International Journal of Economics, Commerce and Management

United Kingdom ISSN 2348 0386 Vol. VIII, Issue 2, February 2020

http://ijecm.co.uk/

THE EFFECT OF FINANCIAL LITERACY ON

INVESTMENT DECISIONS (A STUDY ON MILLENNIAL
GENERATION IN FIVE BIG CITIES IN INDONESIA)

Afinda Nur Rahmadhani

Universitas Telkom, Telekomunikasi Terusan Buah Batu, 40257, Bandung, Indonesia
[email protected]

Anisah Firli
Universitas Telkom, Telekomunikasi Terusan Buah Batu, 40257, Bandung, Indonesia
[email protected]

Abstract
Investment decision is one of the concepts in finance, where an individual, with investment
decision, may expense his or her assets and allocate them for an investment product. The
allocated asset is expected to yield future profit. The making of an investment decision is based
on financial behavior. Financial behavior is considered to provide a depiction of how an
individual makes an investment decision. Behavioral finance is one of the variables affecting
financial literacy. Thus, the present study aims to view how financial literacy affects investment
decisions. The present study was conducted in five big cities with largest millennial population in
Indonesia, namely DKI Jakarta, Surabaya, Bandung, Semarang, and Serang. This generation is
a generation with financial behavior propensity and investment that are different from other
generations. The questionnaire was distributed to the respondents in order to measure their
financial literacy and investment decision. The present study applied t-test to test the hypothesis
of the study. The result of the study found that financial literacy affected the investment decision
by 39.56%. The implication of the study is that an individual’s good investment decision is
determined by his or her financial literacy.
Keywords: Behavioral finance, financial literacy, investment decision, millennials

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INTRODUCTION
Millennial generation is one of the four generational classifications. In Indonesia, it equals
33.75% of the Indonesian population. Budiati et al. (2018) reported that there are five provincial
capitals with the largest number of millennial generations, namely DKI Jakarta, Surabaya,
Bandung, Semarang, and Serang. According to Mulyantini (2018), millennials prefer to save
their money for short-term purposes, are unwilling to make a long-term investment, and are
capable of traveling, which also may generate money. Millennial generation exhibits an
investment method that is different from the previous generations did. They tend to make their
investment in a company with a clear mission, such as product and service offered by hedge
funds. Thus, they have a higher tendency to participate in a stock market.
Financial literacy refers to an ability to know how money works in this era, how an
individual manages it, and how he or she invests it (Abdeldayem, 2016). When an investor
makes his or her investment decision, he or she needs to consider market conditions, risk, rate
of return. An investor requires a good financial literacy index before making any investment
decision (Putri & Hamidi, 2019). Financial services authority reported that the financial literacy
index of Indonesian people was low (38.03%), this report was based on 2019 National Survey
on Financial Literacy. That survey did not only measure the respondents' financial literacy but
also measure the role of financial literacy in financial decision-making, both in saving and
investing. The present study was aimed at finding out the effect of financial literacy on the
investment decision, the subject of the study was millennial generation in five big cities in
Indonesia. The present study is different from the previous study. The present study involved
millennial generation, which allows the different results of the study.

LITERATURE REVIEW
Behavioral Finance
Behavioral finance focuses on how an investor interprets and acts based on the information
he/she obtains in order to make an investment decision (Dhankar, 2016). Thus, when an
individual makes a judgment, he/she should be able to make a choice among the available
options, develop, and evaluate. Thus, behavioral finance provides an individual with a picture in
making an investment decision, and it is one of the components affecting financial literacy
(Soetiono and Setiawan, 2018).

Financial Literacy
According to Ates et al. (2016), financial literacy is a key that should be taken into consideration
when an individual makes an investment decision. Besides, it may lead to a better financial

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decision. There are indicators to measure financial literacy, according to Bongomin et al. (2016),
they are:
1. Behavior, it is associated with the attempts and purpose of an individual in utilizing his/her
budget.
2. Skills, this indicator relates to the ability to understand the benefit and carry out simple
calculations regarding finance
3. Knowledge, this refers to an individual’s level of understanding of financial products and
their instruments.
4. Attitude, this indicator refers to one's ability to make a decision and take effective action.

