Exploring Financial Instability in America through the Lens of Financial Education

doi:10.21203/rs.3.rs-3011026/v1

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Exploring Financial Instability in America through the Lens of Financial Education

https://doi.org/10.21203/rs.3.rs-3011026/v1

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Financial instability in America is a significant problem worth examining because of its vast social costs. People assume that financial education is the antidote to this problem, yet less than half of the states in America mandate it in high school. Using the 2018 National Financial Capability Study (NFCS), this thesis explores the links between financial education and financial instability, using financial literacy as a mediating factor. This research used descriptive statistics to give an overview of all the important variables and logistic regression to test the hypotheses. The results show that financial education and financial literacy are positively related and that financial literacy is negatively associated with financial instability. Policymaking should be aimed at the high school level because that is where most people have access to financial education. This study indicates that financial education is underutilized in America, which has resulted in a vast majority of the population’s becoming financially unstable.

Financial Education

Financial Literacy

Financial Instability

Financial Capability

Subjective Financial Knowledge

Education is seen as a key to financial freedom. However, with many American families struggling to live comfortably, it is time to reexamine the link between financial education and financial success. While many Americans’ highest level of education is high school, the curricula at this level are not designed to teach the basics about the personal financial decisions students will make later in life. These factors contribute to a system where people cannot pay back their debts, rely on social programs, and become more financially unstable overall. Consequently, the problems that follow from financial illiteracy are passed onto society (Lusardi and Mitchell 2011). Financial instability in America is significant, “with roughly three-quarters of Americans living paycheck to paycheck with hefty debt responsibilities and little to no savings” (Clark 2014). Likewise, financial education in high schools needs to be reexamined and revised to increase students’ financial knowledge. By examining the financial literacy of individuals and how it relates to their current financial strength, this thesis will explore the relationship between the lack of financial education in American high schools and financial instability in the average American household.

1.1 Literature Review

1.1.1 Financial Literacy

For this study, financial literacy is defined as "how well an individual can understand and use personal finance-related information" (Huston 2011). This definition was proposed by Sandra Huston in her paper “Measuring Financial Literacy.” Before Huston, many other definitions were proposed that were similar to one another. Huston reviewed the previous definitions of financial literacy and constructed a composite definition to capture the meanings of financial literacy up to that point. Subsequently, many other authors writing on this topic have used this definition (Korankye, Pearson, Salehi 2022, Kim and Xiao 2021, Zhang and Fan 2021). Gignac (2022) built on it, stating, “financial literacy may be defined as ‘the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.’” A key to understanding financial literacy is to divide it into two parts: personal financial knowledge and the application of that knowledge.

Financial knowledge can be broken down into four key areas: basic concepts, borrowing concepts, saving and investing concepts, and protection concepts. This scheme is based on Huston (2011), who reviewed the literature on financial literacy from 2000 to 2010 to find the most accurate concepts to work with. The term basic concepts refers to the “time value of money, purchasing power, and personal financial accounting concepts.” Borrowing concepts refers to “bringing future resources into the present through the use of credit cards, consumer loans, or mortgages.” Saving and investing concepts refers to “saving present resources for future use through the use of saving accounts, stocks, bonds or mutual funds.” Protection concepts refers to financial protection “either through insurance products or other risk management techniques.”

The application of personal financial knowledge encompasses how one uses the four key areas of concepts described above. Someone can understand that a portion of their money should be kept in a mutual fund but may lack the self-control to invest it there (Alhenawi and Elkhal 2014). In this circumstance, one would have ample financial knowledge but low financial literacy because they are not applying what they know. This can cause problems; in the short term, low financial literacy may be associated with inadequate precautionary saving (Zhang and Fan 2021), while in the long term, the lack of vital financial knowledge and skills may lead to a lack of retirement savings (Lusardi and Mitchell 2007). Therefore, a person’s overall behavior must be measured to understand their financial literacy.

