financial management practices
(Parrotta and Johnson 1998). Financial attitudes refer to One’s beliefs and values
related to various personal financial concepts, such as whether one believes it is
important to save money (Gan Chowa 2012). It can be said that financial attitude is
about a thinking style for e.g., how does a person feel about investing in a stock
market, does it interest him, excite him, scare him, what does a person think about
their personal financial situation? Does it give them a sense of security? Or does it
get them nervous, etc.,. People may have different attitudes towards money, about
the future, about risk taking about receiving money related advice and guidance.
They tend to have various financial aspirations and goals, and other psychological
factors such as self confidence, self control, perseverance, time orientation,
impulsivity, locus of control influence the attitude of an individual. To understand
the attitude of a person, or his thought process towards spending, saving and
borrowing is to be examined and analyzed. Diener and Seligman (2004) opine that
money has four symbolic values, which are status, respect, freedom and luxury. Few
studies have found a positive relationship between these values and well-being.

Attitudes towards money could reflect the kind of emotional relationship

people can have with money, willingness to talk to people about money, and a state
of happiness one may enjoy with what money can buy. A survey conducted by the
New Zealand National strategy for financial literacy found that attitude towards
money can alter adverse financial outcomes after adjusting for socio economic
status. Attitudes to the future would reflect how a person identifies the importance of
his or her future financial need and balance the current financial need while planning
for future needs. Risk perception is yet another attitude that influences financial
decisions. (Guiso & Paiella 2008, Haushofer and Fehr 2014) proposed that there
exists a relationship between risk attitudes and house hold wealth. One recent study
by Fidelity investments found that over 70% of Gen Y workers are very concerned
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about their finances and stay updated on their cash balances. A conservative and
reflective mind set is now evident among the Gen Y according to the survey.

Substantial literature based on theory of planned behaviour supports the

notion that attitudes predict behaviour (Ajzen and Fishbein 2005). The OECD 2017
survey by report compiled by A. Atkinson and F. Messy uses three attitude
statements to gauge respondents attitudes towards money and planning for future.
The average response to these statements is taken as an overall indication of attitude.
If a person has a positive attitude towards saving, they will be more likely to execute
this thought into behaviour. Similarly if one focuses on short term wants they may
not reserve plans for long term financial commitments, implying attitude would
reflect in a person’s behaviour.

After a careful consideration of various studies and concepts used by several

researchers to measures the financial attitude, the present study takes into account a
composition of various such measures to comment on the financial attitudes of the
individuals. The study throws light on dimensions such as belief in planning,
propensity to save and confidence in personal financial management, which
highlight attitude towards long term events. These are essential in today’s world to
wade through the complex financial system.

3.6 Financial Behaviour

Financial behaviour can be defined as any human behaviour that is relevant

to actual financial decision making and execution of the decision making e.g.,
household budgeting or cash management or saving etc. It is becoming increasingly
important for people to demonstrate responsible financial behaviour as there is an
ever increasing need for people to make financial decisions. The world is
digitalizing at a fast pace and money problems are or the rise.

Financial behaviour is influenced by a host of psychological factors like

greed, optimism, fear, herd instinct, overconfidence and previous experience. (Roza
Hazli Zakaria 2012) opine that responsible financial behaviour adds up to a strong
financial position, and financial satisfaction. Behaviour is a manifestation of
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attitudes which are exhibited and can be observed by oneself and others. Lusardi,
Mitchell and Curto (2010) argue that the basic implication of financial literacy is to
change financial behaviour of a person.

Sally Bagwell et al (2014) describe financially capable behaviour as “the

financial or monetary behaviour that a person exhibits at a particular point in time.
This behaviour is largely an expression of financial capability, but is constrained or
enabled by the interaction between a person’s financial means and pressures. The
financial behaviour a person exhibits can in turn, increase or decrease their financial
means, and exacerbate or mitigate the impact of their financial pressures”.

