Financial literacy and financial behavior among college students
V.I. Dewi, I. Balian, I.P Tanimukti & P.E. Sastrooredjo
Parahyangan Catholic University, Bandung, West Java, Indonesia
ABSTRACT: The purpose of this study is to determine the level of financial literacy among college students, to examine the effect of financial literacy on financial behavior.
In this study, dependent variable of financial literacy is projected by general knowledge, interest rate and inflation, time value of money, and risk diversification. The measurement is using multiple choice questions and it was calculated based on the percentage of the correct answers. The dependent variable is measured using questions. This study is an applied research using explanatory method. The samples contain 535 college students. The data were analyzed by calculating the percentage of the correct answers to determine the level of financial literacy, and the multiple linear regression and hypothesis testing using F-statistics and t-statistics were used to analyze the effect of the financial literacy on the financial behavior. The results show that respondents answered about 56.6% of financial literacy questions correctly. It indicates that the level of financial literacy remains low. The result of financial behavior indicates that 80% of students still ignore to plan their financial decision. From multiple regression analysis, there is a significant effect of financial literacy on financial behavior.1 INTRODUCTION
Recently, financial literacy is one of the important issues in the global economy. Financial literacy also becomes one of the policy focus of Indonesian government and financial institutions in Indonesia. National survey on Indonesian Financial Literacy conducted by Indonesian Financial services Authority (Otoritas Jasa Keuangan/OJK) in 2013 indicates that Indonesian population still experiences a relatively low rate of financial literacy.
Only 21.8% of the Indonesian population is categorized as financially literate (Kusumaningrum 2014). In 2015, the World Bank conducted a survey of 150 thousand people in 140 countries and found that the financial literacy level of Indonesia was 32% (2 of 3 people in Indonesia are not financial literate).Financial literacy influences how people manage their financial affairs. It has implications for their capability to leverage their wealth and lifestyle. Financial literacy also affected people’s investment decisions. Financial literacy helps to improve the level of understanding of financial matters, which enables to process financial data and issue, filter out the information, and make decisions about personal finance (Sarigul 2014). Financial literacy is crucial to make decisions, especially related to daily activities such as saving, investment, and borrowing funds. Young adults need to have the basic financial knowledge and skill that could help them to make important personal financial decisions (Chen & Volpe 1998). Results of the survey on Financial Literacy of Young American Adults (Mandell 2008) found that high school seniors and college students have poor financial knowledge.
OECD/INFE International (Atkinson et al. 2016) surveyed 51,650 adults aged 18-79 within 30 countries using the OECD/INFE toolkit to measure relevant aspect of financial literacy indicated by combining score on financial knowledge, behavior, and attitudes to longer term financial planning. The results show that overall levels of financial literacy are relatively low. The minimum target score is answering 70% of the basic financial knowledge questions correctly, but all countries on average achieved only 56%.
The purpose of this study is to determine the level of financial literacy among college students and how is their financial behavior. Furthermore, this study examined the effect of financial literacy on financial behavior among college students.
2 LITERATURE REVIEW
There are some previous studies on financial literacy that have been conducted by researchers, scholars, academicians, and finance professionals.
Danes & Hira (1987) studied on money management knowledge of college students. The result showed that students had high level of knowledge in personal loan and record keeping but had low levels of knowledge in insurance, credit cards, and general management. Chen & Volpe (1998) analyzed the personal finance literacy among college students. The sample in this study is 924 college students. The result shows that respondents answer about 53% of questions correctly. Based on the level of financial literacy categorization from Danes & Hira (1987), the mean percentage of correct scores can be grouped into relatively high level of knowledge (for the mean percentage of more than 80%), medium level of knowledge (60%-79%), and relatively low level of knowledge (below 60%). The mean of college students financial literate is categorized in the low level of knowledge. Less knowledgeable students tend to hold wrong opinions and make incorrect decisions.Van Rooij et al. (2007) conducted Internet survey on 2000 households in the Dutch population. The study measured the level of basic financial knowledge and advanced financial knowledge. Furthermore, they assessed the direction of causality of financial literacy to the stock market. Results show that while the understanding of basic economic concepts is far from perfect, it outperforms the limited knowledge of stocks and bonds, the idea of risk diversification, and the working of financial markets. A respondent who has low financial literacy is significantly less likely to invest in stocks.
Lusardi & Mitchell (2007) explained that financial literacy comprised not only the combination of individual understanding of financial products and concepts but also capability and confidence to take financial risks and opportunities. If the risk happened, they know where to go for help, using information to make choices and doing effective actions to improve their financial well-being. Cole et al. (2009) assessed the level of financial literacy and its relationship to demand for financial services in Indonesia and India.
The results of this study show that financial literacy and financial behavior have strong relationship with each other. They find evidence that financial literacy not only has an important correlation to household financial behavior and household well-being, but also financial literacy training program does not affect financial decision. The other interesting finding is that people who open bank accounts was via providing small incentives not by financial literacy training program.Lusardi et al. (2010) examined financial literacy among the young adults and showed that financial literacy is low, fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy was strongly related to sociodemographic characteristics and family financial sophistication.
