Abstract
Orientation: The notion that financial knowledge and capability alone drive optimal financial decision-making is being challenged, highlighting the complexity of financial behaviour and necessitating a more nuanced approach to analysing financial decision-making processes.
Research purpose: The purpose of this study was to investigate the financial factors influencing financial capability and anxiety, and to explore strategies for reducing financial anxiety and elucidate the complex relationships between these constructs.
Motivation for the study: This research explores the relationship between financial capability and anxiety in South Africa, contributing to the literature, with the purpose of enhancing financial well-being.
Research approach/design and method: A quantitative approach was used, collecting cross-sectional primary data from 530 bank clients in South Africa using an online questionnaire, and analysing the data using structural equation modelling (SEM).
Main findings: The study found that financial control, family financial socialisation, financial foresight and financial distress tolerance were positively associated with financial capability. In contrast, cautious spending and digital savvy did not reveal significant relationships. Financial anxiety was inversely associated with financial capability.
Practical/managerial implications: The findings suggest that targeted financial education and counselling initiatives could be effective in mitigating financial anxiety and promoting financial well-being.
Contribution/value-add: This study contributes to existing literature by exploring the relationships between financial capability, financial anxiety and various financial factors, providing valuable insights for policymakers, financial educators and practitioners.
Keywords: financial anxiety; financial behaviour; financial capability; financial decision-making; financial literacy.
Introduction
Normative economic theory assumes that consumers who possess adequate financial knowledge will make financial decisions that are in their best interests (Simon 1959). Yet, despite efforts to improve their financial literacy, it seems that many consumers are still unable to make optimal financial decisions (Archuleta et al. 2021). Such suboptimal financial decision-making and behaviour are characterised by unprecedentedly low savings rates, which often result in unsustainably high debt levels and the risk of falling into the so-called ‘debt trap’ (OECD 2018). With many people already finding themselves in a financial predicament, poor financial decision-making and behaviour have the further adverse effect of crippling a country’s economy and putting pressure on state funds.
Optimal financial behaviour is deemed important because of several factors: the development of sophisticated and complex financial products and services, easy access to credit driven by technological advances and changes in demographic profiles and employment trends. The latter requires savings to last longer, accommodating a longer life expectancy. Additionally, there is a shift away from government and industry support, placing the responsibility for achieving financial independence during retirement on the individual consumer.
Financial education and the resultant financial capability have been proposed as a means to overcome the ill effects of poor financial decision-making. However, financial capability is not a panacea, and its impact on financial anxiety, a growing concern in today’s financial landscape, remains underexplored. Financial anxiety, characterised by feelings of worry, stress and apprehension about financial matters (Ahamed & Limbu 2024; Xiao & Meng 2024), can have severe consequences for individual well-being and financial decision-making. Anxiety in general has been demonstrated to have serious negative consequences for human decision-making and behaviour (American Psychological Association [APA] 2015). In a financial decision-making context, these consequences include both psychological influences (such as apprehension and stress) and dysfunctional behaviours, such as poor decision-making and, according to Xin, Xiao and Lin (2023), the reluctance to deal with financial difficulties.
The literature suggests that the effectiveness of financial education efforts to improve financial literacy and to influence actual financial behaviour on their own is limited (Fernandes, Lynch & Netemeyer 2014). By contrast, Kaiser et al. (2022) provide compelling evidence that financial education programmes have overall positive causal treatment effects on financial knowledge and more effective downstream financial behaviours. Given the absence of consensus on the impact of financial capability in the literature, this study extends the existing literature by including several financial factors over and above those commonly included in OECD studies (such as financial control, financial planning, financial knowledge and understanding and financial product awareness), which have not previously been investigated simultaneously, namely digital savvy, family financial socialisation, cautious spending, financial distress tolerance and financial foresight. Financial factors, in this context, refer to various domains of financial literacy. In particular, the focus of this study is the impact of these factors on financial capability directly and on financial anxiety indirectly. The purpose of this study was to test the validity of a proposed theoretical model, examining how financial factors (digital savvy, family financial socialisation, cautious spending, financial distress tolerance and financial foresight) influence financial capability, and whether financial capability can subsequently reduce financial anxiety, providing actionable insights for policymakers, financial educators and individuals seeking to mitigate financial anxiety and promote financial well-being.