One’s confidence, measured in terms of subjective financial knowledge, can also be important in offsetting financial instability and can be directly related to one’s financial literacy. Allgood and Walstad (2015) studied this connection and found that both objective financial knowledge and self-assessed financial knowledge seemed equally valuable in predicting financial behaviors.

A financial literacy test was used in the 2018 National Financial Capability Study (NFCS) to measure financial literacy. Six questions were asked, and an overall score was assigned to each respondent. Two of the questions were about the time value of money, one question was about investing, two about borrowing, and one about bonds. The test measures financial knowledge, but the data can be used to deduce the respondents’ application of that knowledge. For example, questions about savings accounts and budgeting can reveal the successful application of basic financial concepts. Furthermore, a section of the test asks respondents about their investing habits, borrowing habits, and retirement preparedness.

1.1.2 Financial Education

Previous literature hypothesizes that financial education is an antidote to America’s financial instability problem. The Organization of Economic Cooperation and Development (OECD) defines financial education as:

The process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being. (Crude and Henager 2016)

This definition can delineate what financial education courses should look like in a high school. Previous studies have positively linked financial education to financial literacy (Alhenawi and Elkhal 2014, Lusardi 2019). Henager and Crude (2019) demonstrated that “high school financial education was significantly related to the long-term financial behavior index … it also was a significant predictor of budgeting behavior increasing the odds [of budgeting] by 23%.” Other attributes linked to higher financial literacy are confidence and the ability to take financial action. Henager and Crude (2019) also correlated financial literacy with confidence and financial ability, which means that educators need “to focus on confidence and ability as well as objective knowledge.” Furthermore, because one’s successful application of financial knowledge can build confidence, high school courses should teach about practical applications relevant to one’s position in high school (Henager and Crude 2019). The literature on this subject also indicates that financial education builds one’s confidence, amongst other benefits (Xiao & Kim 2021). Financial education in high school has also been linked to better saving and wealth accumulation in adulthood (Bernheim et al. 2001). It has been found that a single information seminar is not enough to improve financial literacy, which points to the value of investing in more extensive financial education (Lusardi and Mitchell 2007). In addition, financial education for vulnerable populations has been shown to increase their chances later in life of avoiding debt, which is an aspect of financial instability (Jin & Chen 2020). Fernandes et al. (2014) have provided substantial research that shows that the curriculum for the financial education of young people should be tailored to matters that are of timely importance to them, or the knowledge will be lost when it is time to act. Therefore, when considering the role of high school courses in financial literacy, it should be noted that they are positively related to budgeting and long-term financial behavior and should be relevant to students and take advantage of students’ ability to ensure stability in their financial futures. A substantial body of literature ties financial literacy to financial education. This link warrants study because of the possible mediating role of financial literacy between financial education and financial instability.

To measure financial education in the NFCS, the respondents were asked to report if they had ever been required to take classes in finance, and if they had, to rate the quality of the financial education they received.

1.1.3 Financial Capability

Financial capability refers to what one is able to do with their current financial resources. Lusardi (2011) defines financial capability “in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions.” This definition paints financial capability and literacy as similar, but they differ in their measures of current financial resources. Jin and Chen (2020) define financial capability broadly as financial knowledge, skills, values, and attitudes, as well as access to financial products and services that foster financial security. The addition of access to financial services is essential because it indicates that financial capability has to do with more than an individual’s behaviors. Although there is more than just behavior to consider, other studies have linked behavior to financial capability as well (Nam and Loibl 2021). However, this should not be surprising since good financial behavior is associated with building financial wealth. Lučić et al. (2022) observe that financial capability is the capacity to “undertake comprehensive financial activities which ensure an individual's financial well-being.” One’s net worth, financial resources, and financial connections can all compensate for the deficits caused by financial instability (Rothwell et al., 2022).

