Measuring Financial Literacy
Huston, Sandra J., The Journal of Consumer Affairs
Financial literacy (or financial knowledge) is typically an input to model the need for financial education and explain variation in financial outcomes. Defining and appropriately measuring financial literacy is essential to understand educational impact as well as barriers to effective financial choice. This article summarizes the broad range of financial literacy measures used in research over the last decade. An overview of the meaning and measurement of financial literacy is presented to highlight current limitations and assist researchers in establishing standardized, commonly accepted financial literacy instruments.
Increasing consumer financial literacy is a public policy objective to improve welfare through better decision making (U.S. House of Representatives, Financial Services Committee 2009). The recent mortgage crisis, consumer overindebtedness and household bankruptcy rates provide evidence to support this goal. To assess current levels of financial literacy and explore means to improve it, a construct is needed to measure consumers' ability to make effective financial decisions. Despite its importance, the academic literature has given little attention to how financial literacy is measured.
The terms financial literacy, financial knowledge and financial education often are used interchangeably in the literature and popular media. Few scholars have attempted to define or differentiate these terms. Unlike health literacy, which is typically measured using one of the three standardized tests, there currently are no standardized instruments to measure financial literacy. Marcolin and Abraham (2006) identified the need for research focused specifically on measurement of financial literacy. Typically, financial literacy and/or financial knowledge indicators are used as inputs to model the need for financial education and explain variation in financial outcomes such as savings, investing and debt behavior. Far fewer studies specifically emphasize measurement of financial literacy as an objective.
The purpose of this article is to examine previous literature to identify obstacles, and propose an approach, to develop a more standardized measure of financial literacy. Previous literature that attempts to measure human capital specific to personal finance is reviewed to identify how financial literacy is currently conceptualized and measured. A commonly accepted, standard construct is particularly important in future studies to provide the consistency needed for comparison studies and/or meta-analyses.
Seventy-one individual studies drawn from fifty-two different data sets were identified for analysis. Selection was based primarily on whether a study used a measure to capture an individual's human capital specifically related to personal finance, including terms such as financial literacy, financial knowledge or a closely related measurement construct. (1) Although several studies assessed financial literacy education, they were not included because the purpose of this article was to establish elements of a financial literacy measure, and not a financial literacy education program (see Fox, Bartholomae, and Lee 2005 for an overview of financial literacy education programs).
Where appropriate, analysis was on the data sets (N = 52) rather than the individual studies (n = 71) to avoid overrepresenting data sets used in multiple studies. The seventy-one individual studies were from fifty unique (first-listed) authors/organizations. The majority of the fifty-two data sets used U.S. samples. The studies were published in a wide variety of outlets including academic journals and conference proceedings. Although the compilation may not be exhaustive, it should represent the majority of research published between 1996 and 2008 that included financial literacy/financial knowledge measures.
Method of Analysis
Prior studies were analyzed emphasizing information related to construct validation. …