Understanding the Financial Capability Disparity across Income Groups

Background

Financial capability for all, which has been identified as one of the grand challenges for social work (Uehara et al., 2014), has gained increased interest of scholars across disciplines.  Financial knowledge is an important component in the financial capability framework which includes both financial knowledge and financial inclusion (Sherraden, 2013). Evidence suggests a higher level of knowledge is associated with better financial behaviors and practices (Hilgert, Hogarth, & Beverly, 2003), which in turn improves people's financial well-being. Scholars also claim that people with low-income have a lower level of financial knowledge (Taylor, 2011). However, there are debates around this claim. It is not evident whether financial knowledge influences people’s income-ability or the levels of income and wealth influence people’s financial knowledge (Hamilton & Darity, 2017) or there is a simultaneous effect. To understand the financial capability disparity, this study examined how financial knowledge varies across demographic and socioeconomic characteristics both within and across income groups.     

Method

We used data from the 2009 and 2014 nationally representative Canadian Financial capability Survey (CFCS) (N = 22,204). We used t-test to examine how financial knowledge differs across income groups. We then used bivariate and multivariate regressions to examine how income levels predict financial knowledge. Finally, we calculated and compared the predicted scores of financial knowledge of people with different demographic and socioeconomic characteristics both within and across income groups.  

Results

The results of t-tests suggested that there was a significant difference in financial knowledge between low-income group (M=2.83, SD=1.57) and non-low-income group (M=3.48, SD=1.60); t (22, 2202) =25.71. The bivariate regression results showed that people with low-income had .60 standard deviation less financial knowledge than non-low-income group (β= -.60, p<.001). While controlling for demographic and socioeconomic variables, the low-income group showed .22 standard deviation less financial knowledge than non-low-income group (β= -.22, p<.001). The postestimation test results suggested that the predicted financial knowledge scores within gender significantly varied across income groups. The predicted financial knowledge score for a female with low-income was 3.23 while it was 3.45 for a female with non-low-income. This also significantly varied across gender for non-low-income group. The predicted financial knowledge score for a female with non-low-income was 3.41 while it was 3.63 for male with non-low-income. The predicted scores of financial knowledge significantly varied across education levels both within and across income groups. A significant gap of predicted financial knowledge scores was also found in age groups between 35 and 64 across income groups.     

Implications

The findings of this study suggest that income levels significantly predict the levels of financial knowledge. With a similar demographic and socioeconomic background, people with low-income have significantly lower level of financial knowledge than their non-low-income counterpart. For example, a male with a university degree living in low-income has significantly lower level of financial knowledge than a male with a university degree living in non-low-income. This study provides robust evidence for the financial capability disparity across income groups, which has important implications for social work researchers studying poverty and financial capability.