Investment Decision
According to Halim (2015), investment, in principle, refers to the activity of placing some amount
of money and expect to gain profit from it in the future. In order to gain the expected profit, an
investment process that may assist an investor in making an investment decision is required.
Such a process comprises:
1. Determining the purpose of the investment
2. Analyzing a stock or some stocks
3. Creating a portfolio of the stock
4. Evaluating the performance of the portfolio
5. Revising the performance of the portfolio
According to Putri and Hamidi (2019), indicators to measure an investment decision are:
1. Return, which refers to the profit of the investment expected by an investor.
2. Risk, the higher the rate of return, the higher the risk; these two aspects are
interrelated.
3. The time factor, selecting the length of time of investment, is crucial; this may
influence the investor's behavior toward the investment activity. Thus, the length of
the investment may affect the size of return and the risk of investment.
Investment decision can be measured using return, risk, and time factor. Return refers to the
profit gained from the investment. Risk, in addition to expecting the return, an investor should
bear the risk of his/her investment. With regard to the time factor, this component greatly
influences the investment because it determines the return and risk received by an investor.

Framework
The present study discussed a variable affecting an investment decision (i.e., financial literacy).
Financial literacy refers to knowledge and understanding of a basic financial concept that is

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viewed from behavior, skills, knowledge, and attitude, which aims to make an effective decision
in a financial context.
The present study measured how significant financial literacy affects the investment
decision using some indicators, namely, behavior, skills, knowledge, and attitude. Behavior is
associated with one’s attempt and goal to use his/her budget in order to achieve welfare and
prosperity. Skills refer to an individual's ability to make a simple calculation, including calculating
the return and interest of a financial product or service. Knowledge is associated with an
individual's level of understanding of the purpose of financial product and its instrument,
including benefit, risk, as well as his/her obligation and rights as a customer so that he/she
possesses financial knowledge to obtain financial welfare. Attitude refers to an individual's
attitude relating to a financial institution, such as interest toward the product and services of the
financial institution and capability of taking effective action in the present and the future, as well
as capability of managing his/her finance (Bongomin et al. 2016).
Abdeldayem (2016), Awais et al. (2016), and Putri & Hamidi (2019) show that financial
literacy affects investment decision. When an individual possesses better financial literacy,
he/she may make a better investment decision. In addition, financial literacy may affect
investment decision based on, among other factors, age. Based on the description above, the
following framework is proposed:

Figure 1 Conceptual Framework

Financial Literacy (X) Investment Decision (Y)

RESEARCH METHOD
The population of the study was the millenial generation in five big cities in Indonesia, namely
DKI Jakarta, Surabaya, Bandung, Semarang, and Serang whose aged 19-39 years old
(6,378,645 people). The sample of the study was determined using Slovin's formula with 95%
confidence interval and 5% margin of error. The calculation result showed that the sample size
was 399.99. To make it simple, it was rounded up to 400. Thus, the minimum sample size for
this study was 400 respondentsThe study began by conducting validity test and reliability test of
each item of the questionnaire. The researchers applied Pearson Product moment correlation
technique for validity test and Cronbach’s Alpha for the reliability test. The rtable value of 0.361
with a significance level (α) of 5% (0.05) and rtable of 0.6 for the reliability test were used.
Following the result of the validity test, seventeen items used to measure the financial
literacy and investment decision were considered valid (greater than 0.361). Accordingly, these
items can be used as a measure in the present study. Then, the result of the reliability test

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exhibited the value of Cronbach’s Alpha > 0.6, meaning that the items for financial literacy and
investment decision were reliable to be used as a measuring instrument for the study.
Furthermore, descriptive statistical analysis was also made for each variable. After that,
the classical assumption test, i.e., normality test and heteroscedasticity test, were also done.
Regarding the normality test, one-sample Kolmogorov-Smirnov test was applied, while
Spearman's rho was applied to perform heteroscedasticity test. Once the classical assumption
is satisfied, simple linear regression was done. Then, hypothesis testing using t-test and
coefficient of determination test were done to out the effect of the variable.

RESULTS AND DISCUSSION

Table 1 Descriptive Analysis of Financial Literacy and Investment Decision

No Variable Statement Percentage Category
I always save my money regularly 77.81 Good
My spending complies with the budget I have made 75.50 Good
I always actively make any form of saving every month 79.69 Good
I have the ability to find out the benefit of a financial transaction 79.06 Good
Financial I have the ability to calculate the cost of a financial transaction 80.31 Good
1
Literacy I have an ability to allocate personal budget 81.06 Good
I have a good ability to use financial product and services 83.25 Excellent
I always compare the price before selecting a product or service 88.13 Excellent
I am always interested in financial news 75.63 Good
I am interested in having business with a financial institution. 74.63 Good
Mean Score of Financial Literacy 79.51 Good
I prioritize the return of the investment product I choose. 80.94 Good
I try to seek any crucial information from different parties to
82.44 Excellent
find out the return I will receive.
Before making an investment decision, I always learn the risk
82.69 Excellent
Investment that i would receive
2
Decision I understand how to minimize investment risk. 78.44 Good
I select the time period and return that can satisfy the expected
79.44 Good
return and risk.
I can believe in myself to settle financial problems. 83.50 Excellent
I can believe in myself to do something properly. 85.25 Excellent
Mean Score of Investment Decision 81.81 Excellent

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Table 2 Result of One-Sample Kolmogorov Smirnov Normality Test

As shown in table 2, the value of asymp.sig was 0.200. Since it was greater than significance
0.05. Thus, the data of the study were normally distributed.

