International Journal of Business and Management Invention (IJBMI)

ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X

www.ijbmi.org || Volume 8 Issue 02 Series. IV || February 2019 || PP 08-18

Effect of Financial Literacy on Personal Financial Planning:

a Study of Bengaluru City
Vinod Krishna M. U1Dr. Ruchi Gupta2and Dr. U.N. Lakshman3
1.Research Scholar, Management Studies, Reva University, Bengaluru, India;
2.Associate Professor, Management Studies, Reva University, Bengaluru, India
3.Co-Guide, Retired Professor and former Special Officer of University of Mysore, India
Correspondent Author: Vinod Krishna M. U

ABSTRACT:Financial literacy helps individuals to make well-informed financial decisions. For people who
are unable to take wise financial decisions, personal financial planning service has the potential to serve as a
substitute for financial knowledge and capability. However, according to 2009 FINRA (Financial Industry
Regulatory Authority, Inc. USA) Financial Capability Survey, financial planning serves as a complement to
financial capability: individuals with higher incomes, educational attainment, and levels of financial literacy
are most likely to go for financial advice or personal financial planning. Lack of basic financial understanding
leads to unproductive investment decisions. In this paper an attempt is made to study the acceptance of personal
financial planning services in Bengaluru city. People of Bengaluru are showing more inclination towards life
insurance products, but provide scope for improvement in terms of retirement planning, health insurance, and
using credit optimally.
Keywords:financial literacy, personal financial planning, financial decisions, retirement planning
----------------------------------------------------------------------------------------------------------------------------- ----------
Date of Submission: 03-02-2019 Date of acceptance: 19-02-2019
----------------------------------------------------------------------------------------------------------------------------- ----------

I. INTRODUCTION
Financial affairs were managed by the elders of the house just two decades back and when they were
responsible for satisfying everyone‟s requirements in the family. There was no need or necessity for others to
know personal financial concepts or products. Today, in the liberalized, privatized, globalized Indian economy,
the social change from single wage-earner families to dual-career, dual-income families is increased. Of the 121
crore Indians, 83.3 crore live in rural areas while 37.7 crore stay in urban areas, according to Provisional
Population Totals of Rural-Urban Distribution in the country (Census – 2011). The level of urbanisation
increased from 27.81 per cent in the 2001 Census to 31.16 per cent in the 2011 Census, while the proportion of
rural population declined from 72.19 per cent to 68.84 per cent. Most of the urban families are nuclear and dual-
income families. These changes have resulted in more and more people to be financially literate and actively
involved in personal finance decision making.
As per Census report, the absolute increase in population is more in urban areas than in rural areas.
Individuals‟ financial well-being is a result of their actions based on the decisions taken. These are influenced
by external forces such as economic factors and policy structures adopted by government and private industry,
decisions are ultimately made by individuals. Understanding the relationship between knowledge of personal
financial issues and corresponding financial behavior is increasingly recognized as an area of critical financial
importance. Understanding issues related to personal finance is important for India‟ long-term financial security
as the transition to defined contribution plans and the lack of compulsory retirement benefits in private sector
place greater responsibility on individuals‟ savings and financial decisions.
Concepts relating to spending, saving, investing and borrowing are not clearly understood even by
literates. Today, it is required by every earning person to think, plan and act on securing their financial future.
Increasing life expectancy, rising costs of healthcare and increasing complexities of financial products make it
very important to get basic understanding of personal finance (Sobhesh Kumar, Et.,al, 2015). But various
studies, survey and research from around the world on financial literacy shows concern about the ability of
individuals to secure their financial future. Financial decision making becomes much better with increase in
financial literacy (Sumit Agarwal, Et.,al 2010). Individuals tend to apply their acquired information on various
financial products to plan for future. Concepts of financial goal-setting, prioritizing, and accordingly selecting
various investment options brings in a much needed financial discipline among individuals.
Along with this there are hundreds of intermediaries recommending thousands of investment products.
All this provide wide range of choices for the individual. But it is also creating lot of confusions. In this context
financial literacy and financial education are key areas that need development. It is a daunting task for the

