Financial Knowledge, Financial Inclusion and Economic Strain Among Low-Income Parents of Young Children

Purpose: Low-income parents of young children routinely experience economic strain, given resource constraints and the resulting lack of financial security. Increasingly, social workers focus on reducing economic strain by increasing financial capability and building assets among low-income families. In this paper, we test the conceptualization of financial capability, which is thought to include both financial knowledge and financial inclusion, by exploring the independent and combined effects of financial knowledge and financial inclusion on economic strain. We also test the relationships between household resources on economic strain.  Our research questions are: (1) Are financial knowledge and financial inclusion associated – independently or jointly – with economic strain? (2) Do household resources in the form of income and/or assets help explain economic strain?

Methods: Our sample includes 664 parents of children attending subsidized pre-school. The sample is overwhelmingly female (93%), racially and ethnically diverse (48% white; 11% Latina), and unmarried (65%). Survey data on financial knowledge, financial inclusion, and household resources were collected as children began pre-school, and economic strain was measured four years later. We use the economic strain scale (Pearlin et al., 1981) to measure our outcome of interest. Financial knowledge is measured by the number of correct answers to five basic personal finance questions. Ownership of bank accounts in our measure of financial inclusion. We use multiple regression analyses to address the relationships between financial knowledge, financial inclusion, the interaction between financial knowledge and inclusion, household resources, and economic strain. 

Results: Our findings suggest that interaction of financial knowledge and financial inclusion is quite important in understanding economic strain. This finding supports the conceptualization of financial capability as a construct that includes both financial knowledge and financial access. The significant relationship between the interaction term (knowledge x inclusion) and economic strain also suggests a moderation effect.  We tested for such an effect finding that the relationship between financial knowledge and economic strain is moderated by financial inclusion. In other words, financial knowledge has an effect on economic strain only for those low-income parents who own bank accounts. Finally, when controlling for income, the role of assets in the form of homeownership helps explain economic strain.  When controlling for assets, we found no significant relationship between income and economic strain among the parents in our study.

Implications: Findings from this study suggest support for the conceptualization of financial capability as a combined construct that includes both financial knowledge and financial inclusion.  We also find support for assets theory in this study.  Future research is needed to further test financial capability and assets theory with data from other low-income family samples. Implications for practice include the possibility that financial education in the absence of bank account ownership may be negligible. Partnering with public and private sources of funding and financial services providers to provide financial inclusion may be necessary in order to help clients and members of the community benefit from financial education.  If so, social work education needs to include content on financial capability and asset building.