The Role of Financial Literacy in Enhancing Household Economic Sustainability: A Quantitative Analysis of Financial Behaviors and Outcomes

Abstract

This study explores the relationship between financial literacy and family economic sustainability, hypothesizing that higher financial literacy (financial knowledge, financial budgeting behavior, savings habit, investment decision and family debt management) is related to greater family economic sustainability. A quantitative cross sectional research design was used and data was gathered from 1000 HHs which were selected by stratified random sampling in 40 urban and rural communities which yielded 978 valid data after data cleaning. Demographic data and financial information, such as the Financial Literacy Index, Household Economic Sustainability Index, Savings Rate, Investment Participation Rate, Debt Management Score, and Financial Resilience Index were collected through structured questionnaires. Descriptive statistic, Pearson correlation, Multiple linear regression and Structural Equation Modeling (SEM) are statistical techniques used. The dependent variable: Household economic sustainability was regressed on the set of independent variables with the highest beta coefficient given by financial literacy (0.46, p < 0.001), followed by budgeting practices (0.38, p < 0.001), savings behavior (0.34, p < 0.001), and least of all came investment participation (0.27, p = 0.002). The model accounted for 72.6% of the variance in the household economic sustainability, (R² = 0.726 %). The findings showed that there is a strong positive correlation between financial literacy and sustainability (r = 0.81, p < 0.001) which was followed by a good model fit as revealed by SEM (chi-square/df = 2.12, CFI = 0.96, TLI = 0.95 and RMSEA = 0.046). Higher financial literacy is observed to be correlated with higher savings rate, higher financial resilience and lower financial distress level among the families that have higher financial literacy as compared with those who have lower financial literacy by 27.4%, 24.1% and 18.9% respectively. Furthermore, 76.4% had moderate to high financial literacy, with 39.6% being the opposite side where they had not received any formal training in regards to finance which was a huge disservice. Financial Literacy is thus reinforced as a critical tool to contribute into the economic stability/fiability of households through improved budgeting, saving, investing and debt management