These definitions are important because they shed light on how one can possess low financial literacy but high capability, which can offset how financially unstable one would otherwise be. For example, if a doctor has a large income with an inheritance due, then his or her long-term medical school bills may be of little concern because the doctor has the capability to pay them off. Although the doctor is deep in debt, there is no cause for fear. However, if someone has not had a job for a couple of months and still has bills and a small amount of debt to pay, this debt may seem monumental because there are no means to pay it off. If one is financially literate but not capable of much, then it can be assumed that financial literacy and financial capability do not correlate. However, because financial capability can influence financial stability, it must be taken into consideration for the sake of the study’s accuracy.

Financial capability is measured in the NFCS with background questions about work status, household income, and the ability to raise money quickly, and with various subjective questions about financial wellness. More importantly, the two most important determinants of financial capability identified in previous studies, age group and household income, were broken down into categorical variables.

1.1.4 Financial Instability

Financial instability is a significant problem in America, where consumerism is trending. Instability causes psychological harm, as well as financial harm, through the immense stress it places on individuals. Xiao and Kim (2022) found that mortgages, credit card debt, and student loans had a positive association with financial stress, while financial capability had a negative association. In addition, the literature draws a connection between certain aspects of financial literacy and the quelling of financial anxiety and stress (Lusardi et al. 2021). Heavy debt puts stress on individuals, and financial capability can ameliorate this stress. Tsuchiya et al. (2020) reported that about three-quarters (74.6%) of Americans are experiencing a financial stressor, and Valdes, Mottola, and Armeli (2020) revealed that 81% of citizens who are living paycheck to paycheck experience high financial anxiety.

Financial instability can take on many meanings among people, depending on their life scenarios. That is why a simple metric of debt and income cannot be used to fully understand if someone is financially stable. Instead, fear of debt, spending levels, income satisfaction, financial satisfaction, income relative to expenses, and unpaid bills can reflect the extent of one’s financial instability. Furthermore, behaviors such as skipping medical visits, utilizing payday loans, or patronizing pawn shops are visible evidence of instability. Altogether, financial instability is psychologically and socially harmful, and finding ways to alleviate it is good for both individuals and society at large.

Financial instability was measured in the NFCS with questions about the respondent’s current situation. This was done to avoid conflating instability with poor financial knowledge. For example, a question about risky borrowing habits was categorized under the application of financial knowledge, while a question about fear of debt was categorized under financial instability.

1.1.5 Summary

An extensive body of research has shown that financial instability has social and personal costs. Societally, it is estimated that 80% of the workforce tries to deal with their financial worries at work, taking their focus from occupational tasks (Clark 2014). Research has also shown that financial literacy can reduce financial distress (Scott et al., 2018). The primary way to improve one’s financial literacy is through financial education. Currently, according to the Council for Economic Education, only 23 states require that students take a personal finance course before graduating from high school (CEE 2022). Since students start their financial journey right after high school, studying the relationships among education, literacy, and instability is important. If it is shown that education plays a significant role in reducing financial instability later in life, the government should focus more on financial education at the high school level, where it can benefit the greatest amount of people.

2.1 Data and Methodology

The data for this thesis were taken from the 2018 National Financial Capability Study, which was based on the 2015 National Financial Capability Study. A total of 27,091 respondents completed the 2018 NFCS survey, approximately 500 from each state and 500 from the District of Columbia. The data were then cleaned by removing surveys with missing data, leaving the dataset at 17,481 items. Participants self-administered the survey online during the months of June to October 2018.

The descriptive statistics were generated with Excel and were used to produce general findings, which in turn were used to outline the variables and provide insights into correlations that could support the hypotheses. Logistic regression analysis was used to test the hypotheses. Two logistic regression models were run, one using financial literacy as the dependent variable and the other using subjective financial knowledge. Both analyses used age and gender as control variables. Subjective financial knowledge, financial education, and financial instability were included as variables to assess financial literacy. Financial literacy, financial education, and financial instability were included to assess subjective financial knowledge. Both logistic regression models were generated using R.

