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Journal of Contemporary Issues in Business and Government Vol. 27, No. 02, 2021

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P-ISSN: 2204-1990; E-ISSN: 1323-6903

DOI:10.47750/cibg.2021.27.02.662
______________________________________________________________________
Financial Knowledge, Saving and Investment Behaviour among Women: A Review
Khujan Singh
Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar-125001, Haryana (India)

E-mail: [email protected]

Kavita Berwal
Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar-125001, Haryana (India)
E-mail: [email protected]

______________________________________________________________________

Abstract
Financial knowledge is all about having financial awareness and understanding of various
financial concepts and procedures. It also includes the proper application of this
understanding in solving financial problems. Many countries are carrying out financial
literacy surveys (particularly on their women section), thereby providing an insight into
saving and investment-related knowledge as well as financial behavior. This paper is
intended to review the literature relating to the level of financial knowledge among women
section as well as to know the type of relationship financial knowledge holds with saving and
investment behavior. The study also looked into the factors affecting both financial
knowledge and saving & investment behavior of individuals. Along with this, do financial
education courses or programs impact saving and investment behavior or not.

Keywords: Financial knowledge, saving and investment behavior and Financial courses.

Introduction

The financial environment and market have become complex with the launch of the new
financial instrument every day by banks, government, insurance companies, etc. Nowadays,
the government of India is putting efforts to enhance access to financial services through
financial inclusion to increase accessibility to various credit products; thus creating a huge
pool with a variety of financial products to choose from even for low-income groups (Filipiak
and Walle, 2015). Moreover, changes in the current pension landscape have transferred the
responsibility of decisions regarding financial security from the employers or government to
participants and employees after their retirement. Thus, individuals are more prone and
helpless against misleading practices by financial institutions and bankers (Grant, 2018).

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Financial ignorance strikes too hard. The best financial outcomes demand an adequate level
of financial knowledge. People who possess a low level of financial knowledge are likely to
indulge in high-cost borrowings, spending more on transaction fees, pilling up debts, and
saving fewer resources (Stango and Zinman, 2009; Lusardi and Tufano, 2015). Meanwhile,
being financial literate has manifold potential benefits, as it is responsible for various
financial outcomes such as participation in the stock market (Van Rooij et al., 2011; Yoong,
2011); handling mortgages ( Lusardi and Tufano, 2009); borrowing at low cost (Lusardi and
Tufano, 2009; Fonseca et al., 2012); retirement planning (Lusardi and Mitchell, 2008);
budgeting, saving and controlled spending (Perry and Mooris, 2005) and wealth
accumulation (Stango and Zinman, 2009; Lusardi and Mitchell, 2008; 2014). Thus, the
understanding of basic financial concepts is essential for making informed saving and
investment decisions during different stages of life.
Available literature provides conclusive evidence of the low level of financial knowledge
across countries (Mandell and Klein, 2009; Gupta and Negi, 2014) and acute financial
illiteracy was depicted particularly among teenagers, women, and low educated people
(Lusardi and Mitchell, 2006) or lower-income groups (Lusardi, 2008). No doubt, women are
leading in every sphere of life. They have even proved themselves to be masters of multi-
tasking, thereby managing their careers and households simultaneously. But when the matter
relates to financial planning, they take back seats and consider a man to be the financial
planner of their lives. Various studies show that women exhibit lower financial knowledge
and confidence in their financial affairs. Even the women for whom (e.g. widows and single
women) financial knowledge is of the foremost importance in their day-to-day operations
lack the knowledge of basic concepts of finance. But they need to understand that their
financial needs differ from that of men and so as their savings and investment plan should.
Women face distinctive financial challenges in their lifespan as compared to men - long life
expectations (OECD, 2013), child-rearing leads to career interruptions, etc. Moreover, lower
financial skills along with less availability of resources put up a big question on the financial
security of women in their old age. Thus, for the financial well-being and financial
independence of women, they need to decide how much they have to save for emergencies or
retirement as well as how to allocate their wealth to different financial products to make
money. Earning wealth is only halfway to achieve financial independence; rather putting it
effectively to work is equally important. Thus the need for financial knowledge about various
financial products arises. It’s high time for women to make use of their financial knowledge

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and get their savings out from their piggy banks to invest in a balanced portfolio that further
helps their money grow and serve them during their financial distress.

