Moderating Role of Individual Diversity in the Relationship between Financial Knowledge and Financial Behaviour

Abstract

The current paper examines the relationship of financial knowledge and financial behaviour in the presence of moderating variable i.e. Individual diversity comprised of Gender, Qualification and Residential background. Theoretically, when consumers lack knowledge of financial concepts, they are not able to make sound financial decisions which can be most detrimental to their financial well-being. Various studies revealed heterogeneity in financial behaviour and show that the typical household does not manage household finances well. Financial behaviour is influenced by financial knowledge because the act of financial behaviour which includes expenditure planning, budgeting and ensuring financial safety and avoiding over-use of credit etc would not be possible without having the knowledge of basic financial concepts like budgeting, saving etc. There is evidence that those who were more financially literate had higher financial practices index scores. Literature also revealed that the level of financial literacy depicted in the surveys are often criticized for not showing the true state of financial knowledge and behaviour etc as they are influenced by respondents characteristics like their sensitivity towards the wordings of the questions. Following a descriptive research design, an empirical investigation was carried out by approaching 400 respondents from India through physical questionnaires. The research instrument was developed using a five-point Likert-type scale and items for the constructs in study were taken after literature review. The SPSS 21.0, AMOS 21.0 and PROCESS (Prof A. Hayes) and Daniel Soper’s statistical tool called “Interaction” for moderation graph were employed for data examination and hypothesis analysis. It was found that the relationship between financial knowledge and financial behaviour is influenced by level of education and residential background of an individual and proved to be a significant moderator except gender. The study is original in the sense as it provides insights into understanding the financial behaviour of individual and its association with financial knowledge. The present study is an attempt to present a model that shows association of financial knowledge and financial behaviour. Knowledge of how financial services operate in the financial markets among masses should ensure financial wellbeing and sound financial decisions. Basic financial knowledge of an Individual is must for sound financial behaviour and it differs among individuals as the level of education and residential background of individual i.e. rural and urban locality influence such relationship. The results of the study should help the concerned authorities to introduce financial education programmes particularly to cater the needs of rural population to ensure sound financial behaviour.