Abstract
We have found that education attainment, monthly income, age and whether an individual save or invest, affects financial well being and financial literacy. Causal effect cannot be confirmed but we understood that these features are relatively correlated. We also found out that financial literacy not only affects financial well being but also the views on Higher Risk Financial Vehicle (HRFV). We also noted that even thought with the increase of perceived risk and understanding for the HRFV, individuals with higher financial literacy, would still go ahead with the participation into HRFV.
Research Topic
Topic of Investigation
Financial literacy has been a popular topic to explore, which can be seen in the number of publications and researches increasing year over year, as shown in this bibliographic analysis by Goyal and Kumar (2021). The aim of the research is to explore the relationship of between sociodemographic attributes and financial literacy and their effect on financial well-being and the avoidance of higher-risk financial vehicle (HRFV). In this study, a questionnaire survey will be conducted, as existing literature review have demonstrated the positive impact of financial literacy on financial well-being, as discussed in later sections. As for the aspect of avoiding risk financial, this will be the additional contribution to the study of financial literacy and also to understand if financial literacy makes an individual avoid higher-risk financial vehicles (HRFV) or encourage them to utilize it due to their better understanding of associated risks and financial management, such as the study by Ofosu and Kotey (2019).
This project is inspired by Nițoi et al. (2022) as the questionnaire from this study will be adopted, but focuses on target demographic of university students and working adults of Malaysians residing in Kuala Lumpur. The result of the project by Nițoi et al. (2022) will be used as data source for comparison against the outcome of this project. Additional questions to the questionnaire will be added to further explore the avoidance of HRFV, and will be compared to other existing studies such as the study by Ofosu and Kotey, (2019).
Background Research
Sociodemographic Attributes, Financial Literacy and Financial Well-Being
The findings in several studies, such as Zulfiqar and Bilal (2016), Zhang and Chatterjee (2023), Akhter and Sangmi (2016), have demonstrated a positive relationship between financial literacy and financial well-being. This is because financial literacy equips individuals with the skills to effectively plan and manage their finances, which reduces stress and anxiety that could be caused by unforeseen circumstances. These findings also emphasize the importance of policymakers, regulators, governments and educators taking proactive measures to improve and elevate financial literacy for everyone through educational program. As emphasized by Zhang and Chatterjee (2023), “it is never too late to educate individuals on financial literacy”.
This project will utilize a dataset (secondary data) from a study conducted in Romania, Nițoi et al. (2022). The study highlighted that 92% of the 1391 respondents in the questionnaire survey were financially illiterate. Results also indicated that only 15% felt financially secured, 35% had a moderately stable financial situation, 38% struggled to meet their financial needs, and the remaining 13% experienced significant financial insecurity. Income levels, age and education were identified as influential factors in determining financial well-being, while gender and residential status exhibited no significant impact. Furthermore, the study also noted that individuals with higher financial literacy, have above-average financial well-being.
Numerous studies have been conducted in Malaysia, in a variety of areas of financial literacy. Despite their limited citation, they offer valuable insights in a local perspective. For instance, in a study conducted by Kah et al. (2021), it was identified that sociodemographic attributes, including income, age and education level, along with financial literacy, played significant roles in the engagement of financial planning. This engagement in turn, results in achieving good financial well-being. Similarly, Ali et al. (2015) concluded that financial literacy was a crucial determinant for basic money management and financial planning, which are essential steps toward financial well-being. Notably, over 60% of the sampled Malaysian demonstrated moderately high levels of financial literacy. Furthermore, a study by Rahman et al. (2021) examined the financial well-being, financial stress, and financial literacy as variables. The results indicated that all three variables were statistically significant. Therefore, this project will explore into the relationship between sociodemographic attributes, financial literacy and financial well-being.
Avoidance of Higher Risk Financial Vehicle
There were also studies that explore the relationship with financial literacy and stock market participation. Two studies, Hii et al. (2022) and Yang et al. (2021), examined the relationship but yielding contradictory results. Hii et al. (2022) found a positive relationship, suggesting that individuals with financial literacy are more likely to participate the stock market while Yang et al. (2021) demonstrated that factors such as risk tolerance, social interaction and herding behavior, played a more significant role in stock market participation, while the influence of financial well-being and financial literacy was found to be insignificant.
Furthermore, as shown in studies by (Nyemcsok et al., 2022) and (McGee, 2020), normalization and proliferation of HRFV platforms can be problematic as individuals today might participate in HRFV for its faster and higher returns. As mentioned in the studies, this is bad because HRFV includes betting and gambling platforms, participants might get addicted to it. On the other hand, in this study by Ofosu and Kotey, (2019), participants have easy access to sports betting, but the participants did not view sport betting as a substitute to investing. Instead, they viewed it as a way to make short term gains to complement their investment or financial goals, as they were risk-aware, risk averse and educated enough to also understand the associated risks of sport betting. Furthermore, due to the rise in cryptocurrency during the pandemic, it has also solidified itself as an option to generate some extra wealth. Additionally, the study by Zhao and Zhang, (2021), show that financial literacy and investment experiences positively influence in participation of investing in cryptocurrency. Therefore, this project will attempt to find and explore the relationship between financial literacy and the avoidance of HRFV.
Operational Definitions
Higher Risk Financial Vehicle (HRFV)
In the context of this project, higher risk financial vehicles refer to activities such as sport betting, day trading with leveraged financial products such as options and foreign exchange, and involvement in cryptocurrency for the intention of profit. Because in most cases, participation in the stock market is already considered of high risk, but due to the normalization of these HRFVs for higher and faster returns, individuals today might move towards HRFVs as resistance and friction to accessing them decreases day by day. To address this, questions are inspired and referenced from several studies. The questions covering this topic for will be using a 5-point Likert scale for more accurate measures and it can also easily be converted into other format of measure to compare with other studies.
Key Findings
Education and Income are strong predictors of Financial Literacy?
Financial Literacy Strongly Correlates with Financial Well-Being
The HRFV Paradox - Knowledge Does Not Mean Avoidance
Age and Life Stage Matter
The Saving and Investing Divide
What does all these mean?
Limitation of Research
Causaction and Correlation
Sample Limitations
Demographic Scope
- Adults in Kuala Lumpur
Appendix
References
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