Financial behaviour can consist of different domains. Elaine Kempson,

Andrea Finney and Christian Poppe (2017) analysed financial behaviour using
variables like budgeting, planning spending, monitoring finances, not overspending,
living within ones means, making sure that unexpected expenses could be covered,
saving, making informed financial decisions, choosing appropriate financial
products. Behavioural economists argue that certain psychological factors can be
key drivers of behaviour. (Garcia 2013, Guzavicius 2015, Wills 2008).

Kempson et al, 2013a found that core psychological factors such as time
orientation, impulsivity and achievement orientation can influence financial
behaviour.

In order to achieve financial discipline, financial management behaviour is

considered as a key element. Wachowicz (2002) propose financial management
behaviour as the determination, acquisition, allocation and utilization of financial
resources, usually with an overall goal in mind. (Xiao and Dew 2011) opine that it is
important to measure different domains of financial management behaviour as each
domain may have a unique role. Nguyen Thi Ngoc Mien and Tran Phuong Thao
(2015) conceptualize that financial attitudes, financial knowledge and external locus
of control influences personal financial management behaviour. Atkinson and Messy
(2012) suggest that capturing evidence of financial behaviour is very important for
measuring financial literacy. Therefore the OECD INFE 2012, 2017 in their survey
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estimates financial behaviour by questioning about paying bills on time, budgeting,

saving, thinking before making a purchase, and borrowing to make ends meet. In
addition, setting long term goals, choice of financial products after gathering
information, using advice etc. are other financial behaviour that are monitored.

Roberts. B., Struwing.J. and Gordon.S 2016) argue that understanding

prudent financial behaviour is fundamentally important. In a study on financial
literacy among South Africans Lloyd Buthelezi, General Manager Nedbank advised
South Africans to adopt prudent financial behaviour such as financial planning and
systematic financial research.

Lloyd Buthelezi said “Full knowledge of your own financial situation, from
budgeting and current circumstances to clear goals and objectives are basic things
that every individual should know and manage”. (Mail & Guardian 02/05/2014).

Sally Bagwell (2014) categorized financial behaviour into four main

domains : (i) tackling debt, this is concerned with those who are in debt and is
related to how individuals seek help to minimize their debt, (ii) managing well day
to day, this is about how a person keeps track of income and expenditure, draws up a
budget, maximizes income, pays bills on time etc, (iii) Building resilience which
includes saving for emergencies, taking insurance coverage as a protection and short
and medium term saving, and final domain (iv) is preparing for life ahead, which is
concerned about long term planning, retirement planning, pensions, saving for
health related needs and achieving life goals.

Monticone (2010) opines that there is a vice-versa relationship between

financial literacy and financial behaviour, where financial literacy affects financial
behaviour. Good financial behaviour benefits not just households but the entire
nation. Nurul Shahnaz Madzan and Saleh Tabiani (2013) opine that savings
behaviour benefits households and provides the base for long term investments and
contributes to infrastructure development and economic growth.
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Ann Woodyard (2013) opines that multitude of behaviour gives various

outcomes, that affect financial wellness. Series of financial activities that an
individual participates in as well as avoids reflects this phenomenon.

Financial literacy is related to financial behaviour and consequently to

borrowing, saving and investments decisions of individuals. (Van Roji et al 2011a;
Jappelli and Padula 2013; Lusardi and Mitchall 2014).

(Tang, Chua 2009) describe that high savings rates display the meaning of
‘boosting economy’ rather than ‘freezing economy’. It is to be highlighted that
financial knowledge alone is not sufficient to achieve financial well-being. One must
act on the knowledge and display a desirable financial behaviour. Brett Theods et al
(2014) enumerate that a person who is aware that he must rebalance his retirement
portfolio, but has not acted on it, after having the knowledge to do so, is as good as
one other who has less knowledge but the same behaviour. (Finney 2016; Gutter and
Copur 2011) found that propensity to save and plan for the future resulted in higher
levels of financial wellbeing.