Given these considerations, this study explores the relationships between financial factors, financial capability and financial anxiety. The following sections discuss the relevant literature and hypotheses.
Conceptual framework and hypotheses
Despite growing interest in financial anxiety and capability, the interplay between financial factors, financial capability and financial anxiety remains underexplored in the literature. Examining relationships between financial factors, financial capability and financial anxiety seeks to address a gap in the literature.
Financial anxiety
Anxiety is generally seen by scholars as harming humans’ mental health and overall quality of life (Eisenberg et al. 2007). Financial anxiety refers to feelings of worry, stress and apprehension related to one’s financial situation, including concerns about debt, inadequate savings and financial insecurity. These concerns can lead to physical symptoms (such as headaches and insomnia) and emotional symptoms such as decreased mental well-being (APA 2015). Financial anxiety has become a global concern amid geopolitical tensions and high inflation (Ahamed & Limbu 2024). Regrettably, whereas two-thirds of American adults are concerned about their financial situation, one-fourth of them experience financial anxiety regularly when paying bills and handling other financial issues (Archuleta et al. 2020).
Despite the substantial body of scholarly literature on investigations into the association between financial literacy and economic behaviour, there appears to be little empirical research focusing on the associations between financial anxiety and financial capability on the one hand, and between financial anxiety and financial literacy factors on the other hand. Some of the few studies on this relationship include a study by Archuleta et al. (2021) that revealed a positive relationship between financial anxiety and the number of student loans among college students. Other studies on financial anxiety among students in the US found that financial anxiety had increased the extent of credit card debt (Grable & Joo 2006) and led to poor academic performance (Bennett, McCarty & Carter 2015; Joo, Durband & Grable 2008). Adams, Meyers and Beidas (2016) found that perceived stress mediated the relationship between financial strain and psychological symptoms such as depression, and between financial strain and academic and social integration. Using data from the Midwestern United States and Hawaii, Klontz et al. (2012) showed that dysfunctional financial behaviours (such as compulsive buying, pathological gambling, financial dependence, financial enabling and financial avoidance) were associated with negative financial outcomes such as the excessive use of revolving credit, a lower net worth and lower levels of income. A Japanese study found that financial anxiety even hurt the participants’ physical health (Ogata & Yokoyama 2024). Although limited scientific evidence exists, some scholars have found associations between financial anxiety and financial capability. Also, Xiao and Kim (2022) confirmed the notion that financial capability alleviates financial stress. The results further suggest that consumers with debt delinquencies are more likely to experience financial stress. In another study, Kim, Cho and Xiao (2022) demonstrated that the use of alternative financial services (e.g. small amount short-term loans with higher interest rates) was associated with higher levels of financial anxiety, whereas financial knowledge was negatively associated with financial anxiety. Also, the negative association between financial knowledge and financial anxiety was more pronounced for users of mainstream financial services. Finally, Xiao and Meng (2024) directly compared the associations between financial anxiety and financial capability factors before and during the coronavirus disease 2019 (COVID-19) pandemic. Financial capability was measured by three indicators, namely financial knowledge, financial behaviour and financial confidence. The results indicated that financial knowledge and financial behaviour are positively associated with financial confidence, which in turn reduces financial anxiety. In a similar vein, based on a Swedish sample, Lind et al. (2020) demonstrated that both objective financial knowledge and confidence serve as a buffer against financial anxiety.
In summary, financial anxiety is a prevalent issue affecting mental and physical well-being, with research suggesting it is linked to various financial aspects, including debt and financial literacy factors. While limited studies have explored this relationship, findings indicate that financial capability can reduce financial anxiety, highlighting the importance of further exploring these associations.
Financial capability
Despite a call by some academics for a clearer distinction between the constructs, financial literacy and financial capability, they are still often used interchangeably (LeBaron & Kelley 2021). Recently, Xiao et al. (2022:1682) proposed a synthesised definition of financial capability as ‘an individual’s ability to apply appropriate financial knowledge, perform desirable financial behaviours and take available financial opportunities for achieving financial well-being’. Atkinson et al. (2007) identified four domains of financial capability, emphasising the behavioural aspects, namely managing money, planning, choosing products and staying informed, which correspond to the four core domains of financial literacy, namely financial control, financial planning, financial product awareness and financial knowledge and understanding (OECD 2013).