Table 3 The Result of Heteroscedasticity Test using Spearman's rho

Correlations

Literasi Unstandardized
Keuangan Residual

Spearman's rho Literasi Keuangan Correlation Coefficient 1.000 .036

Sig. (2-tailed) . .477

N 400 400

Unstandardized Residual Correlation Coefficient .036 1.000

Sig. (2-tailed) .477 .

N 400 400

As shown in Table 3, the significance value of Sig. (2-tailed) of financial literacy variable was
0.477. Since the value of the independent variable was greater than 0.05, it could be concluded
that there was no problem of heteroscedasticity.

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Table 4 The Result of Simple Linear Regression Analysis

Coefficientsa
Unstandardized Coefficients Standardized Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 11.309 .944 11.985 .000
literasi keuangan .446 .028 .629 16.146 .000
a. Dependent Variable: keputusan investasi

Based on the output, as shown in Table 4, the constant value and the regression coefficient can
be seen. Thus, the following simple linear regression equation can be made:
Y = 11.309 + 0.446X
It was found that there is a positive relationship between the variables, meaning that the higher
the millennials' financial literacy, the better the investment decision. Decision-making criteria:
H0: Financial literacy does not significantly affect the Investment Decision.
H1: Financial literacy significantly affects Investment Decision

Table 5 Hypothesis Testing

a Result
Coefficients
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 11.309 .944 11.985 .000
literasi keuangan .446 .028 .629 16.146 .000
a. Dependent Variable: keputusan investasi

Following the SPSS output as shown in Table 5, the tcount was 16.146, and the ttable was
1.966. Since tcount > ttable, H0 was rejected, and H1 was accepted. In other words, financial
literacy significantly affects the investment decision.

Table 6 The Analysis Result of Coefficient of Determination

Model Summary
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .629a .396 .394 2.87442
a. Predictors: (Constant), literasi keuangan

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KD = r2 x 100%
= 0.6292 x 100%
= 39.56%
Based on the calculation result, it was found that the coefficient of determination was 39.56%, it
means that financial literacy accounts for 39.56% of investment decision, while the rest 60.44%
is accounted for by other variables that are not examined in the present study.
Based on the descriptive analysis result, as shown in Table 1, it was found that overall,
the millennial generation in five big cities in Indonesia was 79.51%, meaning that respondents
possessed a good understanding about the basic financial concept and had applied it in the
form of behavior or habit. However, the descriptive analysis result showed that millennial
generation in five big cities in Indonesia exhibited a low tendency in interacting with financial
institutions, knowing financial news, and noncompliance between the designed budget and the
expense made.
Based on the result of simple linear regression analysis, it was found that Y = 11.309 +
0.446X, where Y refers to Investment Decision variable and X refers to Financial Literacy
variable. It was found that there is a positive relationship between the variables, meaning that
the higher the millennials' financial literacy, the better the investment decision. The hypothesis
testing result showed that financial literacy significantly affects investment decision. This is
consistent with the result of the study conducted by Abdeldayem (2016), Awais et al. (2016),
Assefa & Rao (2018), Ahmed et al. (2018), which states that an individual with high financial
literacy exhibits improved investment decision. However, the present study contradicts the
study conducted by Arif, K (2015) and Arianti (2018), where they found that financial literacy
does not significantly affect investment decision.

CONCLUSION
The result of the present study provides evidence that financial literacy significantly affects the
investment decision of millennial generation in five big cities in Indonesia in 2019. The
implication of the study is that the millennials should learn more about the return of investment
to make, such as the ability to prioritize the return of the investment product, seek information
from various parties about the return to receive, and to consider the length of time of the return
and the risk. Besides, millennial generation should be more open towards financial institutions,
more interested in financial news, and be able to adjust their expenditure to the budget they
have made. The role of the government is required in order to optimize the financial institution in
improving financial literacy by conducting collaboration with various parties.

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Accordingly, it is suggested for the future research to take samples from other millennial
generation for their study such as generation Z or generation X to find out the understanding of
financial literacy and investment decision of each generation in five big cities or other cities in
Indonesia. The future researchers can also study other variables such as financial efficacy,
income, and other factors that influence the investment decision.

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