Caores, Richelle Jane U.

SV1-1
“Financial literacy” is a term used to describe a person’s ability to
comprehend and use financial skills, such as personal finance,
budgeting, and investing. It is sometimes used interchangeably with
“financial capability.” Its opposite is “financial illiteracy,” which is
meant only as a description of financial knowledge and not as a
pejorative.
A gap in financial literacy affects people in developed or advanced
economies, as well as those who live in emerging or developing
countries. Consumers in advanced economies also fail to demonstrate a
strong grasp of financial principles that can help them understand and
negotiate the financial landscape, and manage financial risks.
Gender Gap in Financial Literacy
 Research has shown that financial illiteracy is widespread among
women, and that many women are unfamiliar with even the most
basic economic concepts needed to make saving and investment
decisions. This gender gap in financial literacy may contribute to
the differential levels of retirement preparedness between women
and men. However, little is known about the determinants of the
gender gap in financial literacy. Using data from the RAND
American Life Panel, the authors examined potential explanations
for the gender gap including the role of marriage and division of
financial decision-making among couples.
 They found that differences in the demographic characteristics of
women and men did not explain much of the financial literacy gap,
whereas education, income and current and past marital status
reduced the observed gap by around 25%. Oaxaca decomposition
revealed the great majority of the gender gap in financial literacy is
not explained by differences in covariates - characteristics of men
and women - but due to coefficients, or how literacy is produced.
They did not find strong support for specialization in financial
decision-making within couples by gender. Instead, they found that
decision-making within couples was sensitive to the relative
education level of spouses for both women and men.
Financial Knowledge Gap
 Financial knowledge is one’s understanding of financial matters.
Individuals need to be aware of the micro and macroeconomic
environment and understand basic issues of everyday finance such as
saving, investment, credit, interest rates, inflation, and pricing of
consumer products, among others. As such, financial knowledge is a form
of literacy about financial issues. In this area of research, the term
financial knowledge is sometimes used interchangeably with financial
literacy. For example, Kempson et al. (2005) define financial literacy as
individuals’ ability to obtain, understand, and evaluate financial
information. In other cases, financial knowledge is understood as one
component of financial literacy.
 For example, various authors have conceptualized financial literacy as
being comprised of financial knowledge, skills, and attitudes, all of which
influence people's financial behaviors (Lusardi, 2011; Lusardi & Mitchell,
2013; Xiao et al., 2014). Both subjective and objective assessments are used
to measure financial knowledge. Objective financial knowledge is
measured by assessing people’s level of understanding of various
components of financial markets and products, such as assets, debts,
savings, and investments (Leskinen & Raijas, 2006). Xiao et al. (2014)
measured objective financial knowledge using a knowledge quiz or a
numeracy test on a specific domain. Lusardi and Mitchell (2014) identified
three basic areas to measure objective financial knowledge: (i) numeracy
and capacity to do calculations related to interest rates, (ii) understanding
of inflation, and (iii) understanding of risk diversification. For simplicity,
we use the term ‘objective financial knowledge’ in this study.
 Objective financial knowledge is measured by assessing
people’s level of understanding of various components of financial
markets and products, such as assets, debts, savings, and investments
(Leskinen & Raijas, 2006). Xiao et al. (2014) measured objective
financial knowledge using a knowledge quiz or a numeracy test on a
specific domain. Lusardi and Mitchell (2014) identified three basic areas
to measure objective financial knowledge: (i) numeracy and capacity to
do calculations related to interest rates, (ii) understanding of inflation,
and (iii) understanding of risk diversification. For simplicity, we use the
term ‘objectivefinancial knowledge’ in this study.
 Subjective financial knowledge is understood as
individuals’ self-assessment of them levels of financial
knowledge. Both the National Financial Capability Survey
(NFCS) in the US and the Canadian Financial Capability Survey
(CFCS) used a number of questions to assess the subjective
financial knowledge of the respondents (FINRA Investor
Education Foundation, 2009; Statistics Canada, 2009). To
measure subjective financial knowledge, Xiao et al (2014) used a
single item from the NFCS that asked on a one to seven scale:
"how would you assess your overall financial knowledge?”.
 The level of financial knowledge matters because of its relationship to
financial decision making and behavior. Accordingly, low levels of
financial knowledge can lead to greater risk of financial vulnerability
amongst older adults, which is an important cause for concern. Studies of
financial decision-making suggests differences across the life course. For
example, compared to younger adults, older adults paid more for credit
services (Laibson, Agarwal, Gabaix, & Driscoll, 2009), and were more
likely to file for bankruptcy (Pottow, 2011). Overall, possessing financial
knowledge can serve as a protective factor against potentially deleterious
decision-making in older age (James, Boyle, Bennett, & Bennett, 2012).
Financial vulnerability is a rising concern. Social workers are now
actively engaged in building financial capability. Social workers can
create equitable economic conditions, and enhance financial security and
well-being in old age by building awareness of the financial knowledge gap.
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