www.ijbmi.org 8 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

government, regulatory bodies and corporate to educate the general public on the basic concepts of personal
finance. In spite of various proactive measures taken by all of them, financial literacy in India among adults in
India is just 24% compared to worldwide rate of 33% as per S&P Global Financial Literacy Survey 2016 (S&P,
2016). As per the factsheet of Financial Literacy and Inclusion Survey 2013-14 by National Centre for Financial
Education, financial literacy in Karnataka is 25% and financial inclusion is 15% which is much higher than
national level rate of 20% and 11% respectively.
Education is prescribed as a common response for this lack of knowledge (Scott, 2010), with the
general assumption that improved financial knowledge will result in more effective financial decision-making.
Some evidence indicates that the relationship between knowledge and behaviour is more complicated as
improved knowledge does not automatically result in improved behaviour (Braunstein & Welch, 2002). Perry
and Morris (2005) suggested that psychological factors, such as locus of control, may mediate the impact of
financial knowledge on behaviour.
Economic and financial sector reforms have placed higher disposable incomes with the public.
Availability of a variety of new financial products on both, credit and investment sides, which are provided by a
host of financial intermediaries has necessitated that the investing public understands each product and product
supplier and takes an informed decision about where s(he) should invest. At the same time, those who are not
part of the formal financial system need to be educated about banking and why they should have a relationship
with banks. Financial literacy is considered an important element for promoting financial inclusion and
ultimately financial stability. Financial literacy would benefit the financially-excluded by enabling them to
understand the benefits and the ways to join the formal financial system.
This paper reports the results from the study that shows interest and consent of people to accept and
avail various personal financial products in Bengaluru city based on on-call financial education provided by
IndianMoney.com. It explores the relationship between financial literacy and scope for personal financial
planning. This paper has been divided into 7 chapters. In the introductory chapter, a brief overview of the
overall paper has been provided. In the next chapter, the research objectives of this paper is enumerated. Chapter
3 provides a review of related literatures and Chapter 4 discusses the methodology used for analyzing the data as
well as establishing findings. Chapter 5 explains the theoretical and conceptual frameworks used, Chapter 6
discusses Results and Findings of the study.

Objectives
The Study aims at achieving the following objectives:
● To understand about the dependency of financial literacy and financial planning on financial satisfaction of
an individual.
● To understand the importance of financial literacy for the economic wellbeing of the nation.
● To study the effect of financial literacy on accessing the personal financial planning services.
● To evaluate impact of personal financial planning on financial satisfaction.

II. LITERATURE REVIEW

“The What, Why and How of Financial Literacy” (February, 2013) by K. C.Chakrabarty, former
Deputy Governor of the Reserve Bank of India, addressed a few key issues relating to financial literacy in a
country like India. In his address at the stakeholders‟ workshop on “Financial literacy”, organized jointly by the
UNDP, NABARD and MicroSave, Mumbai he mainly spoke about the importance of financial literacy, the
target audience for financial literacy and the key suggestions to improve the levels of literacy for the growth and
development of the nation. He structured his speech around What, Why, Who and How of Financial Literacy.
As OECD defines financial literacy as “a combination of financial awareness, knowledge, skills, attitude and
behaviours necessary to make sound financial decisions and ultimately achieve individual financial well-being
(OECD, 2005).” Which means financial literacy is expected to provide the required understanding to individuals
to make informed decisions when using financial services. It is not just about markets and investing, but also
about saving, budgeting, financial planning, basics of banking and most importantly, about being “Financially
Smart” (Dr K C Chakrabarty, 2014).
The report, “Financial Literacy among Working Young in Urban India” (2013), by Sobhesh Kumar
Agarwalla, Samir K. Barua, Joshy Jacob, Jayanth R. Varma (IIM-A), presents an investigation of a study on the
influence of various socio-demographic factors on different dimensions of financial literacy, among the working
young in urban India. The study also investigates the relationship between the dimensions of financial literacy.
Adding to the growing empirical understanding of financial literacy across countries, the study provides an
analytical basis for enunciating policy to enhance financial literacy of the youth in India.
Previous field studies around the world find that majority of individuals has a low level of financial
knowledge (Lusardi & Mitchell, 2008; Lusardi & Tufano, 2009; Van Rooij, Lusardi, & Alessie, 2011). Low
financial knowledge is associated with sub-optimal financial outcomes in many areas such as retirement