A host of previous studies and conceptual definitions show that financial

behaviour is an important determinant in analyzing the financial literacy of an
individual. Therefore the present study focuses on this dimension of financial
literacy and provides an in depth analysis of financial behaviour after meticulously
taking into account various financial behaviour concepts used by researchers earlier.
This study brings to light various financial behaviuoral aspects such as debt
management, long term planning, monitoring personal financial, emergency and risk
management and advise seeking.

3.7 Financial Well-being

Financial well-being is an important factor which determines the quality of

life. The ultimate and common financial goal of an individual is to achieve financial
well-being. Yet financial wellbeing has lacked a standardized definition.
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The following table presents various definitions provided by different

researchers.

Table 3.2 : Definitions of Financial Well-being

Author Definition

Goldsmith, 2000 “Financial adequacy and safety of individual or family

that protects the person against economic risks such as
unemployment, illness, bankruptcy, poverty and
destitution in retirement”.

Prawiu et. al, 2006 “The level of stress and well-being emanating from
one's personal financial condition”

IFMR Finance, 2011 “The state in which a household can optimally choose
patterns of consumption over time and in uncertain
states of the world. In other words, a household's
ability to grow, manage liquidity and weather
downturns”

Academic Tafi el al, 2013 “The material and non-material aspects of a person's
perception from their financial status, improving their
living standards and includes perceptions such as:
ability to meet the needs, feeling safe, feeling
comfortable and satisfied with the income and the
award distribution system”

Zaimahetal, 2013 “The subjective perceptions and objective indicators of

individuals' personal financial status”

Vlaev and Elliott, 2013 “Having enough money left over for non-essentials to
live your life”

Australian Unity, 2014 “Both a subjective measure of how satisfied a person

feels about the state of their finances, and an objective
assessment of their financial position”
Voslooet al, 2014 “Objective and subjective aspects that contribute to a
person's assessment of his/her current financial
situation”
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Author Definition

Barclays, 2014 “Being and feeling financially healthy and secure,

today and for the future”

Consumer Financial “A state wherein a person can fully meet current and
Protection Bureau, 2015 ongoing financial obligations, can feel secure in their
financial future, and is able to make choices that allow
enjoyment of life.”

Table Source: Kempson, E., Finney, A., &Poppe, C. (2017). Financial Well-Being:
A Conceptual Model and Preliminary Analysis (No. 3-2017). SIFO Project Note.
Page No:18

A quick insight into the above definitions reveals that most researchers
suggest financial adequacy having a satisfied frame of mind with respect to finances
will result in financial well-being. It is mostly looked at in a given current time
frame. The definition given by Consumer Financial Protection Bureau (2015)
however considers the financial security and takes into account the current as well as
the future time frame in commenting on the financial well-being of an individual. In
addition the CFPB also talks about making financial choices that will enable an
individual to enjoy life. It can be said that to savour one’s life is the inner most
desire of every individual. Therefore the present study adopts the definition given by
CFPB as the conceptual definition for the purpose of this study.

Well-being is a multi part concept. According to Van Praag et al (2003),

well-being is provided by individual satisfaction in six areas: business, finance,
home, leisure, health and environment. Financial well-being is a subjective measure
of how satisfied a person feels about the state of their finance and objective
assessment of their financial position (Towers Watson, Australian Unity 2014).

Sally Bagwell et al (2014) opine that “financial” well-being is a measure of

an individual or household’s overacting financial situation, taking into account both
objective elements such as level of savings, ability to pay bills or time and more
subjective dimensions, such as how frequently a person worries about money and
how positive they feel about their current and future financial situation”.
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According to Joo (1998) the concept of well-being or people’s perception of

well-being varies with change in the level of people’s life. It has also been found
that work productivity and financial well-being are positively related (Joo 1998, Joo
& Garman 1998). Garman et al (2005) have suggested in order to increase financial
well-being; one has to evaluate and improve spending behaviours, increase income,
manage debt more effectively and have financial education.