Literature review

It is an obvious fact that to make informed decisions in the present and future, one needs to
look back into the past. Analyzing the past lays down a strong foundation to predict what the
future would likely be. This holds importance to take maximum advantage of future research.
Thus an attempt has been made to summarize the arguments on financial knowledge and
saving and investment behavior to acquire domain knowledge about the subject and find a
research gap for further research.

Financial knowledge

While exploring the literature, different terminologies are used to denote knowledge and
understanding of personal finance such as financial well-being, financial competency,
financial capability, financial knowledge, and especially financial literacy. Financial
knowledge is a vital element of financial literacy (Huston, 2010). In addition to this, it is most
often considered as an equivalent word to financial literacy (Lusardi and Mitchell, 2011;
Huang et al., 2013; Bucher-Koenen et al., 2016). Thus the scope of terminology points out
that there is a lack of consensus in defining the term financial literacy (Frühauf and
Retzmann, 2016). Some researchers defined financial knowledge as a person’s understanding
of various financial concepts (Huang et al., 2013) or everything about finance that is
experienced or that happens in regular day-to-day existence (Lusardi, 2019). While financial
knowledge is illustrated into different categories- firstly, Conceptual financial knowledge- is
all about factual knowledge of explicit financial concepts; the capacity to recall and
distinguish various financial concepts and facts, and to order those concepts into significant
classifications. Secondly, procedural financial knowledge- involves the knowledge of
financial procedures and strategies or the ability to put on accurately arithmetic processes and
financial calculations. Thirdly, applied financial knowledge- implies one’s ability to put in
use financial knowledge to resolve various financial issues and make informed financial
decisions. Thus financial knowledge is all about having financial awareness as well as the
understanding of various financial procedures and concepts. This also includes the proper
application of this understanding in solving financial issues. Thus conceptual financial
knowledge, procedural financial knowledge, and applied financial knowledge constitute the
financial knowledge of an individual (IGI Global, 2020) As per Huston (2010), four

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important elements define financial knowledge: basic monetary concept, saving or
investment, borrowing, and at last protection concepts.

Approaches to financial knowledge

With the objective to assess the level of financial knowledge, researchers used two
approaches - one is the objective approach while the other is a subjective approach. Under the
objective approach, a test that measures various financial concepts namely- inflation, interest
compounding, risk diversification, time value of money, and money illusion is conducted
(Pudlo and Gavurova, 2012; Nguyen et al., 2017). While the subjective approach, undertook
self-assessment of financial knowledge. The objective approach holds its importance in
economist’s research while the subjective approach is often used in various economic and
financial behavior studies on individual’s perception of life satisfaction and well-being
(Kahneman and Kruger, 2006), credit scores (Courchane et al., 2008), risk attitude (Leonard,
2012). While Herd et al. (2012) assess the level of financial knowledge as the individual’s
knowledge of his financial situations rather than basic financial concepts and regarded it as a
pre-requisite for effective decision making. Filipiak and Walle (2015) put forward some
general financial knowledge questions (such as the current value of their investment
government guarantees for deposits in national banks) while specific financial knowledge
questions (covers Kisan card, credit card).

People with higher financial knowledge are likely to understand the basic financial concepts,
numeracy, interest compounding, inflation impact on prices or investment returns, time value
of money, an association between risk and return, risk reduction through diversification
(Lusardi and Mitchell, 2006, 2011; Lusardi and Tufano, 2009; Remund, 2010; Atkinson and
Messy, 2012; Huang et al., 2013; Yu et al., 2015). Individuals display a lower level of
financial knowledge and are unable to understand the concept of interest compounding
(Lusardi and Tufano, 2009), and especially the Indian working youth are unable to
comprehend basic financial principles and fails to assess the impact which inflation had on
their return (Agarwalla et al., 2013).