www.ijbmi.org 9 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

planning (Lusardi & Mitchell, 2007), borrowing decisions (Lusardi & Tufano, 2009), and stock market
participation (Van Rooij et al., 2011).
There is also evidence that financial literacy is a multi-dimensional construct and separately measuring
its different dimensions is important. Schicks (2014) finds that while over-indebtedness is lower for borrowers
with good debt-literacy, general financial literacy and numeracy seem insufficient to reduce over-indebtedness.
The coordinated efforts of Reserve Bank of India and the Government of India over the last five years
have culminated in providing access to banking services to a majority of the Indian population. The formulation
and implementation of the National Strategy for financial education therefore becomes a top priority for the
country to educate the new entrants into the financial system. The Indian national strategy was initially prepared
by a committee representing all of the country‟s financial regulators (Financial Stability and Development
Council of India, 2012), and was also peer reviewed by the OECD/INFE. The national strategy for financial
education is deemed essential in ensuring that the national financial inclusion policies implemented by the
government are successful. Increased levels of financial literacy will be essential to support the national
financial inclusion efforts, in particular once the basic financial products such as micro-insurance and pension
products are offered to basic bank account holders throughout the country.
“National Strategy for Financial Education” (2012), published by the RBI, is an important paper
reviewed for this study considering the reliability of the source. The paper traces the evolution of the concept of
financial literacy. It understands the importance of developing a national strategy for financial literacy in the
country. The paper suggests the inclusion of finance and analysis in the curriculum of the schools and colleges
through a variety of subjects. After liberalization, BFSI contribution to India‟s GDP is a meagre 5.9%. To
improve this, they are coming out with innovative investment instruments. In 2016, India‟s Gross National
Savings (GNS), as a percentage of GDP, is estimated at 31.24 percent (IBEF Report on Financial Services, April
2017). The Financial Industry Regulatory Authority (FINRA) is a self-regulatory agency formed from the
former National Association of Securities Dealers (NASD) and certain regulatory functions formerly performed
by the New York Stock Exchange (NYSE) in 2007. The FINRA Investor Education Foundation, or FINRA
Foundation, exists to provide education to underserved populations regarding the skills, knowledge and tools
required to achieve financial literacy. In 2009, the FINRA Foundation, in conjunction with the U.S. Department
of the Treasury, conducted the National Financial Capability Study in order to assess Americans‟ ability in
dealing with four key components of financial capability. These are: making ends meet, planning ahead,
managing financial products, financial knowledge and decision-making. According to the Survey, financial
planning serves as a complement to financial capability: individuals with higher incomes, educational
attainment, and levels of financial literacy are most likely to go for financial advice or personal financial
planning.
Financial literacy plays important role in managing the earned money of an individual. It is a difficult
task in itself and managing the finances for others, the challenges get exponentially high. Considering the
difficulties that people face and the guidance they require on where to invest and how to grow their funds in the
market paves way for the personal financial planning profession. The profession involves providing guidance to
the people on investment, mortgage, insurance, college savings, property taxes, and retirement (BLS, 2017).
The need for personal financial consultations is high in India as the country is going through a rapid
expansion in terms of existing financial services firms as well as there is the addition of new and diverse
financial products coming into the market (G.Srinivas Rao, 2018).
In a large and diverse country such as India, enhancing financial awareness amongst the people of the
country requires more than relevant action from the regulatory authorities, financial institutions, and stock
exchanges (Subha and Shanmugha, 2014). Several studies indicate that the financial literacy in India is low, as
highlighted by Naidu (2017) in his study wherein he indicated that the literacy rate is further low among
youngsters and women. A briefing paper by the European Parliament highlighted that financial literacy is the
combination of knowledge, awareness, skill, behaviour, and attitude and thus essential for taking intelligent
financial decisions. These factors help an individual in making sound financial decisions and reach the position
of financial wellbeing (European Parliament, 2015).
Theoretically, knowledge of how financial markets operate should result in individuals making more
effective borrowing decisions (Liebermann & Flint-Goor, 1996). This is generally supported by the available
literature as numerous studies indicated that well developed financial skills are necessary for effective money
management (Carswell, 2009; Collins, 2007; Haynes-Bordas, Kiss, & Yilmazer, 2009; Scott, 2010). However,
the majority of these studies failed to provide a direct link between personal financial knowledge and actual
financial behavior. Several studies provided evidence of a link between knowledge and behaviour, though they
vary in how knowledge is measured and what behaviours are addressed.
Chen and Volpe (1998) established a link between financial knowledge and financial decisions. Based
on a 36-item measure of knowledge, more knowledgeable students achieved higher scores on hypothetical