The Consumer Financial Production Bureau (2015) conceptualized the

factors that are responsible for financial well-being. According to the bureau the
combination of factors responsible for financial well-being are social and economic
environment, knowledge and skills, personality and attitudes, decision context (i.e
how a particular decision is presented), financial behaviour, and best use of available
opportunities.

Financial well-being is an upcoming and popular concept in social welfare

and financial literacy discussions. (Stiglitz, Sen & Fitoussi 2009) define subjective
wellbeing as “cognitive evaluation of one’s life, positive emotions like pride and joy
and negative ones like pain, worry and anger.” Allin & Hand 2017 developed a
national measuring well-being program for the UK across three layers:-subjective
wellbeing, factors such as health, relationships, education and skills, personal
finance and contextual domain which includes governance, economy and the natural
environment.

Kempson (2016) describes that financial wellbeing is characterized by “the

capacity to meet current commitments, with money left over and the resilience to
ensure that can continue to do so in future’. In order to achieve overall wellbeing the
concept of financial well-being is pertinent.

The CFPB developed measurement scale for financial well-being and

included four elements : (i) having control over ones finances in terms of paying
bills on time, being able to make ends meet and having a manageable debt, (ii)
capacity to absorb a financial shock, which means to have a backup in case of
unexpected emergencies, having savings, health insurance (iii) On track to meet
financial goals, which makes people feel that they are in good shape and being done
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away with paying off loans and in a safe financial situation. (iv)Make choices that
allow one to enjoy life such as taking a vacation, enjoying a meal out, working less
to spend more time with family.

The CFPB opines that financial well-being implies having financial security
and financial freedom of choice, in the present and in the future. Sohyun Joo (2008)
defines financial wellness as “a comprehensive, multidimensional concept
incorporating financial satisfaction, objective status of financial situation, financial
attitudes and behaviour that cannot be assessed through just one measure.” Joo 2008
defines financial wellbeing as “a state of being healthy, happy and free from worry”
Malone, Stewart, Wilson & Korsching (2010) contributed four domains of financial
well-being: buying behaviour, perception of current finances, perception of the
financial future and attitudes towards long term care insurance. Shim et al (2009)
used both objective and subjective measures in assessing financial well-being.

3.8 Financial Literacy: Global Scenario

A sound financial system plays an important role in the growth and

development of a country. Financial literacy acts as the foundation stone of a strong
financial system. Hogarth (2002) suggest that “financial literacy is important
because well informed, well educated consumers make better decision for their
families, increase their economic security and wellbeing, contribute to vital, thriving
communities, and foster community economic development.”

Various agencies and organization have made several attempts to assess

financial literacy levels across the Globe. For example, Standard & Poor undertook a
global financial literacy survey across 140 economics in 2014. The Allianz group
assessed financial literacy across Western Europe by collecting date from 10
Western European countries in 2016. The OECD conducted a study to assess the
financial literacy among international students Assessment (PISA), they collected
data from 15 years olds’ in 15 countries in 2015.
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In addition the OECD through the creation of International Network on

Financial Education INFE evaluates Adult Financial literacy competencies across
numerous countries around the world. In 2012 the OECD surveyed 14 countries and
in 2017 the OECD/INFE in response to the G20 Summit surveyed 19 of the G20
countries, and 2 guest countries on their financial literacy.

The S & P Survey found that only one in three adults worldwide responded
to three out of four concepts (numeracy, compounding, inflation & risk
diversification) correctly. Around 60% of the respondents in the age group 36 to 50
were knowledgeable about financial concepts in major advanced economies;
whereas only around 28% of the respondents (in age group 36 to 50) in major
emerging economics were aware about financial concepts.

Denmark, Germany, Sweden and Netherlands were rated as the highest

among European Union with at least 65% of the adult population being financially
literate.

It was found that the savings habit was not popular and many people were
found to be under saving across central and Eastern Europe and the older generation
was found to be struggling with retirement planning related to finance.

