In many popular accounts, Baby Boomers are characterized as fiscally-conservative consumers who value work and savings relative to debt and excessive spending. However, due to the increasing financial demands of aging, and the recent housing crisis, there is increasing concern about the adequacy of retirement savings for this segment. At the same time, there has been considerable interest and debate in the policy community about financial literacy and its role in consumer financial decisions, particularly the use of various forms of credit to finance purchases and education. Previous research suggests that consumers who are financially knowledgeable are more likely to save, budget, and control their spending. Individuals with low financial literacy are less likely to engage in retirement planning, accumulate less wealth for retirement, and are more likely to rely on high-cost loans. Additional research suggests that consumers rely on debt to finance conspicuous consumption. In this study, we examine the relationship between financial literacy, indebtedness, and conspicuous consumption behavior among Baby Boomers. Conspicuous consumption, used here, refers to the acquisition of goods and services, such as luxury items, that display one’s status.
Methods
We propose that conspicuous consumption is a function of financial literacy, financial resources (e.g. indebtedness), as well as individual and demographic characteristics. That is, the less knowledgeable individuals are about financial principles, the more likely they will engage in conspicuous consumption. This relationship is both direct as well as indirectly mediated by the amount of indebtedness.
We used data from the 2008 Health and Retirement Study (HRS), which is a nationally representative, longitudinal survey of individuals over 50 years and their spouses. This study also uses the 2009 HRS Leave-Behind Questionnaire (LB). The LB measures constructs such as social support, sense of control, religiosity, personality, chronic stressors, and financial strain. These data were merged with the 2009 Consumption Activities Mailed Survey (CAMS), a supplement to the HRS, which includes data on consumption behaviors.
Results
The results of our analysis indicate that after controlling for background variables such as income and years of education, financial literacy has a significant negative relationship with both indebtedness and conspicuous consumption; and the relationship between financial literacy and conspicuous consumption is partially mediated by indebtedness. In addition, there were significant differences in these relationships based on gender, education, and race/ethnicity. Thus, low financial sophistication is implicated in higher levels of conspicuous consumption, even after controlling for key demographic variables.
Implications for Public Policy
The implications have broad potential ramifications for minority and low-income consumers. In terms of consumer education, existing financial literacy programs tend to emphasize basic financial and economic principles, and particularly understanding the financial marketplace. While additional research on educational content is warranted, these findings suggest that consumers can benefit from critically evaluating their consumption goals as well as how best to finance them, thus potentially increasing personal, familial and community wealth.