www.ijbmi.org 10 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

spending, investment, and insurance decisions when compared with less knowledgeable students. More
knowledgeable students were also more likely to keep financial records.
Borden et al. (2008) presented findings that questioned the link between knowledge and behaviour, as
they did not note any significant relationship between financial knowledge and effective financial behaviour.
The results presented by Borden et al. (2008) suggested that greater knowledge may improve student intentions
towards more responsible behaviour, it did not necessarily indicate whether or not students follow through with
their plans. Research on credit card use among college students yielded conflicting evidence. An exploratory
analysis by Jones (2005) did not provide any evidence of a link between credit card debt behaviour and financial
knowledge based on a 6-item measure.
Among the general population, there is some evidence that financial knowledge and financial
behaviour may be positively related. Hilgert, Hogarth, and Beverly (2003) examined the correlation between
financial knowledge and actual behaviour among the general population in the United States. They measured
knowledge using the 28-question Financial IQ measure that is included in the Survey of Consumer Finances,
which deals with aspects of cash-flow management, credit management, savings, investments, mortgage
information, and other financial-management topics (Hilgert et al., 2003). The researchers noted significant
correlations between credit management scores and scores on the composite measure of financial knowledge.
Lusardi and Mitchell (2006) analysed retired households, indicating that greater knowledge was associated with
planning and succeeding in retirement planning, as well as investing in complex assets such as stocks. Further
research by Lusardi and Mitchell (2007) indicated that more knowledgeable Americans thought more about
retirement.
Research by Courchane (2005) indicated that self-assessed knowledge was one of the most significant
factors in determining financial behaviour. However, research has made it clear that people do not always have a
full understanding of their own level of financial knowledge (Courchane, 2005).
Financial satisfaction is an individual‟s subjective perception of the adequacy of his or her own
financial resources (Hira & Mugenda, 1998). Financial satisfaction has long been acknowledged as a component
of well-being (Campbell, Converse, & Rodgers, 1976) and has received attention in studies on wellness related
stressors such as financial strain, risk management issues, locus of control and employment issues (Porter &
Garman, 1993).

Research Gaps
The majority of these studies failed to provide a direct link between personal financial knowledge and
actual financial behaviour leading to have a clear financial plan for future financial goals. Financial Literacy
enabling financial planning behaviour also need to be explored. Importance of personal financial planning to
provide financial confidence and financial satisfaction and in turn scope for practicing financial planning as a
profession is evaluated in the current study.

III. THEORETICAL AND CONCEPTUAL FRAMEWORKS

Theoretically, knowledge of how financial markets operate should result in individuals making more
effective borrowing decisions (Liebermann & Flint-Goor, 1996). This is generally supported by the available
literature as numerous studies indicated that well developed financial skills are necessary for effective money
management (Carswell, 2009; Collins, 2007; Haynes-Bordas, Kiss, & Yilmazer, 2009; Scott, 2010). It is also
important to address the possible impact of subjective financial knowledge (or self-assessed knowledge) as well.
Research by Courchane (2005) indicated that self-assessed knowledge was one of the most significant factors in
determining financial behaviour. However, research has shown that people do not always have a full
understanding of their own level of financial knowledge (Courchane, 2005). Financial literacy is the possession
of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of
their financial resources (https://en.wikipedia.org/wiki/Financial_literacy).
The present study analysed the degree to which a composite measure of financial knowledge was
associated with financial planning behaviours. Given the available evidence, it was hypothesized that more
knowledgeable consumers would display more responsible financial behaviours (by scoring significantly better
on a composite measure of best practice behaviour) and are managing their finance through systematic financial
planning.

www.ijbmi.org 11 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

Figure 1. Extract of Joo‟s (2008) Financial Wellness Diagram

Financial knowledge was proposed as an element of personal financial wellness in a conceptual

framework that includes financial satisfaction, financial behaviour, financial attitudes, and objective status
measures (Joo‟s, 2008). In this framework, financial knowledge, along with financial attitudes, was grouped
together under the umbrella of “Subjective Perception.”
The present study analysed the degree to which a composite measure of financial knowledge was
associated with what might be considered best practice financial behaviours collectively measured as financial
planning. Given the available evidence, it was hypothesized that more knowledgeable consumers would display
more responsible financial behaviours (i.e., have significantly better scores on a composite measure of best
practice behaviour). The present analysis explains the relationship between financial satisfaction, financial
planning, financial knowledge and financial confidence.