Financial knowledge and women

Although financial illiteracy is spread around the world, it is prominent among women
section. Empirical data on financial illiteracy depicts one striking feature of wide and
consistent gender difference (Lusardi and Mitchall, 2014; Hasler and Lusardi, 2017; Chen

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and Garand, 2018; Preston and Wright, 2019). In both developed and developing countries,
the level of financial knowledge of women is lower compared to men (OECD, 2013). 70% of
women are financially illiterate compared with 65% of men. This gender gap on average is
around 8% in advanced economies (known as G7) and 5% in emerging economies (known as
BRICS) (Standard and Poor’s Ratings Services Global Financial Literacy Survey, 2015).
While in India, 80% of women are illiterate in comparison with 73% of men thereby making
the gap wider. The existence of the gender gap may negatively impact the financial well-
being of women (Fonseca et al., 2012).

According to OECD (2013), the average performance of women in a test of financial

knowledge is worse than that of men. Ample evidence support that women are less confident
(Barber and Odean, 2001; Chen and Volpe, 2002; Lusardi and Mitchell, 2008; Bucher-
Koenen et al., 2016) and show less enthusiasm, particularly in financial affairs (Chen and
Volpe, 2002). Further, Bucher-Koenen et al. (2017) pointed out that women give lower self-
assessments of their financial knowledge as compared to men. There is more probability that
they say, they do not know the answer and less chance to give correct answers to the
questions (Bucher-Koenen et al., 2017; Chen and Garand, 2018). As per Webster and Ellis
(1996), even financial expert women show a lower level of self-confidence while analyzing
their financial matters. Various studies reported that women are less likely to make informed
financial decisions as they are more prone to indulge in costly credit card behaviors (such as
late and overdraft fees) (Allgood and Walstad, 2011); less likely to plan and prepare for their
retirement (Lusardi and Mitchell, 2008); engage in costly borrowing methods-payday lenders,
pawnshops, etc (Lusardi and Tufano, 2009) and are more risk-averse than man (Almenberg
and Dreber, 2015). Moreover, they are less likely to move out for financial education
(Lusardi and Mitchell, 2008). The reasons which explain such a difference between the two
genders include the disparity of the factors such as income level (Anthes and Most, 2000),
their exposure to the world, and involvement in household responsibilities. The gender gap
can be reduced with the existence of parity among the variables such as income and financial
literacy. Filipiak and Walle (2015) stated the root cause for such a difference in financial
knowledge among the two gender is not due to nature but its nurture viz. low investment in
gaining financial knowledge or lower formal education or lower utilization of media as a
source. Thus, a higher level of financial knowledge would enable them to accumulate and
manage their wealth for retirement, and low-cost financing as well as gain confidence and
independence in their financial affairs which would ultimately lead them to a secure future.

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The relation between financial knowledge, and saving and investment behavior

Many researchers have tried their hand at depicting the relation between financial knowledge
and an individual’s financial behavior. Most of the studies have identified a positive and
significant relationship between financial knowledge and financial behavior (Hilgert et al.,
2003; Robb and Woodyard, 2011; Behrman et al., 2012). Financial knowledge is considered
a crucial element for best financial practices such as having an emergency fund (Hilgert et
al., 2003); planning for retirement (Kotlikoff and Bernheim, 2001); credit card management
(Robb and Sharpe, 2009).

Robb and Woodyard (2011) found perceived financial knowledge to be a strong sign in
governing the financial behavior of individuals. Supporting the findings, Henager and
Mauldin, (2015) found financial knowledge (perceived) as a vital element responsible for the
best financial practices as well as positive financial behavior like- retirement savings,
emergency funds, and managing a credit card. Cole et al. (2011) believed that a higher level
of financial knowledge was linked to the usage of insurance products in India along with
bank accounts in Indonesia. Lusardi (2008) analyzed that the level of financial knowledge
and numeracy possessed by individuals are the two important factors of household saving
behavior. Furthermore, an individual’s ability to save for a comfortable retirement is
associated with the level of financial literacy and information; being ignorant even about
basic financial concepts can result in a lack of wealth and ineffective retirement planning. As
per Van Rooij et al. (2012), the one with a higher level of confidence in financial knowledge
is more probable to save and plan for his retirement. Mitchell and Moore (1998) provided
evidence to support that lack of financial knowledge is a reason for failure in effective
retirement planning. Further, people's propensity to save for a long period is influenced by
their level of financial knowledge. Likewise, Murendo and Mutsonziwa, (2017) found that
the probability to save increases by 17% points in the case of the female while 15% points for
males. Both formal and informal saving decisions are positively influenced by the level of
financial knowledge (Kim and Yuh, 2018).

