Having Trouble Making Ends Meet? Financial Literacy Makes the Difference

Abstract

Financial stability is an important contributor to economic and psychological well-being. However, even before the economic upheaval of the Covid-19 pandemic, many households around the world had trouble making ends meet. The aim of this paper is twofold. First of all, we investigate financial literacy’s effect on householders’ ability to easily make ends meet. Then we focus on any financial literacy differential effects on female householders. We use subsamples from the Bank of Italy Survey on Household Income and Wealth (SHIW) and find that the data support the positive impact of higher financial literacy. Householders who correctly answer the Big Three questions-the standard assessment of financial literacy-are 8 percentage points more likely to make ends meet easily. When we apply a more comprehensive financial literacy indicator (21-score) based on the Organisation for Economic Co-operation and Development (OECD) methodology, the effect is even stronger (13.5 percentage points). Household financial stability is lower in southern regions of Italy and among women householders, but no findings support differential effects on women. Our estimates are robust to different models such as OLS, Probit and Ordered Probit and financial literacy specifications. Overall, our results underscore the economic importance of financial literacy in ensuring social and economic well-being.

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