Figure 2: Variables Captured in the Present Study (in bold)

Variables captured in the present study based on the Joo‟s Financial Wellness Diagram is given in
Figure 2. The Financial behaviour umbrella from Joo‟s diagram is modified as Financial Planning and it covers
major areas of financial planning like risk management, retirement planning, estate planning, cash management,
emergency savings and credit management.

www.ijbmi.org 12 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

IV. DATA ANALYSIS AND FINDINGS

The required data for the study has been provided by IndianMoney.com. Imparting financial literacy
across India is a daunting task. This challenge has been taken up as a business opportunity by
IndianMoney.com, a company in Bengaluru, which is providing free financial education through phone for
those who are contacting them by leaving a missed call on their helpline number. They were educated on basics
of personal finance and suggested products based on their need analysis.
Trained wealth doctors administered the questionnaire over phone and recorded the responses in the
proprietary online application of the company. Over 33,000 customers from 30 cities and towns across the state
of Karnataka have given missed call to the company helpline from 1 st April 2018 to 30th September 2018. Out of
this sample universe, Bangalore city has been considered for detailed study as there are 23% (8,709) of total
customers educated from across Karnataka during the period. Details are given in Table-1 Sample Universe.
Among Bangalore City customers, 84% were male and 16% were female. They were classified
according to income and occupation. Majority of customers wanting financial advice belong to salaried class.
55% of customers were salaried and 46% were from income group of 1,00,000 to 2,50,000. Details are given in
Table 2 Demographics.

Table-1: Sample Universe (N=33,316)

TOTAL % of % of % of Sample
City/Town Name Male Female
Respondents Male Female Universe

Bangalore City 7502 1207 8709 86% 14% 23%

Belgaum 2621 240 2861 92% 8% 8%

Mysore 1617 279 1896 85% 15% 5%

Gulbarga 1583 139 1722 92% 8% 5%

Bijapur 1467 111 1578 93% 7% 4%

Bellary 1387 113 1500 92% 8% 4%

Tumkur 1178 182 1360 87% 13% 4%

Bagalkot 1078 104 1182 91% 9% 3%

Davanagere 1061 120 1181 90% 10% 3%

Raichur 1089 65 1154 94% 6% 3%

Haveri 1002 113 1115 90% 10% 3%

Chitradurga 983 131 1114 88% 12% 3%

Bidar 993 78 1071 93% 7% 3%

Shimoga 874 171 1045 84% 16% 3%

Hassan 841 153 994 85% 15% 3%

Kolar 790 116 906 87% 13% 2%

Mandya 725 146 871 83% 17% 2%

Dharwad 698 104 802 87% 13% 2%

Bangalore Rural 700 91 791 88% 12% 2%

www.ijbmi.org 13 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

Koppal 675 48 723 93% 7% 2%

Mangalore 514 111 625 82% 18% 2%

Chikkaballapur 524 53 577 91% 9% 2%

Gadag 520 48 568 92% 8% 2%

Ramanagara 464 96 560 83% 17% 1%

Chikkamagaluru 455 88 543 84% 16% 1%

Yadgir 505 28 533 95% 5% 1%

Hubli 412 60 472 87% 13% 1%

Udupi 343 96 439 78% 22% 1%

Chamarajanagar 373 54 427 87% 13% 1%

Madikeri 342 73 415 82% 18% 1%

30 33316 4418 37734 88% 12% 100%

Tabe-2: Demographics (n = 8,709)

Variable Category n %
Gender Male 7502 86.14%

Female 1207 13.86%

Age 18-24 1106 12.70%
25-34 1463 16.80%
35-44 1716 19.70%
45-54 1637 18.80%
55-64 1350 15.50%
65 and above 1437 16.50%
Education Did not complete high school 880 10.10%
Completed SSLC 1515 17.40%
Did not complete Graduation 2543 29.20%
Graduate 2674 30.70%
Post Graduate 1097 12.60%
Income Up to 100000 1117 12.83%
10000 to 250000 3998 45.91%
250000 - 500000 2538 29.14%
500000 - 1000000 769 8.83%
Above 1000000 287 3.30%

After consultation with practicing financial planners, insurance advisors from the sample of 8,709, sample size
has been reduced to n=4,816, which represents 55% respondents from Bengaluru city, excluding the age group
from 18-24 and 55 and above for the present study. The final sample size of the study is given in Table-3
Sample Size.

www.ijbmi.org 14 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

Tabe-3: Sample Size (n1=4,816)

Variable Category n %
Gender Male 4,142 86%
Female 674 14%
Age 25-34 1463 30%
35-44 1716 36%
45-54 1637 34%
Education Did not complete high school 482 10%
Completed SSLC 819 17%
Did not complete Graduation 1397 29%
Graduate 1493 31%
Post Graduate 626 13%
Income Up to 100000 626 13%
10000 to 250000 2215 46%
250000 - 500000 1397 29%
500000 - 1000000 433 9%
Above 1000000 144 3%