The Allianz group evaluated financial literacy levels based on the financial
literacy questions on compounding, inflation and diversification. They also
considered risk literacy, and surveyed on expected return and risk and return. The
study found that Austria, Germany and Switzerland topped the ranking in financial
and risk literacy while France, Portugal and Italy were at the bottom.

The OECD (PISA 2015) survey was conducted in Australia, Belgium,

Brazil, China, Chile, Canadian Provinces, Italy, Lithuania, Netherland, Peru, Poland,
Russia, Slovak Republic, Spain and the United States. The study found the students
from The USA, Italy and Poland had financial literacy scores comparable to the
OECD Global average. Whereas, China, Belgium, Canadian provinces, Russia,
Australia and Netherlands had scores above OECD average performance, while
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Slovak republic, Lithuania, Chile, Peru and Brazil had scores below OECD average
performance.

On an average across OECD countries it was found that 22% of the students
do not have basic financial skills, and 12% of the students across participating
economies were top performers who could tackle complex financial tasks. 56% have
bank accounts and 19% have prepaid debit cards but less than31% have the skills to
manage a bank account.

The S & P Global fin lit survey 2014 reveals that financial literacy rates
differ measurably wide between major advanced economics and emerging
economics. Financial literacy rates vary from 37% in Italy to 68% in Canada, in
contrast to 24% in India to 42% in South Africa which are BRICS countries with
emerging economies.

Financial literacy rates were found to differ based on demographic

characteristics like gender, education, income and age. Worldwide it was found that
35% of men are financially literate compared to 30% of women being financially
literate. Women were also use the ‘don’t know’ option and this was a consistent
finding in many studies (Lusardi and Mitchell 2014). The gender gap is found in
both advanced and emerging economies. With respect to income among the BRICS
countries 31% of the rich are financially literate compared to 23% of the poor. In
many of the advanced economies, on an average 56% of adults aged 35 years or
younger are financially literate compared to 63% of those aged 35 to 50. A very
different finding emerged among developing economies, where 32% were
financially literate in the age bracket of 35 years and younger while 17% of those
aged 35 to 50 were found financially illiterate.

Globally, a 15% gap is found with respect to education level, while

comparing financial literacy levels based on primary, secondary and tertiary
education. In advanced economics, 52% of adults who received secondary
education, 31% of adults who received primary education and 73% who had higher
education were found to be financially literate.
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Globally 57% of adults had saving habit but only 27% out of this only used a
bank or other formal financial institution to do so. Only 42% used bank accounts to
save money. The Global Findex found that 59% of adults opine that they are
‘unbanked’ as they do not have enough money to use an account with respect to
credit cards, 51% adults use credit cards in most advanced economics, compared to
only 11% in most emerging economies.

Overall governments in most countries try to boost access to financial

services and design financial products which can be accessible to wide range of
population.

However the need for financial education has caught the lime light and
countries across the globe have now made financial literacy a core policy agenda.

3.9 Financial Literacy : Indian Scenario

India is home to 17.5% of the world’s population and nearly three forth of its
adult population does not understand basic financial concepts according to the
Standard and Poor’s survey. Financial regulators in India such as RBI, SEBI, IRDAI
and PFRDA have created a joint charter called “National Strategy for Financial
Education” to promote financial education collectively with other market players
like banks, stock exchanges, mutual funds, insurance etc,. A study found that only
35% of Indians have a bank account compared to 63% in China, and in the new age
of digital wallets and universal payments interface (UPI) and new ways of cashless
economy only 2% Indians use mobile phones for fund transfer against 11% in
Nigeria.