Evidence on the links among financial literacy domains is well documented. For example, a large body of literature concurs with the notion that stock market participation is positively associated with financial literacy (e.g. Almenberg & Dreber 2015; Arrondel, Debbich & Savignac 2012). Also, there is evidence that financial knowledge is linked to savings behaviour (e.g. De Bassa Scheresberg 2013; Sabri & MacDonald 2010). Financial literacy has also been linked to effective financial planning (e.g. Arrondel, Debbich & Savignac 2013; Hastings & Mitchell 2020; Lusardi & Mitchell 2007, 2011a, 2011b, 2011c). Strong links have also been found between financial literacy and economic behaviour on the liability side of households’ balance sheets. The literature seems unanimous about the link between debt literacy and optimal debt behaviour. By contrast, low levels of debt literacy are associated with (1) over indebtedness, both in the US (Lusardi & Tufano 2015) and in the UK (Disney & Gathergood 2013); (2) high-cost borrowing (often informal), also both in the US (Lusardi & De Bassa Scheresberg 2013) and the UK (Disney & Gathergood 2013); (3) uncertainty about the appropriateness of a debt position and being uninformed about borrowing terms (Lusardi & Tufano 2015); (4) subprime mortgage defaults in the US (Gerardi, Goette & Meier 2013); (5) 401(k) borrowing (Utkus & Young 2011); and (6) other financial mistakes relating to debt decisions (Agarwal & Mazumder 2013).
The empirical research focusing on the associations between financial capability and individual financial literacy factors appears to be limited (Goyal & Kumar 2023; Johnson & Sherraden 2007). Notwithstanding, some scholars have studied the impact of financial literacy education on financial capability, especially among younger generations in the US. For example, Sherraden et al. (2011) demonstrated that financial literacy initiatives had a positive impact on the financial capability of primary school children, regardless of their parents’ education and income. By using longitudinal survey data collected from college students, Serido, Shim and Tang (2013) showed that knowledge about personal finances, accompanied by self-belief, culminated in optimal financial behaviours and, ultimately, in both financial and overall well-being. Loke, Choi and Libby (2015) found a significant increase in financial knowledge, financial self-efficacy and the frequency with which positive financial behaviours were carried out among the economically disadvantaged youth after participating in training courses during which savings were promoted. Other studies linked financial capability with financial satisfaction (Xiao, Chen & Chen 2014), financial well-being (Guo & Huang 2023), financial access (e.g. Johnson & Sherraden 2007) and the propensity to plan (Xiao & O’Neill 2018).
In summary, financial capability involves applying financial knowledge, behaviours and opportunities for financial well-being. Financial literacy is linked to positive outcomes like effective planning and debt management. However, research on financial capability and individual financial literacy factors is limited.
Given the discussion of financial anxiety and financial capability, the following hypothesis is proposed:
H1: Financial capability reduces financial anxiety.
In the present study, we argue that the following financial factors could enhance financial capability and, consequently, reduce financial anxiety: financial control, financial foresight, cautious spending, digital savvy, family financial socialisation and financial distress tolerance.
Financial control
Hilgert and Hogarth (2003) found a link between financial control and financial behaviour by focusing on four financial management activities, namely cash-flow management, credit management, saving and investing. Dew and Xiao (2011) developed a financial management behaviour scale (FMBS) and found the scale to be strongly associated with other measures of financial management behaviours and predictive of the participants’ sound handling of their personal finances. Also, Goyal, Kumar and Xiao (2021) found potential positive effects of effective personal financial management practices on financial well-being and overall life satisfaction (see Dew, Barham & Hill 2020).
It is evident from this review that being involved in day-to-day financial decision-making will enhance financial capability, and we thus hypothesise:
H2: There is a positive relationship between financial control and consumers’ financial capability.
Financial foresight
Financial foresight (a concept derived from financial product awareness) pertains to a resistance to giving in to short-term desires, by instead predicting what will be needed in the future and carefully evaluating the financial impact and consequences of financial decisions. People who demonstrate financial foresight carefully consider the potential consequences before making a financial decision (OECD 2018). On the other hand, impulsive spending is often associated with overspending and with overall difficulty in effectively handling finances (Santini et al. 2019). A serious consequence of impulsive spending for consumers is a higher likelihood of experiencing financial difficulties, such as higher levels of debt (Fossion, Van den Berghe & Warlop 2015). This contention is confirmed by Kim (2019), who found that impulsive spending is strongly associated with financial difficulties, feelings of regret and decreased life satisfaction.
