A Study on Association Between Basic Financial Literacy and Societal Factors

Abstract

Financial literacy is the holding of the set of skills and knowledge that allows an individual to be financially literate enough to make effective decisions. Financial Literacy is becoming a priority area all across the world in present time. The present scenario has made it essential for individuals to be well aware with the basic financial knowledge in order to use their financial resources in an optimum way. The study examines the association between basic financial literacy with demographic factors by using a questionnaire. The data were collected from 65 respondents to test the association. The findings shows that above 50% of the total respondents demonstrate higher basic financial literacy. Although the majority of the people possess basic financial knowledge and manifest positive financial behaviour and remaining respondents exhibit reluctant financial attitude. However, analysis of the demographic factors reveals that certain factors may prevent persons from being more financially literate.

Introduction

I. INTRODUCTION

Financial literacy is the capacity to properly manage our finances by creating systematic budgets, eliminating debt, choosing what to buy and sell, and finally becoming financially independent. Financial literacy is the ability to apply fundamental financial management ideas in daily life. Everything becomes a part of financial literacy, from basic skills like keeping track of our spending and realising that we must spend money if we like a product to finding a balance between the value of time saved and money lost, paying our taxes and filing tax returns, concluding property deals, etc. We are not expected to understand the specifics of financial management as humans. But it's crucial to manage our personal money so that it doesn't negatively impact us and our family. We do not want to find ourselves going through the day without food or money.                                                     

A person with financial literacy may be able to create a budgetary plan that helps him or her keep track of his or her spending, debt, and other obligations. This topic also affects business owners, who significantly strengthen our economy and contribute to its financial growth.

People who are financially literate are more likely to be independent and self-sufficient. You get fundamental understanding of financial markets, capital budgeting, and investment possibilities.

Knowing how to handle your money reduces the likelihood of encountering fraud-like circumstances. Some ideas are not at all difficult to accept, especially when they come from someone who appears to be knowledgeable and well-prepared. People will be better able to anticipate dangers and debate/justify with anyone knowledgeable and well-informed with the help of basic financial literacy. Lack of awareness about money concerns and poor personal financial management hurt not only a household but also the economy as a whole. Financial inclusion can be accelerated via financial literacy.

Financial literacy is described as "A combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing" by the OECD INFE.

A need for basic financial education

1. An average person finds it quite challenging to make an informed selection due to the wide variety and complexity of financial products. Financial literacy gives the average individual the information, skills, and confidence to manage financial products and services, giving him or her more control over their current and future financial well-being.
2. Freedom from exploitation: Financial literacy aids in defending society and individuals from predatory lending practises and exorbitant interest rates.
3. Avoiding excessive debt: Financial education will improve service quality, prevent excessive debt, and encourage prudent financial decisions.
4. Supporting entrepreneurship: Educated small business owners with a background in business will benefit from knowledge of financial products as it will enable them to better comprehend market dynamics and conduct business.
5. Beneficial spillover effects: Economic growth can be boosted by financial literacy. A household with strong financial knowledge would regularly save, which would then result in investments in the proper areas and higher revenue creation. Individuals' financial stability will consequently improve the welfare of society.
6. Easing the burden on social programmes: A person with sound financial judgement would be in a better able to gauge their own needs and save money through proper plans.
7. Behavioural change: Due to the financial products' widespread availability, consumers are using them carelessly and without understanding the potential financial consequences. In reality, the recent global financial crisis has prompted people to consider whether their lack of financial literacy caused them to sign up for adjustable-rate mortgages or rack up credit card debt they couldn't pay. Financial literacy programmes have the potential to influence behaviour.
8. Greater involvement in financial markets: India must encourage savers to become investors. The domestic retail securities market will become more diversified as domestic retail investors participate more in it. Domestic savings will also profit from business expansion.

II. OBJECTIVES

1. To understand the financial literacy in respondents.
2. To understand the association between basic financial literacy and demographic factors.

III. LITERATURE REVIEW

A study of wave 11 participants' financial literacy revealed that it is low and that only around one-third of young adults had a working knowledge of interest rates, inflation, and risk diversification. Socio-demographic traits and family financial sophistication were both significantly correlated with financial literacy. According to Lusardi, Mitchell, and Curto (2006), a guy with a college degree whose parents had stocks and retirement funds was roughly 45 percentage points more likely to be aware of risk diversification than a girl with less than a high school diploma and parents who did not have money. Age and education are positively connected with financial literacy and financial wellbeing, according to a 2013 study by Marzieh et al. Men and married persons have higher financial literacy levels.   Financial well-being and worry about money increase with financial literacy. Last but not least, financial security reduces financial anxiety.

According to Michael (2009), people's capacity to make wise financial decisions might be hampered by a lack of financial literacy. Financial advice has the potential to replace financial knowledge and skill for those who struggle with making sound financial decisions. Puneet Bhushan et al. (2013) used multistage sampling to conduct a survey of 516 Himachal Pradesh residents who were employed to determine their level of financial literacy. It has been shown that there is a low degree of overall literacy and that men are more financially literate than women. Geographical area has no bearing on financial literacy, although level of education, income, kind of occupation, and place of employment do.

IV. RESEARCH METHODOLOGY

A. Research Design

The current study utilizes a descriptive research design to investigate the research question. The population under study consists of all respondents, and a random sampling method was employed to select a sample of 65 respondents. Data was collected through a survey method, employing a structured questionnaire as the data collection tool. The data was analyzed using statistical techniques, including Chi square test of association.

