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Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness

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  • Elisabete Santos
  • Margarida Abreu

Abstract

This work analyses the impact of financial literacy and financial behaviour of individuals on the likelihood of over-indebtedness, controlling for socioeconomic factors, the type of mortgage and the event of a negative income shock. Using the data from the 2009 National Financial Capability Study of the United States, we consider three self-reported measures of over-indebtedness: financial distress, arrears and foreclosure. Using the data from the National Financial Capability Study carried out in the United States in 2009, we have defined three measures of over-indebtedness – financial distress, arrears and foreclosure -, and constructed a financial literacy index and a financial behaviour index. The financial literacy index is constructed using questions on the compounding of interest rate, inflation, bonds and stocks, mortgage payment and risk diversification. The financial behaviour index is based on questions concerning individuals’ financial choices related with budget management, savings, bank accounts, credit, insurance and financial advice. Results show that gender matters for the intensity of over-indebtedness. Men have higher probability of experience financial distress or being in arrears but have lower probability of getting involved in a foreclosure process. In addition to the impact of socioeconomic factors, we conclude that financial literacy contributes to the prevention of over-indebtedness since individuals with higher levels of financial literacy are less likely of becoming over-indebted. Also, individuals who engage in positive financial behaviours, such as spending less than their own income, setting a ‘rainy day’ fund, using credit wisely or looking for financial advice, are less likely to experience severe financial difficulties. Independently of the level of financial literacy and of financial behaviour, experiencing a large drop in income is an important determinant of over-indebtedness.

Suggested Citation

  • Elisabete Santos & Margarida Abreu, 2013. "Financial Literacy, Financial Behaviour and Individuals’ Over-indebtedness," Working Papers Department of Economics 2013/11, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp112013
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    References listed on IDEAS

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    Cited by:

    1. Kamer Karakurum-Ozdemir & Melike Kokkizil & Gokce Uysal, 2019. "Financial Literacy in Developing Countries," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 143(1), pages 325-353, May.
    2. Emanuele Bajo & Massimiliano Barbi & Sandro Sandri, 2015. "Financial Literacy, Households' Investment Behavior, and Risk Propensity," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 157-174, June.
    3. Josephat Lotto, 2020. "Towards Improving Households’ Investment Choices in Tanzania: Does Financial Literacy Really Matter?," IJFS, MDPI, vol. 8(2), pages 1-10, May.
    4. Szafrańska Monika, 2019. "Level of Financial Literacy of Academic Youth from Rural Areas in the Visegrad Group Countries," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(3), pages 46-58, September.
    5. Tae-young Pak & Swarnankur Chatterjee, 2016. "Savings Decisions of American Households: The Roles of Financial Literacy and Financial Practice," Economics Bulletin, AccessEcon, vol. 36(3), pages 1486-1496.
    6. Azwadi Ali & Mohd Rahman & Alif Bakar, 2015. "Financial Satisfaction and the Influence of Financial Literacy in Malaysia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 120(1), pages 137-156, January.
    7. Francisco J. Oliver-Márquez & Almudena Guarnido-Rueda & Ignacio Amate-Fortes, 2021. "Measuring financial knowledge: a macroeconomic perspective," International Economics and Economic Policy, Springer, vol. 18(1), pages 177-222, February.

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    More about this item

    Keywords

    Personal Finance; Over-indebtedness; financial behaviour; financial literacy.;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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