Findings
This study examined the relationships between financial knowledge, self-assessed confidence in
financial matters, demographic factors, income, education and financial behaviour that can be identified as best
practices of financial planning with financial satisfaction. The statistical technique of linear regression was used
with financial satisfaction as the dependent variable. Three scales were created in to facilitate the analysis of the
financial knowledge, self-assessed competence and financial planning elements of the study.
Financial Knowledge
The FINRA Financial Capability Survey asked five questions relating to financial knowledge. Three of
the questions were developed by Lusardi and Mitchell for the 2004 wave of the Health and Retirement Survey
and have been used in many subsequent studies (Lusardi, Mitchell, & Curto, 2010). These questions were
altered to suit the Indian scenario.
1. About the concept of Compound Interest: Suppose you had Rs.10,000 in a savings account and the interest
rate was 5% per year. After 5 years, how much do you think you would have in the account if you left the
money to grow? Correct answers recoded to 1, all others are assigned a value of 0.
2. About Inflation: Imagine that the interest rate on your savings account was 5% per year, and inflation was
6% per year. After 1 year, how much would you be able to buy with the money in this account? Correct
answers recoded to 1, all others are assigned a value of 0.
3. About Bond Pricing: If interest rates rise, what will typically happen to bond prices? Correct answers re-
coded to 1, all others are assigned a value of 0.
4. About Loans: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but
the total interest paid over the life of the loan will be less. Correct answers recoded to 1, all others are
assigned a value of 0.
5. About the concept of Diversification: Buying a single company‟s stock usually provides a safer return than
a stock mutual fund. Correct answers recoded to 1, all others are assigned a value of 0.
An additive scale was constructed using a respondent‟s answers to the above five questions. Potential
values ranged from 0 to 5. Reliability analysis indicated a Cronbach‟s coefficient alpha of 0.757 for this
measure.
Self-assessed Financial Confidence
Four questions were asked of respondents regarding their own assessment of their financial skills and
knowledge. Respondents were asked to agree or disagree with a statement according to a 5-point Likert-type
scale with 1 indicating “Strongly Disagree,” 3 indicating “Neither Agree nor Disagree,” and 5 indicating
“Strongly Agree.” The four questions read as follows:
● “I am good at dealing with day-to-day financial matters such as bank accounts, credit and debit cards, and
tracking expenses.”
● “I am pretty good at math.”
● “I regularly keep up with economic and financial news.”
● “On a scale from 1 to 5, where 1 means very low and 5 means very high, how would you assess your
overall financial knowledge?”

www.ijbmi.org 15 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

Answers of “Don‟t Know” or refusals were recoded to 0 values. This occurred with less than 0.5% of
respondents. A scale was constructed based on the average value of the answers to these four items. Values
ranged from 0 to 5. Reliability analysis indicated a Cronbach‟s coefficient alpha of 0.774.
Financial Planning
Six financial planning best practices that most closely correlated to financial knowledge were
identified. The practices were selected for their applicability to the major areas of financial planning: personal
finance basics, borrowing, saving/investing, and protection (Huston, 2010). The six areas of financial planning
considered as best practices are described below.
1. Emergency Fund: Have you set aside emergency funds that would cover your expenses for 3 months in case
of sickness, job loss, economic downturn, or other emergencies? Answers „Yes‟ recoded to a value of 1. All
other answers are assigned a value of 0.
2. Credit Report: In the past 12 months, have you obtained a copy of your credit report? Answers „Yes‟
recoded to a value of 1. All other answers are assigned a value of 0.
3. Loans: Do you or your spouse/partner has taken any loans? Answer „No‟ recoded to a value of 1. All other
answers are assigned a value of 0.
4. Credit Card Payoff: In the past 12 months, which of the following describes your experience with credit
cards? – I always paid my credit card balances in full. Respondents who always paid balances in full
recoded to a value of 1. All other answers are assigned a value of 0.
5. Retirement Plan: Do you (or your spouse/ partner) have any retirement plans through a current or previous
employer, like a pension plan or National Pension Scheme? Or do you (or your spouse/partner) have any
other retirement plans? Respondents who answered „Yes‟ to either question recoded to a value of 1. All
other answers are assigned a value of 0.
6. Risk Management: The survey asked about four categories of risk management policies: health insurance,
homeowner‟s or renter‟s insurance, life insurance and auto insurance. Respondents who indicated that they
had at least two of the four policies in place recoded to a value of 1. All other answers are assigned a value
of 0.
An additive scale was constructed based upon a respondent's participation in the six identified
Financial Planning Best Practices. Values ranged from 0 to 6. Reliability analysis indicated a Cronbach‟s
coefficient alpha of 0.779.
Financial Satisfaction
Financial satisfaction was measured using the response to a single question on the FINRA study. The
question reads: “Overall, thinking of your assets, debts and savings, how satisfied are you with your current
personal financial condition?” Respondents reply on a 1 to 5 scale, with 1 signifying “Not at All Satisfied” and 5
is for “Extremely Satisfied.” The mean score of 2.17, median of 2 and standard deviation of 1.07.

