Financial Knowledge, Financial Inclusion, and Household Financial Management in Low-Income Families

Background/Purpose: The growing vulnerability of low-income families requires a thoughtful and multidimensional response at individual and structural levels. The financial situation of low-income families has recently worsened, in part, due to lack of financial knowledge and access to the mainstream financial products and services. However, much of the research in this area has been undertaken with insufficient attention to structural factors (e.g. financial inclusion) that serve as a foundation of poverty. The purpose of this study is to examine the associations between financial knowledge, financial inclusion, and household financial management, controlling for demographic and socioeconomic characteristics.

Methods: The study uses longitudinal survey data from low-income parents of Head Start children (n=681) in Pontiac, Michigan. The study analyzes secondary data from a larger research project called Michigan Saving for Education, Entrepreneurship, and Downpayment (MI SEED), which was part of a national demonstration of Child Development Accounts (CDAs).

Measures: Financial knowledge measure is based on five true or false questions. Financial inclusion is measured on the basis of ownership of savings and/or checking account. Household financial management measure is based on a number of positive household financial practices and financial future orientation. Demographic and socioeconomic characteristics used as controls were income, homeownership, employment, race, marital status, and educational attainment.

Results: In the first three models, multiple regression analysis was conducted to test the associations between financial knowledge, financial inclusion, and positive household financial practices. Regression results indicate all the three models were significant and explained between 5.1% and 5.2% of variance in positive household financial practices [Model 1 R²=.051, F(8, 673) = 4.539, p<.001]; [Model 2 R²=.052, F(8, 673) = 4.600, p<.001]; [Model 3 R²=.051, F(8, 673) = 4.523, p<.001]. Next, financial knowledge and financial inclusion were tested on financial future orientation in a series of three regression models. Regression results indicate all the three models were significant and explain between 5.4% and 6.7% of the variance in financial future orientation [Model 4 R²=.054, F(8, 673) = 4.758, p<.001]; [Model 5 R²=.067, F(8, 673) = 5.977, p<.001]; [Model 6 R²=.061, F(8, 673) = 5.423, p<.001]. Financial knowledge appears to be significantly associated with positive household financial practices [Model 1 r=.117, df=.031, p<.01 , Model 2, r=.111, df=.031, p<.01; Model 3 r=.116, df=.031, p<.01] but not financial inclusion regardless of how it is measured. Ownership of savings account is significantly associated with financial future orientation [Model 5, r=.123, df=.118] but not checking account. The findings suggest households with higher financial knowledge are more likely to have positive household financial practices than households with lower financial knowledge.

Conclusion and Implications: Low-income households may benefit from program and policy efforts that are designed to strengthen the financial knowledge and financial inclusion of low-income families. Owning a savings account appears to be a better measure of financial inclusion than owning a checking account. The association between owning savings account and financial future orientation requires more study in the future to explore causal directions. Future work might involve quasi-­experimental designs with expanded household financial management measures.