Rainy Day Funds: Does Financial Knowledge or Bank Account Ownership Matter More?

Background and Purpose: Most (60%) US households experienced a financial shock in the last 12 months, such as a hospitalization. Over half (55%) of households said shocks made it harder to meet their basic needs (Pew Charitable Trusts, 2015). Material hardships - difficulty meeting basic needs such as housing and food (Beverly, 2001) – increase risks for mental health problems (Heflin & Iceland, 2009) and adverse child development outcomes (Gershoff et al., 2007). Setting aside money can help households cope with financial shocks and reduce material hardship risk (Collins & Gjertson, 2013). However, most (61%) US households did not have enough money set aside to cover household expenses for three months (Board of Governors of the Federal Reserve System, 2014), a situation predicted by a lack of financial literacy (Babiarz & Robb, 2014; Lusardi, 2008). Bank account ownership (FDIC, 2014) may also be a barrier to being able to set aside money for emergencies (Sherraden & Barr, 2005). The purpose of this study was to examine whether financial literacy or bank account ownership had a stronger association with having money set aside to cope with financial shocks among US households.

 

Methods: Using an observational study design, we examined the relationship between use of financial services and having enough money set aside to cope with financial shocks among a nationally representative sample of US households (n = 25,765) who completed the 2009 National Financial Capability Survey. First, we replicated Babiarz and Robb’s (2014) findings concerning the marginal effects of financial knowledge on having enough money to cope with shocks, controlling for income, race, and other factors. Next, we added account ownership to Probit models, adjusting for self-selection into account ownership using inverse probability of treatment weighted average treatment effect (ATE) estimates with robust standard errors to adjust for clustering by state of residence.

Results: Only 38% of respondents said they had enough money set aside to cover three months of expenses. On average, respondents correctly answered 60% of financial knowledge questions. Most (78%) respondents said they owned a savings account, money market account, or certificate of deposit. In the baseline model, an additional correct financial knowledge answer was associated with 2.4% higher probability of having enough money set aside (p < .001), replicating Babiarz and Robb’s (2014) key finding. However, in the alternate model, lack of account ownership was associated with 22% less probability of having sufficient money to cope with shocks (p < .001), while an additional correct answer to questions measuring financial knowledge was associated with only 1% greater probability of having sufficient money set aside (p = .20).

 

Conclusion and Implications: We find that bank account ownership better explains whether a household has enough money set aside to handle unexpected expenses than financial knowledge, controlling for income and several other factors. To help households cope with financial shocks, policies to promote access to safe and affordable financial products are at least as important as efforts to promote financial literacy.