Demographic Variables
A variety of demographic variables were included in the analysis given previous evidence. Data were
collected regarding respondents‟ gender, age, education and income level. Variable definitions and more details
are provided in Table 3.
The number of cases analysed was 4,816. Majority of the respondents were male (86%). The median
respondent was in the 35-44 age group (36%), and most respondents reported completing graduation (31%).
Majority of the respondents reported income between Rs.1,00,000 to Rs.2,50,000 level (46%).

V. RESULTS AND CONCLUSION

Initially, correlation of the measurements was analysed. The results of this analysis are shown in Table 4.
Table-4: Correlation Analysis of Financial Measures (n=4,816)
Financial Satisfaction Finance Knowledge Financial Confidence Financial
Planning

Financial Satisfaction 1.000

Finance Knowledge 0.236** 1.000

Financial Confidence 0.125** 0.038** 1.000

Financial Planning 0.650** 0.213** 0.017** 1.000

** p < 0.01 (two-tailed)

Correlations between all variables were significant at the p < .01 level, although the relationship
between financial confidence and financial planning was weaker than the others. One of the strongest

www.ijbmi.org 16 | Page
 Effect Of Financial Literacy On Personal Financial Planning…

relationships was found between Financial Planning and Financial Satisfaction. This can be inferred as those
who were following the best practices of financial planning are the ones who are financially satisfied. The next
strongest relationship is between financial knowledge and financial satisfaction. Further analysis was conducted
to determine if demographic factors were related to financial behaviour as expressed by financial planning best
practices questions.
Multiple regression analysis was performed using financial satisfaction as the dependent variable with
financial planning, financial knowledge, financial confidence, and the demographic variables relating to age
group, income and education, as independent variables.

Table-5: Regression Statistics

Multiple R 0.683133007

R Square 0.466670705

Adjusted R Square 0.432262363

Standard Error 1.869407183

Observations 4816

R2 = 0.4666 = 46.67% indicate that almost 47% of Financial Satisfaction depends on the variables considered
for the study. As the P-value is 0, model is statistically significant.

Table-6: Regression Results

Coefficients Standard Error t Stat P-value

Finance Knowledge 0.119 0.121 0.985 0.000

Financial Confidence 0.065 0.037 1.770 0.000

Financial Planning 0.628 0.078 8.053 0.000

Age 0.424 0.239 1.773 0.000

Income 0.711 0.205 0.833 0.000

Education 0.085 0.169 0.502 0.000

VI. CONCLUSION
Financial Satisfaction of an individual predominantly depends on meeting the financial goals by
applying his or her financial literacy (measured using Financial Knowledge) or using Financial Planning (best
practices) concepts. Personal financial planning has a significant impact on financial satisfaction as they are
measured in the present analysis. Income has the most significant impact on financial satisfaction, followed by
financial planning, age, financial knowledge, education and financial confidence.
From the demographics, we can conclude that respondents below the taxable slab (between
Rs.1,00,000 to Rs.2,50,000) lack the required financial literacy and in turn are unaware of financial planning
(best practices) concepts. Financial literacy has become increasingly important for the economic wellbeing of
the nation‟s future. It has a significant impact on financial satisfaction after Income and Financial Planning as
they are measured in the present analysis. The study thus shows that improvement in financial literacy will have
a positive effect on accessing the personal financial planning services.

