Review of Related Literature and Studies This chapter wants to provide important thoughts, ideas and findings from different researchers and authors. This chapter also cites other related studies relating to the problem of household financial management. It discusses the relationship between mothers spending behavior and their knowledge in financial management.
Related literature
According to Lusardi and Mitchell, 2009 financial knowledge is Increasing knowledge about the financial matters that enhances an individual’s ability to make informed decisions about how to control and manage their finances. Financial knowledge has implications for how individuals spend, save and invest money, as well as how they budget and set monetary goals. Research shows that lack of financial knowledge is related to debt (Norvilitis et al., 2006) and increased knowledge can lead to individuals engaging in positive financial practices and fewer risky ones (Borden et al., 2008; Hilgert, Hogarth, & Beverly, 2003). Adults with better financial knowledge are more likely to plan for retirement and engage in financial practices that lead to asset accumulation.
Normally, gains in financial knowledge can be tested immediately upon completion of the program, by asking participants a set of questions that cover a range of personal finance topics. Ideally, both pre and post-tests should be implemented to effectively assess a program’s impact on individuals’ financial knowledge, assuming that participants have had long enough exposure to program interventions (NEFE, 2013).
Borden et al., 2008 attitude toward financial matters and practices is an important predictor of financial behavior. Attitudes, values and beliefs toward financial practices impact financial decision making and are reflected in a person’s monetary practices and habits. A person’s financial attitude, value or beliefs can influence their financial stability and goal setting, and be an indicator of financial management practices such as savings, spending, loan delinquency, and credit card debt (Chien and Devaney, 2001; Parotta and Johnson, 1998). Having a positive attitude toward financial management can have a positive effect on an individual’s intentions to utilize several types of savings/investment vehicles, limit credit card use, and manage their finances in more beneficial ways. According to Marianne A. Hilgert and Jeanne M. Hogarth of the Board’s Division of Consumer and Community Affairs and Sondra G. Beverly of the University of Kansas across the decade of the 1990’s to the present, the issue of financial educators, community groups, businesses, government agencies, and policymakers. This increased interest in financial education has been prompted by the increasing responsibility on the part of individuals for their own financial security. Well-informed, financially educated consumer for their better able to make good decisions for their families and thus are in a position to increase their economic security and well-being. Financially secured families are better able contribute to vital, thriving communities and thereby further foster community economic development. Thus, financial education is important not only to individual households of the families but to their communities as well. Knowledgeable consumers who make informed choices are essential to an effective and efficient marketplace. In classical economics, informed consumers provide the checks and balances that keep unscrupulous sellers out of the market. For instance, consumers who know the full range of mortgage interest rates and terms in the market place who understand how their credit –risk profile and personal situation fit with those rates and terms , and, consequently, who can determine which mortgage is best for them make it difficult for unfair or deceptive lenders to gain a foothold in the marketplace. Amid growing concerns about the consumers’ financial literacy, the number and types of financial education programs have grown dramatically since the mid-1990. Many of these programs focus on providing information that increases in information and knowledge will lead to change in financial-management practices and behaviors. Whether that is the case in the province of behavioral economics, which offers its blend of psychological characteristics (such as procrastination, regret, risk aversion, compulsiveness, generosity, altruism, and peer pressure) play in households economic decisions. Thus, behavioral economics offers a framework for studying behaviors that seem inconsistent or irrational – for example, consumers who hold money in a savings account earning interest at 2 percent while carrying balances on credit cards and paying 18 percent interest. This article explores the connection between knowledge and behavior – what consumer know and what they do – focusing on four financial-management activities: cash flow management, credit management, saving, and investment. Data are from the university of Michigan’s monthly surveys of Consumers conducted in November and December 2001. Also, data from the survey of consumer finances (SCF) are used for purposes of comparison. Financial wellness can be explained by financial and economic well-being. Researchers define financial well-being as a perceived satisfaction or a sense of financial situation. Financial wellbeing has been measured with a set of objective, subjective, and behavioral attributes within the financial domain. Based on previous measures of financial well-being, a person’s financial wellness can be examined with five different scales: objective scales of economic status, subjective perception of personal finance, behavioral assessment of personal financial management, overall satisfaction with financial situation, and financial ratios. The personal financial management domain includes financial planning, financial management of income and credit, financial practice, consumer competency, and investments. Many U. S. households have financial problems. Increasing consumer debts and increasing personal bankruptcies are examples of the financial problems that the U. S. households have. Financial problems are related to the financial stress of individuals. Researchers have identified four different causes of financial stress: personal life cycle factors, job-related events, unexpected changes, and unfavorable financial situation (Sporakowski, 1979; Varcoe, 1990; Williams, 1982). Financial stress influences various individual life functions including workplace productivity. The literature indicates the negative impact of personal financial problems on workplace productivity (Garman et al., 1996; Luther et al., 1997); however, no empirical research has been conducted to show the direct impacts.
Williams (1983) theorized economic well-being as a function of material and non-material aspects of one’s financial situation. To identify economic well-being, she included money income, real or full income, agreement about distribution, and psychic income or perceived adequacy of income as independent variables. Fergusson, Horwood, and Beautrais (1981) described economic well-being with the level of financial inputs, such as income and assets. So-hyun Joo Chapter II. Literature Review 12 Hayhoe (1990) observed that “economic well-being is an individual’s perception of satisfaction with their financial situation” (p.119). Porter (1990) defined financial well-being as “a sense of one’s financial situation that is based on objective attributes and perceived attributes that are judged against standards of comparison to form evaluated attributes of that financial situation” (p.22). Porter and Garman (1993) asserted that financial well-being depends upon an individual’s perceived objective attributes of the financial situation after comparing it with certain financial standards of comparison as well as objective and subjective attributes of the financial situation. They assumed financial well-being to be a function of personal characteristics, objective attributes, perceived attributes, and evaluated attributes of the financial domain.
Draughn, LeBoeuf, Wozniak, Lawrence, and Welch (1994) discussed economic well-being as consisting of three components: financial adequacy, perceived economic well-being, and satisfaction with level of living. Financial adequacy was an objective assessment of adequacy of income to meet overall economic survival. Perceived economic well-being was defined as a subjective assessment of overall economic survival. Satisfaction with level of living reflected the perception of ability to meet financial demands for needs. Subjective perception and behavioral assessment of personal financial management are important measures of personal financial wellness. Personal financial management can be thought of as an important component in personal financial wellness. Personal financial management is “the management of the personal and family resources to achieve financial success. Financial success is the achievement of financial aspirations that are desired, planned or attempted. (Garman & Forgue, 1997, p.4). It includes (a) financial planning under long-term and short-term financial So-hyun Joo Chapter II. Literature Review 15 goals, (b) financial management of income and credit, (c) financial practice through purchasing of housing, insurance, automobile, and other durable and non-durable consumer goods and various services including banking, insurance, and investment, and (d) investment for the future (Garman & Forgue, 1997; Kapoor et al., 1994; Mathur, 1989). Related Studies