2.2 Hypotheses

Hypothesis 1

Financial education has a positive relationship with financial literacy

In light of findings like that of Lusardi and Mitchell (2011), who reported a positive association between certain financial concepts and financial education, the first hypothesis is that financial education has a positive relationship with financial literacy. The respondents were asked to report whether they received financial education in high school and, if they had, to rate it, to furnish data on whether such a relationship exists. However, proving this takes more than knowing about a person’s grasp of financial concepts because a person’s actions must also be considered.

Hypothesis 2

One’s financial literacy negatively relates to one’s financial instability

The second hypothesis is that one’s financial literacy negatively relates to one’s financial instability. This proposition is central to understanding the importance of financial education for combatting financial instability. The study investigated several types of financial stressors, giving insight into one’s financial instability.

Hypothesis 3

One’s financial instability has an inverse relationship to one’s subjective financial knowledge

The third hypothesis is that one can have high financial literacy but high financial instability due to a lack of subjective financial knowledge. This hypothesis is meant to assess the respondents’ confidence to make financial decisions and to test the idea that some people have high financial instability not solely because of low financial literacy. Given the hypothesis that subjective financial knowledge is inversely related to financial instability, it was assumed that it would have a positive relationship with financial education and financial literacy. The hypotheses’ interrelationships are illustrated in the hypothesis flow chart in Fig. 1, with positive relationships represented with a blue line and negative relationships represented with a red line.

2.3 Variables

2.3.1 Findings: Financial Literacy

Budgeting
Spending < Income	0.46
Spending > Income	0.18
Spending = Income	0.36

Figure 2. Overview of the respondents’ spending of total income.

Financial Literacy Test
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?	0.81
Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?	0.66
If interest rates rise, what will typically happen to bond prices?	0.31
Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?	0.35
A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.	0.84

Figure 3. Results from the financial literacy test questions.

The average financial literacy test score in the NFCS was 59%, meaning the participants answered three or four of the six questions correctly. Moreover, only 53% of respondents could answer at least four questions correctly. The questions and results are listed in Fig. 2. The respondents were most challenged by two questions: “If interest rates rise, what will typically happen to bond prices?” and “Suppose you owe $1,000 on a loan, and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate how many years would it take for the amount you owe to double?” Only about a third of the respondents could answer these questions correctly.

Financial Literacy Application Areas
Spending less than income	0.46
Do you have a 3-month emergency fund?	0.58
Do you have a savings account, money market account, or CDs?	0.81

Figure 4. Overview of the financial literacy application questions.

In addition to the questions on the financial literacy test, numerous other questions gave insights into the participants’ use of their financial knowledge. First, as illustrated in Fig. 2, only 46% of respondents said they had income higher than their spending level, with 18% saying they spent more than their income and 36% saying they spent as much as their income, a daunting statistic. Second, 58% reported that they had a three-month emergency fund. Finally, 81% said they had a savings account, money market account, or CDs. These three areas, shown in Fig. 4, were used to assess how well the participants applied their knowledge. The findings show that more than half of the respondents are spending as much as, or more than, their income; just over half have enough savings to survive three months; and most had some money in savings or investments. A new variable was created to indicate whether a person was performing well in all three of these areas and applying proper financial principles in their life. Only 33% of respondents demonstrated an ideal application of their financial knowledge. Furthermore, only 21% of respondents answered four or more questions correctly on the financial literacy test and at the same time satisfied all three criteria for the ideal application of their financial skills.

2.3.2 Findings: Financial Education

Financial Education Hours Attended
Answer	Observations	Proportion	Rated Education Highly
0 hours	13864	0.79	0.00
1–2 hours	427	0.02	0.62
3–10 hours	914	0.05	0.77
10 + hours	2276	0.13	0.86

Figure 5. Overview of the duration of the respondents' financial education.

