In an environment where people are required to be increasingly responsible for their own personal financial management, working-aged Canadians face numerous challenges. They are at a stage of life where they need to not only manage their day-to-day finances but also plan for future life events, such as buying a first home or saving for retirement. With a multitude of financial products, services, and offers to consider, making the right decision is not always an easy task. Financial literacy is defined as the knowledge, skills, and confidence a person needs in order to make responsible financial decisions.
“Knowledge” refers to an understanding of personal and broader financial matters; “skills” refer to the ability to apply that financial knowledge in everyday life; and “confidence” means having the self-assurance to make important decisions. Findings show that many people lack the financial literacy to make sound financial decisions. This points to an urgent need to improve the delivery of financial literacy programs and enhance the financial well being of Canadians. We define financial well-being as “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life” (CFPB, 2015).
Knowledge is certainly a critical aspect of the financial literacy equation. However, interventions may under-deliver when they target only financial knowledge and neglect to consider other factors in people’s ability to apply knowledge appropriately in decision-making. While knowledge is clearly important, emerging evidence from behavioural economics shows that an array of interconnected psychological factors frequently result in systematic errors in financial decision-making, in which people act contrary to their own knowledge and intentions. These kinds of self-defeating decisions may in turn reduce confidence in people’s ability to manage their own finances.
In an effort to add to the existing literature and begin to more clearly understand these psychological underpinnings of financial behaviour, this study makes use of microdata from the 2014 Canadian Financial Capability Survey to examine the links between an objective measure of financial knowledge, a subjective measure of financial confidence, and a range of financial outcomes among working-aged (25-to 64-year-old) Canadians. The results highlight the central importance of confidence in financial decision-making, behaviours, and outcomes of working-aged Canadians.
Published: May 2016
Capability: Behavioural Economics
Policy Area: Adult Learning, Income Security - Income Security for Seniors
Population: General Population