98% of the Indian citizens do not have a demat account. 48% of the
population still lives on day to day earnings, which gives them no scope to think
about savings. More than half the population in the rural sector does not have access
to banks or financial schemes and more than 75% of them in these sectors avail
credit facilities from non formal sources.
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With Steps taken by the Central Government by introducing the ‘Prime

Minister’ Jan Dhan Yojana (PMJOY) there is now a notable increase (265 million)
in number of bank accounts in India. Financial inclusion and Education are two
important elements the Reserve Bank of India has recognized. Financial literacy
week is being observed in the month of June and aims to provide basic financial
literacy information relating to banking / opening bank accounts, importance of
budgeting, saving and responsible borrowing, maintaining a good credit score,
awareness about how to lodge a complaint at banking ombudsman, usage of
electronic remittances, importance of investing money in an organised financial
sector etc.,.

Various financial programs specific to farmers, small entrepreneurs, school

children, self help groups and senior citizens have been developed and used by the
RBI. ‘Project Financial literacy’ is one other flagship project undertaken by the RBI
to educate people about the role and functions of the RBI and to introduce various
banking concepts to the individuals.

The G20 OECD/INFE survey found that India’s average financial literacy
score was 11.9 which is less than the G20 countries average of 12.7. India had poor
scores with respect to financial product holding, only 33% of Indians held a payment
product compared to the G20 average of 66%, 41% were holding insurance product
while the G20 average was 52% and 23% held credit products while 51% was the
G20 average. However with respect to saving, India ranked higher with 77% having
a saving product compared to 63% G20 average.

A positive side is now visible in India with respect to financial literacy.

However there is a lot to be done in a country with a diverse social and economic
profile and huge income disparity. Financial inclusion remains a major challenge.
The resource poor and illiterate have to be first brought into the financial system.
Those who are financially included need to be taught about basic financial concepts
and be trained to have the right attitude and exhibit a desirable behaviour while
taking financial decisions.
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3.10 Proposed model of financial literacy and its implications on financial

well-being

The present study proposes a model of financial literacy and its implications
on financial well-being. The model suggests the relationship between the three
dimensions of financial literacy i.e., financial knowledge, financial attitude and
financial behaviour and the impact of each of the dimension of financial literacy on
financial well-being.

Figure 3.3: Proposed model for financial literacy and its impact
on financial well being

The model proposes that financial knowledge consists of two factors namely,
basic knowledge and advanced knowledge. This is based on the classification by
Lusardi & Mitchell (2006), Van Roogi, Lusardi and Alessie (2007).

The model suggests that financial attitude consists of three predominant

factors namely, belief in planning, propensity to save and confidence in personal
financial management.

The third dimension of financial literacy is financial behaviour and the

researcher proposes five key factors namely debt management, monitoring personal
finance, long term planning, emergency and risk management and advice seeking in
this dimension.
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The model proposes that financial knowledge has a significant effect on

financial attitude and financial behaviour. In addition it also suggests that financial
attitude influences financial behaviour.

Based on the conceptual definition of OECD which the present study adopts,
it is proposed that financial literacy results in financial well-being.

Taking into account the definition of financial well-being contributed by the

CFPB, financial well-being in this study is primarily made up of three factors
namely control over finances and on tract financial goals, capacity to absorb
financial shock and freedom to make choices to enjoy life.

The model propounds that each of the dimension of financial literacy

(knowledge, behaviour & attitude) has a significant impact on financial well-being.
The above model is proposed after an in depth review of literature and an elaborate
exploration of the various conceptual and theoretical frame work related to financial
literacy and financial well-being.

3.11 Chapter Summary

This chapter has dealt with the conceptual frame work of financial literacy
and financial well-being. It brings to light various dimensions of financial literacy
namely financial knowledge, financial behaviour and financial attitude. The concept
of financial well-being and its components are also highlighted.

This chapter also features self assessment of financial literacy and the role of
over confidence/under confidence in financial knowledge. It also discusses the
outlook of financial literacy in the global scenario and Indian scenario.

Based on the review of literature and the conceptual frame work a structural
model for financial literacy and its implications on financial well-being is proposed
at the end of this chapter.

The next chapter deals with analysis of the demographic profile of the
respondents and a detailed analysis of the three dimensions of financial literacy.