Figure 5 illustrates the amount of time respondents spent on their financial education. Only 13% of respondents had more than 10 hours. The respondents were also asked, “Overall, how would you rate the quality of the financial education you received?” to be answered on a scale from 1–7, with 7 being perfect and 1 being useless. That answer was then translated into a binary score, with answers of 5–7 counting as satisfactory (1) and answers of 0–4 as unsatisfactory (0). The duration of financial education had an extremely high positive correlation (93%) with its ratings (see Fig. 6). Those who rated their financial education as satisfactory also had a high correlation (75%) with being financially literate. This supports the first hypothesis that “financial education has a positive relationship with financial literacy.”

2.3.3 Findings: Financial Instability

Financial Education and Financial Instability
School Attended	Monthly ability to cover expenses	Credit Score Rating	Will you run out of money in retirement	Are you anxious about your finances	My finances control my life	Do you receive either Medicaid benefits or food stamps/SNAP	Debt Collection Agency Contact	I have too much debt right now
Did Not Graduate High School	0.32	0.33	0.57	0.61	3.33	0.49	0.33	0.47
Graduated High School with Diploma	0.54	0.64	0.53	0.52	2.89	0.21	0.20	0.36
Graduated High School with GED or Certificate	0.45	0.55	0.56	0.57	3.10	0.30	0.26	0.42
Some College No Degree	0.50	0.61	0.56	0.57	3.04	0.23	0.26	0.46
Associate's Degree	0.56	0.67	0.54	0.54	2.93	0.17	0.20	0.43
Bachelor's Degree	0.66	0.81	0.50	0.50	2.74	0.09	0.11	0.34
Post Graudate Degree	0.72	0.86	0.45	0.43	2.62	0.06	0.10	0.32

Figure 7. Survey results for the relationship between education level and financial instability.

Financial instability was measured with eight different questions about the respondents’ financial instability. Monthly ability to cover expenses was rated with 1, as the ability to cover expenses easily, or 0, not easily. Ratings of credit scores were given by respondents and were also binary, with 1 being a good credit score and 0 a bad one. The item “my finances control my life” was graded on a scale from 1–5, with five being “strongly agree” and 1 “strongly disagree.” The rest of the instability questions were coded as binary with one as “yes” and 0 as “no.” Fig. 7 lists all the questions about instability and contrasts them with the respondents’ education levels. Again, more education correlates positively with less instability. Respondents who had some college but did not graduate were an exception to this rule, often presenting as financially unstable, or more so, than those who graduated high school with a diploma.

Financial Instability and Financial Literacy
	Monthly ability to cover expenses	Credit Score Rating	Will you run out of money in retirement	Are you anxious about your finances	My finances control my life	Do you receive either Medicaid benefits or food stamps/SNAP	Debt Collection Agency Contact	I have too much debt right now
Average	0.58	0.70	0.52	0.52	2.88	0.17	0.18	0.39
Literate Respondents	0.92	0.95	0.34	0.25	2.17	0.02	0.03	0.11

Figure 8. Relationship between financial instability questions and financially literate respondents.

Figure 8 shows the effects of financial literacy on one’s financial instability. Consistently, the answers of the financially literate respondents to the financial instability questions were better than those of the others. Perhaps the most startling finding is that the financially literate people were 92% likely to be able to easily cover their monthly expenses, whereas the not-so-financially literate were only 58% likely to be able to do so. The inverse relationship of financial literacy to financial instability, buttressed by these findings, is important for supporting the second hypothesis: “One’s financial literacy inversely relates to financial instability.” Overall, 27% of the respondents gave undesirable responses to more than half of the questions, exhibiting severe financial instability.

2.3.4 Findings: Financial Knowledge

Financial Knowledge
I am good at dealing with day-to-day financial matters	0.86
I am pretty good at math	0.97
How would you assess your overall financial knowledge?	0.79

Figure 9. Results for the subjective financial knowledge questions.

