Uncovering a Paradoxical Relationship between Household Income, Financial Capability, and Financial Well-Being: Can Low-Income People Have High Financial Well-Being?

Background and Purpose

Financial social work has become popular to promote Financial Well-Being (FWB) by building financial capability. Despite the increasing popularity, there is still a lack of participation in financial capability programs among low-income populations. Perhaps, some low-income people may not see the benefit of financial capability without increasing actual income. Others may have high FWB even if their income and financial capability are low. Such a paradoxical relationship between household income, financial capability, and FWB should be further explored to suggest targeted programs that effectively address the unique needs of diverse financially vulnerable populations. We compare individual characteristics between four groups that reflect the different combination of income and FWB levels. We also examine how financial capability variables are associated with the different status of FWB for low-income and middle-high-income groups, respectively.

Methods

We used the 2016 National Financial Well-Being Survey developed to measure FWB and other financial characteristics of nationally representative populations in the US. The analytic sample systematically selected 3136 cases with low (≤ 25 percentile) and high (≥ 75 percentile) FWB for clear comparison. Family income was divided into low-income and middle-high-income using the 200 percent poverty threshold. By combining the two variables, four distinctive groups were created: low-income and low FWB (n = 758, 24.2%); low-income and high FWB (n = 186, 5.9%); middle-high-income and low FWB (n = 753, 24%), and middle-high-income and high FWB (n = 1439, 45.9%). Two financial capability variables—financial skills and financial knowledge—were measured by separate instruments. Using survey weights, descriptive and binary logistic regression analyses were performed to achieve the research purposes.

Results

No gender difference was found between the four groups. High FWB groups for both income samples tended to have a higher percentage of older people (≥ 62). The number of Hispanic populations was higher for the high FWB group within the low-income sample, but not within the middle-high-income sample. Logistic regression analyses showed that financial skills significantly increased the likelihood of being high FWB for both samples (low-income OR = 1.08. p < .001; middle-high-income OR = 1.12, p < .001). Financial knowledge was a significant factor only for the middle-high-income sample (OR = 1.73, p < .001). Within the low-income sample, illness/disability status was negatively associated with the likelihood of being high FWB (OR = .30, p < .01). This negative relationship was not significant for the middle-high-income sample.

Discussions and Implications

The results suggest that financial capability may be beneficial for improving FWB. However, its effects can vary across household income levels. For example, although financial skills were a significant factor for all income groups, financial knowledge was not significant for the low-income group. The results imply that it could be more effective to provide low-income populations with financial counseling or coaching that helps them address their financial problems and accomplish their financial goals, rather than simply increasing their financial knowledge. Furthermore, financial social workers should place a priority on improving FWB for low-income people who are younger and disabled.