Various studies provided evidence to support a positive association between financial

knowledge and the usage of various financial products and services (Honohan and King,
2012). Some authors are of the view that financial knowledge is associated with efficient
credit management and satisfaction (Akin et al., 2013); investment decisions like portfolio
diversification (Guiso et al., 2009; Abreu and Mendes, 2010), equities investments

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(Christelis, et al., 2010) and mortgage performance (Gerardi, 2010). Furthermore, investors
with a low level of financial knowledge were found to be less interested in stock market
participation and use informal ways as a source of borrowing (Klapper et al., 2012); are more
prone to realize losses on the assets which they sold (Bucher-Koenen and Ziegelmeyer,
2011). Several studies revealed a causal effect of financial knowledge on the investment
behavior of individuals. Abreu and Mendes (2010) find a positive impact of a higher level of
financial literacy on portfolio diversification, and participation in the stock market (Alessie,
et al., 2007). Financially literate people better understand the concept of risk diversification
and are more inclined to form stock as a part of their portfolio (Christelis et al., 2010). In
addition, evidence support that investors with higher financial knowledge invest in lower-cost
funds (Hastings and Mitchell, 2011), and the investment performance lessen with advanced
age (Korniotis and Kumar, 2011).

While some studies depict a limited effect of financial knowledge on an individual’s saving
behavior (Mauldin et al., 2016; Hilgert et al., 2003). Studies even show that financial
knowledge is not indicative of good financial behavior rather financial knowledge influences
financial attitudes which in turn governs the financial behavior (Borden et al, 2008; Tang and
Baker, 2016; Yahaya et al., 2019). Further, Robb and Woodyard (2011) support that financial
knowledge (actual or objective) is not a dominant factor rather income level has a significant
impact on financial behavior. Nguyen et al. (2017) suggested that it is the actual financial
knowledge that shows a positive relationship with regular personal savings, not the other
factors such as financial risk tolerance and perceived financial knowledge. Mauldin et al.
(2016) looked into facilitators and barriers to saving behavior, especially in households in
low to moderate-income groups, and found that likelihood of saving was not linked with a
higher level of financial literacy. Further, Hilgert et al. (2003), found that an increase in
financial knowledge doesn't need to result in improved financial management behavior
including saving and investment rather reverse causality may be an outcome i.e. individuals
may gain knowledge as and when they save and accumulate wealth.

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Factors influencing financial knowledge

Table 1: Financial knowledge and demographic factors

Factors Findings Studies

Age ● Age is positively associated with the level of financial knowledge Lusardi and Mitchell (2011);
● Average age between 30- 40 years is linked with a higher level of Almenberg and Soderbergh (2011);
financial knowledge. OECD (2013); Scheresberg (2013);
● A lower level of financial knowledge was found among young and older Filipiak and Walle (2015);
people. Garg and Singh (2018)
● A low level of financial knowledge among the youth across the world
has been noticed.

Gender ● low level of financial knowledge among women as compared to men Chen and Volpe (2002); Lusardi and
● women are more risk-averse Mitchell (2011); OECD (2013); Filipiak
● they are not confident enough to make their own financial decision but and Walle (2015); Bucher-Koenen et al.
rather seeks the guidance of their parents (2016); Hasler and Lusardi (2017);
● show less willingness to learn and less enthusiasm, particularly in Chen and Garand (2018)
financial affairs
● more likely that they are unknown the financial concepts and less likely
to give correct answers to the questions

Education level ● More educated people are more financially knowledgeable. Lusardi and Mitchell (2011); Atkinson

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● The higher the education, the more practical knowledge the person and Messy (2012); Murphy (2013);
acquires about financial dealings. Filipiak and Walle (2015)
● The one with a lower level of education are less likely to answer
questions correctly and are more likely to say they don't know the answer
● Financial courses hold their importance in building up the financial
knowledge of individuals and governing their financial behaviors.