Respondents on average answered the subjective financial knowledge questions well. These questions were answered on a scale of 1–7, with 7 being “strongly agree” and 1 “strongly disagree.” Those who rated the items 5–7 were coded as 1 (satisfactory), and those who rated them 1–4 as 0 (unsatisfactory). In all, 97% of the respondents said they were pretty good at math. However, these numbers do not tell the full story; they just give a glimpse of what the respondents think of their ability, which can be skewed. After all, it is highly unlikely that 97% of respondents are good at math and 86% are good at dealing with financial matters when only 21% of the respondents could be considered financially literate, and only 53% could answer four or more questions correctly on the financial literacy test. What can be deduced from these numbers is the respondents’ confidence in their decisions in life, including their financial decisions. Someone who has a high amount of subjective financial knowledge will likely make decisive financial decisions based upon their subjective knowledge, leading them to employ healthy financial behaviors that they know of.

Instability and Lack of Financial Knowledge
	Instability	Correlation
I am good at dealing with day-to-day financial matters	0.50	-0.21
I am pretty good at math	0.47	-0.08
How would you assess your overall financial knowledge?	0.46	-0.22

Figure 10. Correlations of subjective financial knowledge with financial instability.

Figure 10 shows the inverse correlations between the participants’ subjective financial knowledge and their financial instability. This table shows the results for respondents who said they were not financially knowledgeable in any of the three areas. The instability metric was assigned to respondents who gave undesirable answers to more than half of the instability questions. As seen in the table, 50% of those who answered that they were not good at dealing with day-to-day matters also exhibited severe instability. This question had a -21% correlation between instability and the capability to deal with day-to-day financial matters well.

Knowledgeable Perfect vs Imperfect Instability
	Respondents	Instability
Financially Knowledgeable	0.72	0.20
Not Financially Knowledgeable	0.01	0.66

Figure 11. Results for the respondents’ subjective financial knowledge.

Figure 11 shows this inverse relationship in more depth. A new variable was created to measure respondents who answered all three financial knowledge questions ideally or unsatisfactorily. Those who answered all three ideally were coded as 1; those who answered all three not ideally were coded as -1, and those who had mixed responses were coded as 0. The table shows that 72% of respondents answered all three questions ideally, whereas only 1% of respondents answered all three questions not ideally. Those who answered all three questions ideally were 7% less likely to exhibit severe instability; those who answered all three not ideally were 66% likely to exhibit severe instability. Moreover, there was a strong − 25% correlation between subjective financial knowledge and financial instability, which supports the third hypothesis: “One’s financial instability has an inverse relationship to one’s subjective financial knowledge.”

2.3.5 Findings: The Effect of Age

Age and Instability
Age Group	Financial Literacy	Financial Instability
18–24	0.11	0.33
25–34	0.12	0.43
35–44	0.16	0.39
45–54	0.19	0.31
55–64	0.29	0.19
65+	0.30	0.09

Figure 12. Relation of the respondents’ age to their financial literacy and financial instability.

Age plays an influential role in financial literacy. Previous research connects higher financial knowledge with older age groups (Lusardi and Mitchell 2011). This runs parallel with the findings of previous research that says the content of financial education should be relevant to a person’s current financial state in life, because as people age, the more experience with earning income they have (Robb and Woodyard 2011). Figure 12 shows that the older respondents were more financially literate and more financially stable than the younger ones.

Age and Education
Group and Education	Literacy	Instability
34 and under, not financially educated	0.11	0.40
34 and under, financially educated	0.16	0.42
35 and over, not financially educated	0.23	0.24
35 and over, financially educated	0.33	0.20

Figure 13. Relationship of the respondents’ age and education to their literacy and financial instability.

Figure 13 compares the financially educated and non-financially educated participants, divided into two age groups. In both age groups, the participants who were financially educated were more financially literate than the other members of their group.

2.4 Hypothesis Testing

Literacy = Intercept + Education + Gender + Age + Instability + Sub_Fin_Knw_All

Coefficients	Estimate	Standard Error	Z value	Pr(>\|z\|)
Intercept	-1.69	0.10	-17.33	< 2e-16
Education	0.06	0.01	7.86	3.87e-15
Gender	-0.47	0.04	-11.81	< 2e-16
Age	0.15	0.01	11.37	< 2e-16
Instability	-2.92	0.12	-24.50	< 2e-16
Sub_Fin_Knw_All	0.91	0.06	15.58	< 2e-16

Figure 14. Results of the financial literacy logistic regression.

