Examining a Model of Economic Well-Being Based on Financial Ratios
Park, Mi jung, DeVaney, Sharon A., Consumer Interests Annual
The purpose of this study was to examine a model of economic well-being based on the debt-to-income and debt-to-assets ratios. It was proposed that socioeconomic, attitudinal, and behavioral factors would affect whether households had satisfactory values for the debt-to-income and debt-to-assets ratios. The results of logistic regression with 4,519 households in the 2004 Survey of Consumer Finances showed that single female households were more likely than couples to have satisfactory debt/income (D/I) ratio values but less likely than couples to have satisfactory debt/asset (D/A) ratio values. There was no difference between single male households and couple households for either ratio.
The term well-being has been used interchangeably with happiness or having a worthwhile life (Diener, 1984). A key component of overall well-being is economic well-being or access to economic resources (Osberg & Sharpe, 2002). There are many indicators of economic well-being. For example, Osberg and Sharpe used consumption flows, accumulation of stocks, economic security, and income distribution to measure economic wellbeing. Zedlewski (2000) criticized the measurement of family's economic well-being and suggested that employment, poverty, food affordability, and housing affordability should be included when discussing well-being. Nevertheless, the most frequently used financial indicators of economic well-being are households' income, assets, and debt.
Income is usually the primary indicator of economic well-being; it also has a relationship with psychological well-being (Campbell, 1976). However, income by itself is not an adequate measure of well-being because it might not fully represent all of the components of economic resources (Mullis, 1992). Assets are more comprehensive than income which means that they, too, should be a good indicator of well-being. It is also important to consider the level of debt that a household has because this can indicate whether it is at risk of overspending. To integrate these indicators (income, assets, and debt), financial ratios are commonly used.
A financial ratio is an index that can be used to measure current financial strength as well as progress over time (Winger & Frasca, 2000). For example, the debt-to-assets ratio can be used to assess household solvency and also the ability to pay debts. For instance, Zhang and DeVaney (1999) found that households having a higher debt-to-assets ratio were more likely to have debt payment difficulties.
Another perspective on economic well-being is to include the composition of the household. Does the household consist of a couple or a single individual? Additional insight could be obtained by considering whether the single individual is a man or a woman. Previous research supports this conceptual model of considering the composition of the household.
Sunden and Surette (1998) concluded that gender and marital status significantly affected an individual's preference in allocating assets. Smyth and Weston (2000) found that women and children were more likely than men to experience financial hardship after divorce. Sobieszczyk, Knodel and Chayovan (2003) showed that marital status often mediates gender differences in well-being among older people.
Therefore, the purpose of this study is to examine a model of economic well-being. The study will differ from previous research on economic well-being because it will use two financial ratios to evaluate economic wellbeing. In addition, the study will consider if economic well-being is different for couples and single male or single female households. The results should contribute to an increased understanding of economic well-being by educators, researchers, and policy makers.
Review of Literature
The Use of Financial Ratios
Financial ratios have been used as guidelines in personal financial planning and to predict household insolvency (Baek & DeVaney, 2004; DeVaney, 2000; Garman & Forgue, 1994). …