afcpe 2014- financial education-capability paper-11-14

Financial Education and Financial Capability

Jing Jian Xiao, University of Rhode Island Barbara O’Neill, Rutgers University

Introduction

• Consumer financial capability is a broader concept than financial literacy

• Financial capability includes financial literacy, financial behavior, and more

• Financial capability is the ability to apply financial knowledge and engage in desirable financial behaviors to achieve financial well-being

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Introduction

• There are controversies about the effects of financial education on financial outcomes

• Some research shows that financial education improves financial literacy and financial behavior

• Other research suggests that financial education has limited effects on financial outcomes

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Purposes of Study 1) To examine potential effects of financial

education on financial capability

2) To examine potential effects of financial education from specific sources (high school, college, and workplace) on financial capability

3) To examine these associations with a large national data set

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Uniqueness of Study 1) Uses a unique set of financial capability variables

to measure financial capability

2) Examines potential effects of financial education with a large national data set

3) Examines potential effects of financial education from specific sources on financial capability

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Uniqueness of Study • Behavior based measure (Atknison et al. 2006;

Lusardi 2011).

• Behavior-outcome based measure (Taylor 2011)

• Composite measure including literacy, behavior, and perceived capability (Xiao et al 2014)

• Composite measure including literacy, behavior, perceived capability, and an index

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Significance of Study 1) Findings demonstrate that financial education is

associated with financial capability in several ways with nationally representative data

2) Financial educators should be pleased to know that financial education work has an impact

3) Policy makers should beware of research results and support financial education initiatives

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LR: Status of Financial Capability • National surveys show consumers have low financial literacy levels and engage in undesirable financial behaviors

• Studies also show some demographic groups of consumers are especially weak in financial capability such as low income and young adult consumers

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LR: Financial Education on Financial Capability

• Research shows that financial education improve financial literacy and improve financial behavior

• High school financial education improve youth’s financial knowledge and behavior

• College financial education improve college students’ financial knowledge and behavior

• Workplace financial education improve workers’ financial knowledge and behavior

• Also, some research shows no or small effects of financial education

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Conceptual Framework • Lusardi and Mitchell (2014) developed a life-cycle saving model

that addresses the role of financial literacy

• Under the traditional utility framework, they incorporated several factors such as borrowing constraints, mortality risk, demographic factors, stock market returns, earnings, and health shocks

• This model predicts that financial literacy is endogenously determined over the life cycle

• Consumers invest in financial knowledge to the point where their marginal time and money costs of doing so are equated to their marginal benefits

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Hypotheses • Theoretical predictions suggest that consumers who

receive financial education increase their ability to manage money and perform financially better than their counterparts who do not receive financial education.

• H1: Consumers who have received financial education are more likely to show higher scores in financial capability variables.

• H2: Specifically, consumers who have received financial education from (a) high school, (b) college, and (c) workplace are more likely to show higher scores in financial capability variables.

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Data • Data used in this study were from the 2012 National

Financial Capability Study.

• The data set was commissioned by FINRA IEF in collaboration with Department of the Treasury and the President’s Advisory Council on Financial Literacy.

• The 2012 study included 25,509 American adults (roughly 500 per state, plus the District of Columbia) and 1,000 military service members through online surveys.

• After excluding cases with missing values, the final sample size for this study is 24,395 12

Financial Capability Variables • Objective financial literacy: score of five financial quiz

questions (range: 0-5)

• Subjective financial literacy: self perceived financial knowledge level (range: 1-7)

• Desirable financial behavior: number of desirable financial behavior performed (0-20)

• Perceived financial capability: self perceived money management ability (1-7)

• Financial capability index: sum of Z-scores of previous four variables 13

Financial Education Variables • Have received any financial education

• Have received financial education in high school

• Have received financial education in college

• Have received financial education in workplace

• All of them are binary variables, yes=1, no=0

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Control Variables • Demographic: age, gender, education, marital

status, presence of children

• Economic: income, work status, financial satisfaction, income shock, having checking, having CD, having investments, having 401k plan, owning a home, having mortgage, having credit card

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Data Analyses

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• Weights were used to produce descriptive statistics

• Unweighted samples were used in bivariate and multivariate analyses

Financial Capability

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Variable Unweighted Weighted

Objective financial literacy (0-5) 3.06 2.95

Subjective financial literacy (1-7) 5.18 5.15

Perceived financial capability (1-7) 5.74 5.68 Desirable financial behavior (0-20) 7.82 7.56

Financial capability index (-10.25-6.36)

0.00 -0.19

Financial Education

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Received financial education 0.21 0.20

Received fin. ed. in high school 0.11 0.11

Received fin. ed. in college 0.13 0.11

Received fin. ed. in workplace 0.09 0.08

Control Variables: Demographic

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Age 47.14 45.88

Male 0.45 0.49

Some college or higher 0.68 0.63

Married 0.57 0.55

Having dependent children

0.39 0.39

Control Variables: Financial

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Income under $25,000 0.24 0.26