2.4.1 Hypothesis 1: Financial education has a positive relationship with financial literacy

To test hypothesis 1, two data points per observation were used. The first was a financial literacy measure and the second a financial education measure. The financial literacy measure was encoded as 1 if a respondent answered all three financial application questions ideally and scored higher than 50% on the financial literacy test; otherwise, it was encoded as 0. The financial education measure was determined using the question “Overall, how would you rate the quality of the financial education you received,” which was rated on a scale of 1–7. If a respondent had no financial education, the response was encoded 0. Whereas, if the respondent had received financial education their response would be recorded as 1–7 depending on their rating. Figure 14 shows the logistic regression results for financial literacy, relating it to education, gender, age, and instability. The positive value for education, coupled with a p-value less than 0.05 (3.87*-10^15), shows that education has a positive and significant relationship with financial literacy. This finding proves hypothesis 1. In addition, age has a positive and significant correlation with financial literacy.

2.4.2 Hypothesis 2: One’s financial literacy inversely relates to one’s financial instability

The second hypothesis was tested by examining the financial literacy variable used in hypothesis 1 and comparing it to one’s financial instability. The financial instability metric was based on responses to the eight financial instability questions in the survey. Those who answered more than half of the questions non-ideally were coded as unstable. Figure 14 shows the logistic regression results, including the relationship of financial literacy to financial instability. The negative value for instability, coupled with a p-value less than 0.05 (2*-10^16), shows that instability has a negative and significant correlation with financial literacy, which proves hypothesis 2.

2.4.3 Hypothesis 3: Financial instability has a negative relationship with subjective financial knowledge.

Sub_Fin_Knw_All = Intercept + Literacy + Education + Instability + Age + Gender

Coefficients	Estimate	Standard Error	Z value	Pr(>\|z\|)
Intercept	4.66	0.36	13.08	< 2e-16
Literacy	2.39	0.72	3.33	0.001
Education	0.19	0.05	4.06	4.86e-05
Instability	-1.16	0.16	-7.45	9.67e-14
Age	0.29	0.05	5.70	1.20e-08
Gender	-0.58	0.16	-3.55	0.0004

Figure 15. Logistic regression results for subjective financial knowledge.

The third hypothesis was tested by examining the financial instability variable used in hypothesis 2 and comparing it to subjective financial knowledge. Subjective financial knowledge was determined by looking at the three questions about one’s financial knowledge. If a respondent answered all three questions ideally, they were considered financially knowledgeable and encoded as 1. If a respondent answered all three questions non-ideally, they were considered not financially knowledgeable and encoded as -1. If they did not fit into either of these categories, they were assumed to be in the middle and encoded as 0. Overall, 72% of the respondents considered themselves financially knowledgeable. Figure 15 shows the logistic regression results comparing subjective financial knowledge to financial literacy, financial education, financial instability, age, and gender. The negative value for instability, coupled with a p-value that’s less than 0.05 (9.67*-10^14), shows that subjective financial knowledge has a negative and significant relationship to financial instability, which proves hypothesis 3.

By applying logistic regression to the NFCS dataset and testing the variables of financial literacy, financial education, financial instability, and subjective financial knowledge, correlations were revealed that support the hypotheses. The first hypothesis positively linking financial education to financial literacy was proven to be true; there was a positive link between age and financial literacy as well. The second hypothesis negatively linking financial literacy and financial instability was also proven to be true. Thus, both hypotheses that were needed to prove that financial literacy is a mediator between financial education and financial instability were proven to be true. The third hypothesis, negatively linking subjective financial knowledge and financial instability, was also proven to be true. This hypothesis also supports the idea that confidence in one’s financial knowledge leads to better financial decision-making.

