Validating multi-dimensional model of financial literacy using confirmatory factor analysis

Abstract

PurposeThe purpose of this paper is to validate the measurement model of financial literacy in which financial literacy is a second-order construct with financial knowledge, financial attitude and financial behavior as lower-order constructs.Design/methodology/approachThe study is based on the primary data collected from 536 adult respondents of Punjab, India. Confirmatory factor analysis (CFA) has been used in the study.FindingsFinancial knowledge, financial attitude and financial behavior have significant correlation with each other and they converge to form a second-order construct–Financial Literacy. The model of financial literacy as a second-order construct (using CFA) is the perfect fit. The study also highlights that the financial literacy level of people differ significantly depending upon the age, gender, marital status, area of residence, qualification, monthly family income, employment status.Practical implicationsThe study has major implications for policymakers. It confirms the claim that financial literacy is a combination of three components–financial knowledge, financial attitude and financial behavior. The national as well as international regulatory agencies working to promote financial literacy should realize that the overall financial literacy of people can be improved by imparting financial knowledge along with inculcating positive financial attitude and financial behavior among the masses.Originality/valueThe present study is the first study to validate financial literacy as a multidimensional model in the context of India to the best of our knowledge. The study contributes to the extant literature in the field of financial literacy by providing a strong framework for future research.