REFERENCES
[1]. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas., Financial Literacy and
Financial Planning: Evidence from India, Journal of Housing Economics, 2010, 27. . 10.2139/ssrn.1728831.
[2]. Courchane, M.,Consumer literacy and creditworthiness. Proceedings, Federal Reserve Bank of Chicago, 2005.
[3]. Cliff A. Robb and Ann S. Woodyard, Financial Knowledge and Best Practice Behavior, Journal of Financial Counseling and
Planning, Volume 22, Issue 1 2011.
[4]. Divya Joseph, A Study On Financial Inclusion And Financial Literacy, International Journal of Business and Administration
Research Review, 2014, Vol.2, Issue.4, Jan-March.
[5]. Dr. Upendra Singh, Financial Literacy and Financial Stability are two aspects of Efficient Economy, Journal of Finance,
Accounting and Management, 2014, 5(2), 59-76.

www.ijbmi.org 17 | Page
 Effect Of Financial Literacy On Personal Financial Planning…
[6]. Dr. M.V.Subha, P.Shanmugha Priya, The Emerging Role of Financial Literacy Financial Planning, IJISET - International Journal of
Innovative Science, Engineering & Technology, 2014, Vol. 1 Issue 5, ISSN 2348 – 7968.
[7]. Joo, S., Personal financial wellness, J. J. (Ed). Handbook of Consumer Finance Research , New York, NY: Springer Science +
Business Media, 2008, pp. 21 -33.
[8]. Jyoti Gupta, Manish Madan, An Empirical Study On Financial Literacy Level Of Salaried Females In Digital Era, Business
Analyst, 2016, ISSN 0973-211X, 37(1) 217-230, 2016.
[9]. K C Chakrabarty, The what, why, who and how of financial literacy, Address by Dr K C Chakrabarty, Deputy Governor of the
Reserve Bank of India, at the stakeholders‟ workshop on “Financial literacy”, organized jointly by the UNDP, NABARD and
MicroSave, Mumbai, 2013.
[10]. Lavanya Rekha Bahadur, Financial Literacy: The Indian Story World Journal of Social Sciences, World Journal of Social Sciences,
2015, Vol. 5. No. 3.Issue. Pp.45 – 57.
[11]. Leora Klapper, Annamaria Lusardi, and Peter van Oudheusden, with the support of Jake Hess and Saniya Ansar, Financial Literacy
Around the World: Insights From The S&P Global Finlit Survey, The S&P Global Financial Survey, 2015.
[12]. Lusardi, A., & Mitchell, O. S., Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth.,
Journal of Monetary Economics, 2007, 54, 205-224.
[13]. Matewos Kebede, Dr. Navkiran jit Dalhual Kaur, Dr. Jasmeen Deep Kaur (Associate Professor), Financial Literacy and
Management of Personal Finance: A Review of Recent Literatures, Research Journal of Finance and Accounting, www.iiste.org,
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online), Vol.6, No.13, 201.
[14]. P. Bhushan et al., Financial Literacy and its Determinants, International Journal of Engineering, Business and Enterprise
Applications, 2013, 4(2), March-May, pp. 155-160.
[15]. Shawn Cole, Thomas Sampson, Bilal Zia, Financial Literacy, Financial Decisions, and the Demand for Financial Services:
Evidence from India and Indonesia, Harvard Business School, 2009.
[16]. Shubhra Biswas (Sinha1), Arindam Gupta, Financial Inclusion and Financial Literacy: A Comparative Study in their interrelation
between selected urban and rural areas in the state of West Bengal, IOSR Journal of Economics and Finance (IOSR-JEF), e-ISSN:
2321-5933, p-ISSN: 2321-5925.PP 67-72.
[17]. Sobhesh Kumar Agarwalla, Samir K. Barua, Joshy Jacob And Jayanth R. Varma, Financial Literacy among Working Young in
Urban India, World Development, 2015, Vol. 67, pp. 101–109, 0305-750X
[18]. Sumit kumar & Dr. Md. Anees, Financial Literacy & Education: Present Scenario in India, International Journal of Engineering and
Management Research, 2013, Volume-3, Issue-6, ISSN No.: 2250-0758 Page Number: 83-87.
[19]. Thaler, R. H., & Benartzi, S.,Save more tomorrow: Using behavioral economics to increase employee saving., Journal of Political
Economy, 2003, 112(1), S164-S187.
[20]. Volpe R. P., Chen, H., & Liu, S., An analysis of the importance of personal finance topics and the level of knowledge possessed by
working adults., Financial Services Review, 2006, 15(1), 81-99.
[21]. NCFE-Financial Literacy and Inclusion Survey (NCFE-FLIS), Fact Sheet Karnataka, 2014.
[22]. Financial Literacy In India, S&P Survey, 2015.

Vinod Krishna M. U" Effect of Financial Literacy on Personal Financial Planning:

a Study of Bengaluru City " International Journal of Business and Management
Invention (IJBMI), vol. 08, no. 02, 2019, pp 08-18

www.ijbmi.org 18 | Page