Stress or Education: The Relationship Between Financial Literacy and Financial Stress
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ploszaj2024 - p. 3
Although acquisition of financial literacy can improve financial behavior, it may also result in initial adverse consequences if only partial knowledge is gained (Lusardi & Mitchell, 2014). For example, individuals with limited financial literacy may become overconfident in their own abilities and engage in more risky decisions, rather than recognizing the deficiency of their knowledge base, which could result in poor choices that lead to financial problems (Norvilitis et al., 2006; Wang, 2009). This dynamic provides us with the research motivation to examine whether the relationship between financial literacy and financial stress is non-linear.
ploszaj2024 - p. 3
Household debt, the most common cause of financial stress, has increased in Australia at a rate from 95% of net disposable income in 1995 to 216% in 2017 (OECD, 2019).
ploszaj2024 - p. 4
At the overall level, we observe that financial literacy is negatively related to financial stress; thus, it is a vital factor in reducing the financial stress in individuals
ploszaj2024 - p. 4
Our methodology is based on the assumption that financial stress is a multi-dimensional concept, as addressed by several researchers, such as Brown et al. (2014) or Breunig et al. (2019).
ploszaj2024 - p. 7
Reducing financial stress will not only improve an individual’s overall circumstances, but it also provides a positive effect on the broader economy by decreasing the strain on a country’s social security system (Lusardi & Mitchell, 2011b), thus, improving national economic wellbeing (Lusardi, 2015; Lusardi et al., 2017).
ploszaj2024 - p. 7
Our analysis employs cross-sectional data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA survey, a nationally representative database, was established in 2001 and is conducted annually through interviews and selfcompleted questionnaires distributed to household members (aged 15 and over).
ploszaj2024 - p. 8
In our paper, the dependent variable, financial stress, is constructed using the Breunig and Cobb-Clark (2005) scale, which comprises three indicator measures of financial stress, namely, ‘cashflow problems’, ‘financial hardship’ and ‘any stress’.
ploszaj2024 - p. 8
actor analysis was conducted to verify the accuracy of dividing those items into financial stress indicators. The factor analysis shows that these seven items from the HILDA survey load onto two correlated dimensions.
ploszaj2024 - p. 9
The three key questions of financial literacy developed by Lusardi and Mitchell (2011a) test an individual’s basic understanding of interest rates, inflation, and risk diversification. These concepts are commonly referred to as the ‘Big Three’ financial literacy questions.
ploszaj2024 - p. 10
Our analysis includes control variables for a number of factors that have been found to be important financial stress determinants, including income, employment, education, health, debt (household and personal), location, and a ‘human capital’ specification. This human capital specification includes variables describing demographic characteristics, such as age, gender, marital status, children in the household.
ploszaj2024 - p. 11
The basic econometric estimation to examine the impact of financial literacy on financial stress, while controlling for a number of demographic and economic variables, is as follows: FinS = α + β’FinLit + ω’X + ε
ploszaj2024 - p. 15
To measure the non-linear relationship between financial stress and financial literacy based on an inverted U-shaped hypothesis, we employ ordinary least squares with a bootstrapping analysis. The econometric model is as follows: FinS = α + β1FinLit + β2FinLit2 + ω’X + ε (2) if β1 = β2= 0, financial literacy has no relationship with financial stress; if β1> 0 and β2 = 0, financial literacy has a linear relationship with financial stress; if β1>0 and β2< 0, financial literacy has an inverted U-shaped relationship with financial stress, which indicates the existence of the hypothesis; if β1< 0 and β2> 0, financial literacy has a positive U-shaped relationship with financial stress. The turning point is measured as (−β1/2β2).
ploszaj2024 - p. 18
To test the persistent influence of financial literacy on financial stress over a given time period, we modeled the influence of different levels of financial literacy (Wave 16) on financial problems (Wave 17).