This analysis implies that exercising financial self-control, to demonstrate restraint and avoid impulsive purchase decisions, will enhance financial capability. We thus hypothesise:
H3: There is a positive relationship between financial foresight and consumers’ financial capability.
Cautious spending
Closely related to the concept of financial control, cautious spending refers to reflecting on important buying considerations before a purchase is made, to establish whether it is affordable and necessary (Hilgert & Hogarth 2003). Several scholars seem to concur that exhibiting discipline and self-control in one’s daily financial activities (as opposed to giving in to short-term wants or temptations) exerts a positive influence on optimal financial behaviours and overall well-being (Ameriks, Caplin & Leahy 2003; Sheng & Feng 2023).
Cautious spending is the antithesis of materialistic consumption, which can be described as the need to acquire material goods with the intention of demonstrating status, particularly in a hierarchical society (Eastman, Goldsmith & Flynn 1999). By paying little attention to the prioritisation of purchases of necessity, materialist consumers often spend money less frugally than non-materialists (Fitzmaurice & Comegys 2006). By contrast, cautious spenders demonstrate higher levels of financial capability. In other words, we thus hypothesise:
H4: There is a positive relationship between cautious spending behaviour and consumers’ financial capability.
Digital savvy
With the emergence of the financial technology (FinTech) era, some degree of digital literacy is required to manage one’s finances effectively. Exploring the role of digital financial literacy in improving financial access and effective personal financial management has gained momentum owing to the growth in electronic financial services offerings (Panos & Wilson 2020). In a study by French, McKillop and Stewart (2020), it was concluded that digital savvy translated into better financially capable behaviours, given that participants with access to digital services were more likely to keep track of their income and expenses and proved to be more resilient when faced with a financial shock. Both Kass-Hanna, Lyons and Liu (2022) and Lyons et al. (2020) believe that a combination of financial and digital savvy is needed to ensure resilient financial behaviours.
This assessment suggests that being able to effectively navigate the digital financial landscape will enhance financial capability, and we thus hypothesise:
H5: There is a positive relationship between digital savvy and consumers’ financial capability.
Family financial socialisation
Family financial socialisation can be described as ‘the process of acquiring and developing values, attitudes, standards, norms, knowledge, and behaviours that contribute to … financial viability and consumer well-being’ (Danes 1994:128). The three primary methods of family financial socialisation that have a positive influence on financial outcomes are parent financial modelling, parent–child financial discussions and experiential learning (Kim & Chatterjee 2013; LeBaron & Kelley 2021).
This review suggests that education on financial matters from caregivers in childhood will enhance financial capability, and we thus hypothesise:
H6: There is a positive relationship between family financial socialisation and consumers’ financial capability.
Financial distress tolerance
The concept of financial distress tolerance emanates from psychology and was included as an exploratory factor in this study. Financial distress tolerance relates to the ability or capacity to deal with and manage emotions about difficult negative financial situations without feeling overwhelmed (see Linehan 2014). Being able to handle difficult emotions about distressing money matters can help a person to return quickly to a state of financial equilibrium in which they can behave optimally (Chapman, Gratz & Tull 2011). People who do not have these mechanisms to cope with financial stressors tend to become overwhelmed by difficult financial situations and may resort to unhealthy or harmful behaviour (Simons & Gaher 2005).
This review suggests that being able to effectively deal with negative emotions about stressful financial situations will enhance financial capability, and we thus hypothesise:
H7: There is a positive relationship between financial distress tolerance and consumers’ financial capability.
Literature synthesis and research agenda
This review of the current literature highlights the complex relationships between financial factors, financial capability and financial anxiety, revealing several research gaps. While prior studies have established the importance of financial capability in reducing financial anxiety, identifying the specific financial factors that contribute to financial capability remains relatively underexplored. This study addresses these gaps by examining the influence of financial control, financial foresight, cautious spending, digital savvy, family financial socialisation and financial distress tolerance on financial capability and, in turn, their effects on financial anxiety, providing a more nuanced analysis of these relationships. Figure 1 illustrates the theoretical model, depicting the hypothesised relationships between financial factors, financial capability and financial anxiety (H01 – H07).
