Financial fragility and financial stress during the COVID-19 crisis: evidence from Colombian households

Abstract

PurposeOur findings indicate that workers with more financial education were more prepared to face the negative effects on their finances from COVID. This ability reduces the probability of becoming financially fragile and experiencing financial stress.Design/methodology/approachThe authors applied a survey questionnaire to 856 Colombian adults and used principal component analysis to build an index for each factor. Then, the authors used a linear regression model with the indexes to test our hypotheses and verify our results using a structural equation model.FindingsOur findings indicate that workers who have more financial education are more prepared to face the negative effects on their finances, which reduces the probability of becoming financially fragile and having financial stress.Research limitations/implicationsThe authors found that there is no significant relationship between financial literacy and financial fragility, neither between financial literacy and financial stress, so a better financial education will not lower financial fragility and stress unless it is being applied by households through better financial preparedness.Practical implicationsIt is important to highlight that the pandemic not only taught us to improve biosecurity measures but also that financial strength, ability to work remotely and income diversification were key factors in facing this adverse shock, the authors show that high levels of financial education have a positively relationship with the ability of individuals to manage their resources, so private and public institutions have to promote better financial education.Originality/valueThis is the first study that applies the four different indexes to an emerging country (i.e. Colombia), and the first one to create and use a financial stress index.

Adaptation and validation of the financial stress scale in social conflict contexts: a study conducted with small and medium-sized Peruvian entrepreneurs

“…This aligns with the primary theoretical model that underpins this scale’s construction ( Tito-Bentancur et al, 2021 ). Moreover, the FSSSCC/ ESECPS reliability coefficient value was satisfactory ( Streiner, 2003 ) and acceptable ( Hill and Hill, 2012 ), in line with what has been reported by other studies ( Heo et al, 2020 ; Cardona-Montoya et al, 2022 ).…”

Impact of private and public initiatives on individuals' employment and income during the COVID-19 pandemic: evidence from Peru

“…Chhatwani and Mishra (2021) found that financial preparedness had a negative correlation with financial fragility during the COVID-19 pandemic because financially prepared individuals were able to have more resilient financial planning (savings and debts) and were less likely to be influenced by cognitive biases. Cardona-Montoya et al (2022) found that individuals with more financial literacy are more prepared to face the negative effects on their finances, which reduces the probability of becoming financially fragile (i.e. to decrease their income).…”

Financial inclusion, financial capability and financial fragility during COVID-19 pandemic

“…The second type focuses on exploring the outcomes associated with financial fragility, where financial fragility serves as a contextual background factor (Bialowolski et al ., 2021; Chhatwani and Mishra, 2021b; Preston, 2022; Yu et al ., 2022). The third type seeks to identify factors that are linked to financial fragility, encompassing both risk factors that may increase the likelihood of financial fragility and coping factors that can help reduce it (Ali et al ., 2020; Cardona-Montoya et al ., 2022; Clark et al ., 2021a, b; Lusardi et al ., 2021; West and Mottola, 2016). Incidents of financial fragility are prevalent in the United States and other countries.…”

“…A study using data from Pakistan reveals that education, employment status and the industry of employment of the household head are the main determinants of financial fragility (Ali et al ., 2020). Utilizing data from Colombia, researchers have demonstrated that workers with more financial education are better prepared to mitigate the negative effects on their finances, thereby reducing the probability of becoming financially fragile (Cardona-Montoya et al ., 2022).…”