This thesis set out to examine the link between financial education and financial instability. Overall, the link was shown to exist, with financial literacy as a mediating factor. Based on these findings, society should be concerned with improving financial education. It should approach financial education as an investment because it helps to prevent financial instability, which has stark social costs that go beyond the person who is unstable and ripple into society. Likewise, high school is an ideal place to offer financial education, since it is expected that almost everyone in society will attend high school. With less than half of American states requiring a personal finance course before high school graduation, there is still a long way to go in terms of improving financial education. The more states that require financial education at the high school level, the less impact financial instability will have on society in the future.

4.1 Limitations and Future Work

The limitations of this study are related to the survey. Although there is a wide array of questions in the 2018 NFCS, more specific questions about financial education would have given more insight into the respondents’ backgrounds. They could also have been used to show how effective different types of education are, for example, high school, college, or work seminars. Questions about the number of classes could have been used to refine the data and enable us to establish how many financial classes are ideal but also feasible for the average person.

Future work should seek to examine further how financial capability, as opposed to financial literacy, offsets financial instability. Financial capability likely plays a large role in offsetting financial instability, and work presented in the literature review supports this notion. It should be noted that the status of financial literacy may be correlational rather than causal, because there are means of obtaining resources besides financial literacy, such as chance or generational wealth. Further work would need to look deeply at financial capability, including its sources and its relationship to financial instability and financial literacy.

Future work should also examine which communities are most affected by financial instability and lack of financial education. To receive financial education people usually must go to college, which can be costly and, often, without familial support, impossible. Moreover, if someone cannot afford college, they would likely not fit into the category of people with the financial capability to offset their financial instability. This brings up the question of fairness of opportunity in our financial options, with implications for the financial well-being of the United States.

4.2 Conclusion

This study successfully linked financial education to reducing financial instability by using financial literacy as a mediator. The policy implications of this study are clear: the more financial education a citizen receives, the better suited for adulthood they will be. Since high school level is where most citizens could receive financial education, it is where financial education should be mandated and tailored to students’ lives. Currently, less than half of the states in America require some form of financial education in high school to graduate. Ideally, all states should be mandating it, because it reduces the social harm caused by financial instability.

To further understand how important these problems are, it is necessary to realize that not all communities have access to generational wealth and the ability to attend college. Those who can easily access financial education are those who have the means to pursue a college degree or to learn about personal finance at a high-end company seminar. Meanwhile, those who cannot afford to go to college are unlikely to receive financial education unless it is offered in high school, which means this issue is not only a societal one but also one involving equality. Offering more financial education at the high school level would help those who need it the most and prepare them to handle their finances, instead of having to proceed in life with no guidance. Otherwise, the cost to underserved communities and society at large is too high to ignore. Financial education at the high school level would alleviate this cost and have generational ripple effects, creating a brighter and more equitable future for all.

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Exploring Financial Instability in America through the Lens of Financial Education

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Abstract

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1 Introduction

1.1 Literature Review

1.1.1 Financial Literacy

1.1.2 Financial Education

1.1.3 Financial Capability

1.1.4 Financial Instability

1.1.5 Summary

2 Method

2.1 Data and Methodology

2.2 Hypotheses

2.3 Variables

2.3.1 Findings: Financial Literacy

2.3.2 Findings: Financial Education

2.3.3 Findings: Financial Instability

2.3.4 Findings: Financial Knowledge

2.3.5 Findings: The Effect of Age

2.4 Hypothesis Testing

2.4.1 Hypothesis 1: Financial education has a positive relationship with financial literacy

2.4.2 Hypothesis 2: One’s financial literacy inversely relates to one’s financial instability

2.4.3 Hypothesis 3: Financial instability has a negative relationship with subjective financial knowledge.

3 Results

4 Discussion and Implications

4.1 Limitations and Future Work

4.2 Conclusion

References

Additional Declarations

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