Employment ● Unskilled and unemployed people lack attitudes toward acquiring Chen and Volpe, (1998); Lusardi and
status financial knowledge and are likely to respond much worse than those who Mitchell (2011); Bucher-Koenen et al.
are self-employed or workers. (2016)
● Employed and experienced people possess a higher level of financial
knowledge due to their more familiarity with the economic and financial
affairs of the organization
● A lower level of financial knowledge even among working women

Income ● A lower level of income is linked with a lower level of financial Monticone (2010); Atkinson and
knowledge. Messy (2012); OECD (2013); Filipiak
● A significant and positive relationship between money management and and Walle (2015)
earning as well as knowledge of retirement planning of individuals.

Family ● The one with high family socioeconomic status possesses less Herd et al. (2012); Bucher-Koenen et
background and knowledge with regards to their asset levels. al. (2016)
socialization ● Women prefer to approach their family and friends for advice on

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financial affairs rather than financial advisors.

Factors affecting saving and investment behavior

Table 2: Factors affecting saving and investment behavior

Factors Variables Findings Authors
Demographic Age, gender, Family • Young investors choose to invest in the capital market i.e riskier Lutfi, L. (2011);
and socio- size, Income, assets providing higher returns while elderly investors invest mostly in Ahammad and
economic Education, Marital bank accounts for stable returns. Lakshmanna (2016);
factors status, No. of • Females are more conservative i.e. risk-averse, less confident, low Shaikh et al. (2019).
dependents, net worth, satisfaction, and invest in fewer amounts than males.
homeownership, Family • The likelihood of a family owning a home increases, whereas the
earning status, extent of investment in shares decreases with each additional child.
Occupation, Education • Married individuals are risk-takers because shared means of income
and dual human capital may encourage them to go for riskier assets.
• A higher dependency ratio indicates higher consumption expenditure
thus the individual is left with lower savings.

Behavioral factors
Cognitive aspect Representative bias, • While making investment decision investors tends to overreact in DeBondt and Thaler

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Anchoring, Availability processing information due to Representativeness bias. (1995) ; Kahneman
heuristics, Gambler’s • The results about anchoring, overconfidence, availability, and and Riepe (1998);
fallacy, Investor Gambler’s fallacy bias show that : Barberis (2001);
optimism; - Anchoring bias tends Investors use purchase price as a reference Hunjra et al. (2012)
Overconfidence effect, - overconfidence occurs in investors when the market rises while they
Hindsight bias. become pessimistic when it falls
- due to availability biases investors give unnecessary weight to
easily available information
- Investors suffering from Gambler’s fallacy bias are likely to be
biassed towards predicting reversals in stock prices.
• An investor who is confident increases market vitality and trading
volume as they trade too frequently thereby decreasing their expected
profit.
• Optimistic individuals are more interested in long-term investing as
compared to pessimistic one.
Emotional Mental accounting, • The potential loss is more stressed for investors as compared to an Barberis and Thaler
Aspect endowment effect, equal value of potential gain thus they are more prudent while (2003); Pompian and
regret aversion, loss investing to reduce the risk of losses. Wood (2006).
aversion • Investors separate outgoing and incoming funds as well as
accounting models and use mental accounting in investment decisions
thereby weighing the benefit and cost of all actions on the decision

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taken.
• Regret aversion seeks to anticipate the pain of regret which is
associated with poor decision making thus investors hold onto losing
position for a long time to avoid some admitting errors and to realize
losses.
Herding Aspect Following actions of • As investors choose the decisions of others over their personal Banerjee (1992);
others instead of decision so they react impulsively to the decisions of others. Chang et al. (2000);
following own beliefs • Investors rely on collective information rather than personal Hirshleifer and Teoh
or own information in information. (2003); Humra
choosing, buying, • If the majority of investors go with the wrong decision it may (2014); Rahayu et al.
selling, and trading result in significant market price deviations. (2020).
investments. • Herding behavior is more prevalent in developing countries
emerging markets and market stress situations.