Lusardi & Mitchell (2010), took data using ALP Survey (American Life Panel) and Internet-based survey on respondents aged 18 years and above with the characteristics of socioeconomic vector (age, sex, material status, education, race/ethnicity, income). The survey was using two category: 1) basic financial literacy concept (compound interest, inflation and time value of money); 2) sophisticated financial knowledge (risk/return, difference between stock and bonds, how the stock market and risk diversification work, relationship between bond prices and interest rates).
Acording to Bhushan & Medury (2013), the level of financial literacy among individuals with salary was low and this financial literacy was affected by gender, education, income, nature of employement, and place of work.
Scheresberg (2013) studied on financial literacy and financial behavior of American young adults aged 25-34 years, using telephone and an online survey on 4500 samples from National Financial Capability Study (NFCS). The result showed that the financial literacy was low. The respondents who have a high income and have savings for emergency expenses and plan for their retirement have a high level of financial literacy.
Navickas et al. (2014) stated that “basic concepts of personal finance is compound interests, investment risk and its management during short and long term periods”.Lusardi & Mitchell (2014) explained financial literacy is a way that can affect financial behavior. The level of Financial Literacy can be measured through testing the basic financial knowledge and advanced financial knowledge. Advanced financial knowledge is an understanding of risk diversification that relates to short- and long-term saving and investment.
Preliminary literature research of this study shows that most of the research studies of financial literacy were done in developed countries such as United States, Australia, and United Kingdom (UK). A few research studies have been done in developing countries such as Indonesia, India, Malaysia, and Vietnam. Most studies measure the level of financial literacy correlated to demographics and socio-economics group, but few research studies examined the effect of financial literacy level toward financial behavior. The purpose of this study is to determine that gap.
The following are the objectives of this study: 1) To determine the level of financial literacy among college students; 2) To find out the effect of financial literacy to financial behavior.
Furthermore, the hypothesis of this study are:
H1: General financial knowledge affects financial behavior.
H2: Interest rate and inflation affect financial behavior.
H3: Time value of money affects financial behavior.
H4: Risk diversification affects financial behavior.
3 RESEARCH DESIGN
This sudy is an explanatory research. The population of this research are people between 17 and 25 years old. By using convenience sampling, the questionnaires were distributed to 535 students at Parahyan- gan Catholic University using Internet survey. This study used survey methods. A comprehensive questionnaire was designed to cover four dimensions of financial literacy as the independent variable.
It includes financial literacy on general knowledge, interest rate and inflation, time value of money, and risk diversification. The respondents were asked to answer seven questions as demographic data and 34 items multiple-choice questions of financial literacy. The score was calculated based on the percentage of the correct answers. The dependent variable was measured using 13 items that consist of financial behavior questions. The validity of the questionnaire was confirmed through face validity by people who have competencies in finance and using Spearman and Pearson correlation. The reliability was assessed using Cronbach’s Alpha.To determine the financial behavior, respondents were asked to choose four categories using Likert scale: 1-4 (Never, Almost, Rarely, Always/Routine).
Furthermore, the analysis technique used to confirm the effect of financial literacy on financial decision and behavior is a multiple regression analysis. Hypothesis testing using F-statistics was used to test the significance of the effect simultaneously and /-statistics was used to test partially, with a significance level of 5%.
4 RESULTS AND DISCUSSION
Detailed demographics of the sample are presented in Table 1. In terms of demographic background, most of the respondents are from 19 to 20 years old. Female respondents represent about 52% of the sample. Forty-five percent of the respondents are third-year students.
Table 1. Demographic of samples and the distribution of financial literacy.
| Number of respondents | % | Mean percentage of correct scores | Level of financial literacy | ||
| Gender | Male | 258 | 48% | 56.9% | Low |
| Female | 277 | 52% | 56.3% | Low | |
| Years of Age | 17 to 18 | 16 | 3% | 56.7% | Low |
| 19 to 20 | 325 | 61% | 56.6% | Low | |
| 21 to 22 | 148 | 28% | 56.5% | Low | |
| 23 and over | 46 | 8% | 56.2% | Low | |
| First Year | 14 | 3% | 53.7% | Low | |
| Rank | Second Year | 109 | 20% | 53.9% | Low |
| Third Year | 242 | 45% | 56.6% | Low | |
| Fourth Year and Up | 170 | 32% | 56.5% | Low | |
| Income (IDR) | Under 500.000 | 69 | 13% | 56.5% | Low |
| 500,001-1.000.000 | 126 | 24% | 56.6% | Low | |
| 1,000,001-1.500,000 | 111 | 21% | 56.6% | Low | |
| 1,500,001-2,000,000 | 136 | 25% | 56.5% | Low | |
| More than 2,000,000 | 93 | 17% | 56.6% | Low | |
| Academic Disciplines | Economic Majors | 444 | 83% | 56.6% | Low |
| Non-Economic Majors | 91 | 17% | 53.6% | Low | |
| Amount of Finance Products | None | 28 | 5% | 55.8% | Low |
| One Products | 361 | 67% | 56.6% | Low | |
| Two Products | 104 | 19% | 56.5% | Low | |
| Three Product | 36 | 6% | 56.6% | Low | |
| Four Products | 6 | 0.1% | 57.7% | Low | |
| Five and More | 0 | ||||
| Type of Finance Products | |||||
| Savings | 383 | ||||
| Giro | 4 | ||||
| Deposit | 54 | ||||
| Credit Cards | 53 | ||||
| Stock | 49 | ||||
| Obligation | 2 | ||||
| Mutual Fund | 6 | ||||
| Cooperative | 1 | ||||
| Savings Account | 1 | ||||
| Insurance | 1 | ||||
| Cryptocurrency | 1 | ||||
| None | 28 | ||||
Source: Data processing results.
