Financial Capability and Financial Well-Being: An Empirical Examination Using the Cfpb National Financial Well-Being Survey

Background: The theoretical framework of financial capability (Sherraden, 2013) suggests that individual financial well-being is affected by one’s access to appropriate financial services (or financial access; Huang et al., 2015; Johnson & Sherraden, 2007; Sherraden, 2013, 2017) and financial knowledge/skills (Huston, 2010; Lusardi, 2011; Shim et al., 2009), beyond personal traits and socioeconomic backgrounds (e.g., Gudmunson & Danes, 2011; Howlett et al., 2008). However, empirical studies that test this hypothesis are lacking, particularly those that focus on low-income families. This study uses the 2016 National Financial Well-being survey (N=6,394; CFPB, 2017) to address this knowledge gap.      

Methods: The dependent variable of financial well-being is a 10-item scale created by the CFPB on individuals’ perception of financial status (e.g., handling unexpected expenses and securing one’s financial future). The independent variables are financial skills, financial knowledge, and access to financial services. Financial skills are measured by a 10-item scale initiated by the CFPB, which asks respondents to rank their skill levels on managing finances (e.g., tracking spending). Financial knowledge is measured by a 10-item scale (Knoll & Houts, 2012) assesses respondents’ understanding of various financial concepts. Financial access is a measure created by the authors of this study that counts the different types of financial products individuals have (e.g., bank accounts, life insurance, retirement accounts). Adjusting for the survey design features, four linear regression models are conducted. Model 1 uses three independent variables to predict financial well-being, and Model 2 adds the interaction terms of financial access with financial knowledge and skills. Models 3 and 4 use the same specification of Model 2 on individuals with household income below and above the 200% of federal poverty line, respectively. Multiple demographic and socioeconomic characteristics are controlled in analyses. 

Results: Model 1 suggests that financial access (b=1.28, p<.001), knowledge (b=.44, p<.05), and skills (b=4.86, p<.001) are positively associated with financial well-being. In Model 2, the interaction term between financial access and skills has a statistically positive regression coefficient (b=.73, p<.001); for those receiving financial services, the association between financial skills and well-being becomes stronger. After adding the interaction term between financial access and knowledge, the main effect between financial knowledge and well-being becomes insignificant (b=-.18, p= .664), but the interaction term is positively associated with the dependent variable (b=.21, p<.05). In other words, financial knowledge is not associated with well-being unless respondents have access to financial services. Results on low-income and higher-income individuals are comparable to those of Model 2. Compared to higher-income individuals, financial access and its interaction with financial skills have stronger associations for low-income respondents. 

Conclusion: Supporting the theoretical framework of financial capability, financial access, knowledge and skills all are positively associated with financial well-being. In addition, financial access moderates the relationships between financial well-being and financial knowledge and skills, particularly, for low-income individuals. Findings suggest that, to promote financial well-being, it is critical to ensure that all individuals access appropriate financial services. To make all basic finance a public good could be an effective strategy to achieve this goal.