Income $75,000 or higher 0.31 0.29

Working 0.54 0.53

Financial satisfaction (1-10) 5.19 5.19

Experiencing income drop 0.28 0.30

Control Variables: Financial

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Having checking account 0.91 0.90 Having savings, MMA and CD. 0.76 0.74 Having other investments 0.36 0.34 Having a 401k plan 0.55 0.52 Owning a home 0.62 0.59 Having a mortgage 0.38 0.35 Having credit card 0.75 0.73

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Objective Knowledge (0-5)

Subjective Knowledge (1-7)

Financial Behavior (0-20)

Perceived Financial Capability (1-7)

Financial Capability Index (-10.01-6.38)

Received financial education

Yes 3.43 5.62 9.25 5.96 1.17

No 2.93 5.05 7.38 5.65 -.23

p ***

One-Way ANOVA: Financial Education

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Objective Knowledge (0-5)

Subjective Knowledge (1-7)

Financial Behavior (0-20)

Perceived Financial Capability (1-7)

Financial Capability Index (-10.01-6.38)

High school financial education

Yes 3.38 5.68 9.24 6.03 1.23 No 3.36 5.45 8.89 5.85 .84 p ** ** College financial education

Yes 3.69 5.79 10.15 6.16 1.81 No 3.12 5.36 8.16 5.74 .37 p *** *** *** *** *** Workplace financial education Yes 3.66 5.80 10.37 6.17 1.85 No 3.14 5.36 7.99 5.73 .34 p *** *** *** *** ***

One-Way ANOVA: Specific Education

Regression: Financial Education

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Objective Knowledge

Subjective Knowledge

Financial Behavior

Perceived Financial Capability

Financial Capability Index

B p B p B p B p B p Received financial education

.293 *** .418 *** .630 *** .231 *** .816 ***

R2 .298 .193 .118 .675 .492 p .000 .000 .000 .000 .000

Note: Control variables were used but not shown

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Objective Knowledge

Subjective Knowledge

Financial Behavior

Perceived Financial Capability

Financial Capability Index

B p B p B p B p B p

Financial education: high school

.165 ***

.243 *** .320 *** .166 *** .480 ***

Financial education: college

.161 ***

.282 *** .339 *** .141 *** .496 ***

Financial education: workplace

.108 ***

.187 *** .560 *** .118 *** .421 ***

R2 .297 .193 .119 .676 .492

p .000 .000 .000 .000 .000

Regression: Financial Education

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R2 Changes: Objective Literacy Objective Financial Literacy B ∆R2

Any Financial education .308 .008

High school financial education .265 .003

College financial education .293 .004

Workplace financial education .272 .003

High school financial education .170 .005 College financial education .224 High school financial education .143 .006 College financial education .188 Workplace financial education .132

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R2 Changes: Subjective Literacy Subjective Financial Literacy

B ∆R2 Any Financial education .420 .018





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R2 Changes: Financial Behavior Desirable Financial Behavior B ∆R2






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R2 Changes: Perceived Capability Perceived Financial Capability

B ∆R2 Any Financial education .236 .004





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R2 Changes: Capability Index Financial Capability Index B ∆R2






College financial education .661 High school financial education .459 .015 College financial education .538 Workplace financial education .456

Discussion • This study used data from the 2012 National Financial

Capability Study to examine associations between financial education and financial capability

• Financial education was measured by two sets of variables

– One set had a single variable, receiving any financial education

– The other set had three variables, receiving financial education from high school, college, and workplace

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Discussion • Financial capability was measured by five variables,

objective financial literacy, subjective financial literacy, desirable financial behavior, perceived financial capability and financial capability index.

• After controlling for 16 demographic and financial variables, all financial education variables, both general financial education and financial education from a specific source, showed positive associations with all five financial capability variables

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Implications for Educators • Financial education could improve financial capability in

multiple aspects: objective literacy, subjective literacy, financial behavior, perceived capability, and overall capability

• Educators should take advantage of these findings and design and implement education programs to enhance aspects of financial capability

• Educators should develop action oriented education programs to encourage students engage in desirable financial behaviors to achieve financial well-being

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Implications for Researchers

• The composite measure of financial capability could be replicated in smaller scale studies that target specific populations

• Specific research tools that are helpful for financial counseling and planning professionals could be developed to enhance consumer financial capability

• Mechanisms of the impact of financial education on financial capability could be further examined

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Implications for Policy Makers • Policy makers should be aware of potential benefits of

financial education on financial capability based on research findings from this large scale data set

• Policy makers should encourage financial education initiatives among various populations, especially financially vulnerable populations, and mobilize resources to support these programs

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Thank You for Your Attention Any questions?

For more information, please contact us:

Jing Jian Xiao: [email protected] Barbara O’Neill: [email protected]

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afcpe 2014- financial education-capability paper-11-14

Economy & Finance