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Do financial education courses or programs impact saving and investment behavior?

Numbers of countries are coming up with new national financial education strategies and
programs and investment in such programs as responsible financial behavior is the outcome
of financial knowledge (Grifoni and Messy, 2012). Borden et al. (2008) thought that financial
courses and seminars are the tools to aware students of the importance of good financial
behavior and improve their level of financial knowledge, attitude, and financial behavior.
However, the evidence from the literature connecting financial education and saving and
investment outcomes furnish variegated results. As per Clark and d'Ambrosio (2008),
financial education can induce workers to reassess their retirement goals and alter their
saving and investment behavior. Bruhn and Love (2016) comprehend the financial education
program for high school students in Brazil and found that the program leads to an increase in
the level of financial knowledge, increased savings, and improvement in current and future-
looking intentions to save. Likewise, Bernheim and Garrett (2003) concluded that employees
who attend retirement seminars sponsored by the employer are more likely to save for their
retirement, after controlling a wide range of characteristics. Moreover, Clark and Madeleine
(2008) believed that the problem of a decrease in savings can be brought under control
through effective financial knowledge and saving programs. Contrary to these findings,
Bruhn et al. (2014) in an experiment in Mexico on a four-hour instructional course covering
retirement and other things, the author found a low level of interest among the general
population for being a part of the course. Additionally, there is a short-term boost in some
saving measures but no impact on retirement savings through training. Peng et al. (2007)
evaluated the effectiveness of personal finance courses provided by the college in improving
the investment knowledge of high school students. He did not find the level of knowledge to
be higher among the students who took the course as compared to the ones who did not
complete the course. However, respondents with more financial experience such as owning
bank and investment accounts and observing the saving habits of parents had higher saving
rates than the ones with less financial experience. Bruhn et al. (2016) found that the financial
education program had an impact on the majority of outcomes except that on savings.

Conclusion

The available literature lifted the veil upon the following facts:-

• Financial knowledge is all about having financial awareness and understanding of

various financial concepts as well as procedures. This also includes the proper application

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of this understanding in solving financial problems. Financially knowledgeable people
understand basic financial concepts like- inflation, interest compounding, the association
between risk and return, diversification, time value of money.
• Globally, women possess a lower level of financial knowledge and are less confident,
thus unable to make informed financial decisions as compared to men (OECD, 2013;
Bucher-Koenen et al., 2016; Lusardi and Mitchell, 2008).
• Countless studies track down a positive relationship between financial knowledge and
the saving behavior of individuals (Murendo and Mutsonziwa, 2017; Henager and Mauldin,
2015; Lusardi 2008; Mitchell and Moore, 1998). Be that as it may, the outcome is not
consensual, as other authors (Mauldin et al., 2016; Robb and Woodyard, 2011; Hilgert et
al., 2003) identified a limited relationship between the two.
• While a positive relationship is depicted between the level of financial knowledge and
investment decisions such as portfolio diversification, mortgage performance, and equity
investment.
• Demographic factors which influence financial knowledge such as age, income,
education, marital status, income and gender. Empirical research shows that financial
knowledge is contrarily related to certain factors such as female, young and older
individuals, lower education or Unskilled, Unemployed, or lower pay individuals ( Filipiak
and Walle, 2015; OECD, 2013; Garg and Singh, 2018; Atkinson and Messy, 2012;
Almenberg and Säve-Söderbergh, 2011).
• Education programs are used as a tool to boost saving and investment by policymakers
but studies show them as a short-term boost in saving levels while financial experience and
financial attitude also govern saving and investment behavior.
• Thus, financial knowledge is an important element in decision making and plays a
significant role in governing the saving and investment behavior of individuals but financial
knowledge alone is an insufficient indicator of best financial practices. Various
demographic and socioeconomic as well as behavioral factors significantly impact the
saving and investment behavior of individuals.

References

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Agarwalla, S. K., Barua, S. K., Jacob, J. and Varma, J. R. (2013). Financial Literacy among
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