B. Data Collection

The data was collected through primary sources, a structured questionnaire was circulated as Google Forms to the sample determined to be respondents. The questionnaire was designed after conducting a thorough literature review and consisted of closed-ended questions. It was also pretested before administering to the actual respondents. The questionnaire was designed to study the association between basic financial literacy and demographic factors.

C. Sample Design

The study was conducted on 65 random respondents using random sampling method. As the research is concerned about basic financial knowledge of day to day. The age of the respondents majorly belonged to the age group 40-55. 33 males and 32 females constituted the study.

D. Data Analysis

Descriptive statistics methods were incorporated to analyse the data, frequency distribution, mean, and standard deviation were used to describe the data. Chi square test of association was used to check the association between factors of basic financial literacy with demographic variables.

Development of Hypothesis

The Organisation for Economic Co-Operation and Development (OECD, 2013) conceives financial literacy as a combination of acquaintance, knowledge, skill, attitude, and behaviour required to make financial decisions and ultimately achieve individual financial well-being.

In the view of Criddle (2006), being financially literate includes learning about the choice of many alternatives for setting financial goals. Compared to the score of OECD countries (Atkinson and Messy, 2012), the findings report better financial knowledge among the respondents in comparison to most of the respondent countries of OECD survey.

1. H01: There is no significant association between factors of financial literacy and gender.

Regarding age, major research reveals that financial literacy tends to be higher among adults in the middle of their life cycle and, it is usually lower among young and elderly individuals (Research, 2003; Agarwal, Driscoll, Gabaix, & Laibson, 2009). Lusardi and Mitchell (2011) depicts that respondents aged between 25 and 65 tend to hit 5% more questions than those under 25 or over 65 years. In addition, Scheresberg (2013) revealed that young adults (25-34 years) have used loans with high costs.

2. H02: There is no significant association between factors of financial literacy and age.

Greater financial literacy levels and greater access to financial information are witnessed in individuals with higher education levels. In this way Amadeu (2009) found that during undergraduate or specialized courses, with subjects related to finance and economics positively effects the daily financial practices.

Students belong courses like Economics, Administration, and Accounting had higher financial knowledge level. Upholding such evidence, Lusardi and Mitchell (2011) found that individuals with low educational level are less likely to understand and response the questions correctly and also more likely to say they do not know the answer. However, Chen and Volpe (1998), when assessing students' knowledge on personal finance, got to know that students, regardless of their educational degree, had an inadequate knowledge level, particularly with regard to investments.

3. H03: There is no significant association between factors of financial literacy and education.

Regarding income, Atkinson and Messy (2012) analysed that low income levels are associated with lower financial literacy levels. Monticone (2010) found that wealth has a little, but positive, effect on financial literacy. In turn, Hastings and Mitchell (2011) provide experimental analysis to reveal that financial literacy is related to wealth. In a study on financial literacy, students belonging high-income families had significantly higher knowledge levels than students from low-income families (Johnson & Sherraden, 2007). In addition, low-income individuals tend to drop out of school, something that, in the long run, contributes to their financial illiteracy (Calamato, 2010).

4. H04: There is no significant association between factors of financial literacy and income.

One of major driving factors for this may be that working people have greater exposure and experiences related to financial products and markets owing to their working life such as mandatory pension plans, attending career courses and seminars etc. (MasterCard, 2014).

5. H05: There is no significant association between factors of financial literacy and occupation.

Marital status is also highly associated with the financial literacy level. According to Research (2003) and Brown and Graf (2013), singles have a high propensity to lower financial literacy levels, as compared to married individuals.

 In general, when people have a low financial literacy level, they run the risk of making bad financial decisions that, in the long term, may result in debts and the latter endanger the well-being of their relationships (Calamato, 2010). Ratifying such evidence, Dew (2008) found that consumer debt is a major threat to marital satisfaction and, therefore, married individuals have higher financial literacy levels.

Conclusion

Financial literacy helps people in becoming independent and self-sufficient. It empowers you with basic knowledge of investment options, financial markets, capital budgeting, etc. Understanding your money mitigates the danger of facing a fraud-like situation The findings shows that 84% of the total respondents demonstrate higher financial literacy. Although the majority of the people possess basic financial knowledge and manifest positive financial behavior and remaining respondents exhibit reluctant financial attitude. This study provides a base for understanding the impact of social demographic factors on financial literacy, which may be beneficial in changing the attitudes of the present respondents and policy makers. However, analysis of the socio-demographics reveals that certain factors may prevent persons from being more financially literate. According to our analysis 97% respondents have their account in bank, out of which 78% people are able to independently open and close account. 72% respondents are able to perform common bank transactions like availing locker facility, transfer of fund, issuance of cheque book etc. 60% people are comfortable in withdrawing money from ATM and also have digital wallets in phones but only 56% are comfortable with digital transactions. Majority respondents understands the income and expenditure and are able to prepare family budget and good at doing small investments as well. 63% respondents claim themselves to be literate enough with basic financial knowledge. The relatively high percentage of persons who fall into the average financial literacy category is especially concerning. However, sociodemographic data indicates that there may be certain barriers preventing people from becoming more financially educated. poor levels of financial literacy are specifically linked to poor income, unstable income, and young age and gender. For making people efficient enough in financial decision making first the need to be good with basics of financial literacy irrespective of demographic factors.

References

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Copyright

Copyright © 2023 Dr. Anubhuti Sharma. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.