Financial Knowledge, Financial Fragility, and the Moderating Role of Financial Interdependence Activity

Background and Purpose. Many people engage in financial interdependence activity as an expression of social cohesion. This activity, defined as financial support provided to and/or received from a person outside the household, can serve as a hindrance or safety-net in times of difficulty. Despite the widespread nature of this activity, most financial education efforts focus on the importance of technical knowledge and espouse independence, often ignoring sharing activity altogether. Thus, the financial knowledge needed to reduce financial fragility may be insufficient, or even at odds with the lived reality of the individual or family. The aim of this study is to determine what moderating role financial interdependence activity may have on the relationship between improved levels of financial knowledge and decreasing financial fragility.

Methods. The study drew from the Survey of Household Economics and Decisionmaking (SHED), using data cross-sectionally from waves 2017, 2018, and 2019 (N = 35,676 observations from N = 23,496 respondents). Variables included constructed measures of financial knowledge (three-item score) and financial fragility (nine-item scale), indications of sharing and receiving money (one item each), and six covariates. The median income was $60,000 to $74,999; 28.3% identified with a racial/ethnic group of color. Of the total sample, 16.3% reported providing regular financial support to someone living outside the household (sharing); 8.4% reported receiving regular financial support from someone living outside the household (receiving). This activity was practiced across all racial/ethnic groups. Data analyses were conducted in R using the psych package (for financial fragility scale construction), generalized linear modeling to assess relationships between financial knowledge and the variables of interest, and Hayes’ PROCESS function scripts for R (Model 2) to test financial knowledge’s modeled effect on financial fragility when moderated by sharing and receiving activity.

Results. The financial fragility scale (0 to 0.85; higher scores indicating increased fragility) had modest reliability; α = 0.67. As financial knowledge scores (0 to 3) increased, respondents reported a likelihood of decreased fragility, to endorse sharing money, and decreased likelihood of receiving, or both sharing and receiving, money. The conditional effect of financial knowledge on financial fragility was strongest when no interdependence activity was endorsed (β = -0.035; 95% CI [-0.04, -0.03]), and progressively weakened as respondents endorsed sharing (β = -0.025; [-0.03, -0.02]), receiving (β = -0.022; [-0.03, -0.02]), and both sharing and receiving (β = -0.012; [-0.02, -0.01]). The model, including covariates, accounted for a reasonable amount of variance in the data; R² = 0.29.

Conclusions and Implications. Although improved financial knowledge might contribute to reduced financial fragility, a person’s financial interdependence activity may interrupt or mitigate efforts toward financial stability. Importantly, respondents across all racial/ethnic identities engaged in this practice, suggesting it is not solely a feature of “collectivist” cultures. Amidst delivering technical financial knowledge, educational interventions to improve financial stability should accommodate for these behaviors (i.e., creating a budget line-item for sharing money), enabling participants to simultaneously help themselves and care for others.