Table 2. Mean and median percentage of correct answers to financial literacy questions.
| Level offinancial literacy | ||
| Low | Medium | High |
| below 60% | 60%-79% | over 80% |
| Basic General Knowledge | 54.5% | |
| Mean Correct Responses | 58.3% | |
| Median Correct Responses | ||
| Interest Rate and Inflation | ||
| Mean Correct Responses | 60% | |
| Median Correct Responses | 66.7% | |
| Time Value of Money | ||
| Mean Correct Responses | 70.9% | |
| Median Correct Responses | 75% | |
| Risk Diversification | ||
| Mean Correct Responses | 52.9% | |
| Median Correct Responses | 58.3% | |
| Mean Correct Responses | 56.6% | |
| Median Correct Responses | 57.6% | |
Source: Data processing results.
The distribution of the financial literacy, both basic financial knowledge and advanced financial knowledge indices across demographic variables, such as gender, age, grade, outcome, academic disciplines, and the amount of utility finance product, is determined. Table 1 shows that students from noneconomic majors display lower financial literacy than economic majors. Table 1 also indicates that there are no large differences in the mean percentage of correct scores between gender, age, grade, and outcome. These findings are different from those findings by other literacy surveys such as Lusardi & Mitchell (2007).
The overall results on financial literacy level are presented in Table 2. The overall mean percentage of correct scores is 56.6%, indicating the respondents answered only about below 60% of the survey questions correctly. The median percentage of correct scores is 57.6%. This study finds that the financial literacy of students is less adequate or low.
The second purpose of this study was to determine the effect of financial literacy on personal finance decisions, opinions, and financial behavior among college students. The reliability of the questions of the questionnaire is 0.678 for the variable of financial literacy and 0.617 for the variable of personal finance opinions, decisions, and financial behavior. Cronbach’s Alpha analysis indicates that the questionnaire is reliable.
There are several hypotheses to be tested. Multiple regression is tested whether or not the independent variable are significant towards the dependent variable. If the significant level is smaller than 0.05, then the independent variables are significant towards the dependent variables.
Based on SPSS output, the result of multiple regression is presented in the following table:
Table 3. The t-test coefficients and significant level.
| Variable | Coefficients (B) | Significant level |
| (Constant) | 1.249 | 0.000 |
| General Knowledge | 0.131 | 0.000 |
| Interest & Inflation | 0.127 | 0.000 |
| Time Value of Money | 0.071 | 0.000 |
| Risk Diversification | 0.209 | 0.000 |
The results in Table 3 indicate that financial literacy has a significant effect on financial behavior at 5% level of significance.
The linear regression model is:
Y = 1.249 + 0.131 X1 + 0.127 X2 + 0.071 X3 + 0.209 X4 + ε
The R-square of the multiple regression model is 0.345, which means that 34.5% of dependent variables could be explained by independent variables. The significant level of general financial knowledge, interest and inflation, time value of money, and risk diversivication are smaller than 0.05, which means that those variables are significant in influencing financial behavior.
Statistical F-Test - The F-test was employed to establish whether the model is significant simultaneously. The result is given in Table 4, where the significance of p-valtιe is compared with the level of significance. With the p-valtιe < 0.05, it implies that the model is significant.
Table 4. The F-test.
| ANOVAa | |||||
| Model | Sum of squares | df | Mean square | F | Sig. |
| 1 Regression | 30.741 | 4 | 7.685 | 69.736 | 0.000b |
| Residual | 58.408 | 530 | .110 | ||
| Total | 89.148 | 534 | |||
a Dependent Variable: Financial Behavior.
b Predictors: (Constant), Risk Diversification, Time Value of Money, Basic Financial Knowledge, Interest & Inflation.
5 CONCLUSION
The findings of this research are: First, in average score, respondents answer about 56.6% of financial literacy questions correctly. It indicates that the level is low. Second, knowledge level of Interest & Inflation and time value of money are in medium level. Third, financial Behavior indicates that 80% of students still ignore to plan their financial decision, which shows that financial behavior of the students is in low level. Fourth, there are significant effects of financial literacy on financial behavior simultaneously and partially. The contribution of financial literacy to the financial behavior is 34%.
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