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FIGURE 1: Theoretical model of financial capability and financial anxiety, illustrating relationships between financial factors (financial control, financial foresight, cautious spending, digital savvy, family financial socialisation, financial distress intolerance), financial capability and financial anxiety (H01 – H07). |
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Research methods and design
Data and sample
In response to Goyal and Kumar’s (2023) call for more consumer finance research in Africa, primary cross-sectional data were collected from clients of a major South African bank. Participation was voluntary and anonymous, ensuring respondent confidentiality. The realised sample consisted of 530 bank clients, representing a response rate of 0.4%. The average respondent age was 39.9 years, with 76.4% reporting low to lower-middle income levels. Approximately 79% of clients had completed at least secondary education, and 61% were full-time employees. The sample’s demographic characteristics reflected the bank’s client base. As a measurement instrument, an online questionnaire was designed in Qualtrics. The questionnaire was based on previous studies on financial literacy and financial behaviour. The final questionnaire was subjected to a pretest, mainly to ensure that the survey questions were clearly formulated, unambiguous, and that the questionnaire could be comfortably completed within the given timeframe.
Measurement of variables
All question items were assessed by using a seven-point Likert scale (1 meant strongly disagree and 7 meant strongly agree). Financial capability (6 items; adapted from Xiao et al. 2022) was measured as an overarching construct, consisting of the average of six items: (1) being capable of managing financial affairs; (2) having subjective financial knowledgeability; (3) making financial provisions for loved ones in the event of death; (4) having assets that are covered against contingencies such as fire, theft and other types of damage; (5) educating oneself on money management before making financial decisions; and (6) having emergency savings in place (e.g., in the case of job loss).
The financial factors (the independent variables) were measured with multi-item scales that encompassed financial behaviours, financial knowledge, as well as financial perceptions and attitudes. These items were mainly adapted from previously used scales that could be associated with either an improvement or a deterioration in financial capability. The financial factors modelled in this study were financial control, financial foresight, cautious spending, digital savvy, family financial socialisation, financial distress tolerance and financial knowledge.
Financial control (5 items; adapted from Goyal et al. 2021) refers broadly to the optimal handling and management of money and personal finances regularly and entails: (1) often checking if income can cover planned expenses; (2) knowing more or less the total amount of credit owed to banks and retailers; (3) having a budget; (4) sticking to a budget; and (5) comfortably paying financial obligations on time each month.
Financial foresight (2 items; adapted from Kim 2019) relates to prior consideration given to the impact or consequences of decisions on future financial well-being and entails resistance to (1) being an impulsive buyer and (2) having an attitude of living for today and letting tomorrow take care of itself. Both items were reverse-coded before data analysis.
Cautious spending (2 items; adapted from Sheng & Feng 2023) involves assessing the affordability of a purchase given the specific circumstances and prioritising needs over wants. Cautious spending thus entails (1) considering necessity before making a purchase and (2) considering affordability before making a purchase.
Digital savvy (4 items; adapted from Kass-Hanna et al. 2022) refers to the capability with which technological advancements in the financial industry is embraced and entails (1) preferring digital banking to branch banking; (2) being comfortable with using digital device(s) in one’s daily life; (3) being eager to use new technology to assist with daily tasks; and (4) having a knack for figuring out how to use electronic devices.
Family financial socialisation (4 items; adapted from LeBaron & Kelley 2021) pertains to the acquisition of knowledge and learning behaviours about money from caregivers during childhood and consists of the following: (1) caregiver(s) being open about family finances during childhood; (2) being educated by caregiver(s) about money management from a young age; (3) easy communication with caregivers about money matters during childhood; and (4) having a savings account or something similar to the concept of saving while growing up.
Financial distress tolerance (4 items; adapted from Simons & Gaher 2005) relates to the emotional capacity to deal effectively with financial difficulties and having the ability to return to a calm emotional state in which to function optimally during stressful financial times. Lacking this capacity and ability means that (1) the person cannot deal with feeling financially distressed; (2) their financially distressed state impacts negatively on their ability to go about their daily activities; (3) their financially distressed state harms their interpersonal relationships; and (4) they find feeling financially distressed unbearable.
Financial knowledge (4 items; adapted from OECD 2013) refers to an objective yardstick to measure the ability to comprehend and apply basic financial principles and entails an understanding of finance-related concepts such as (1) the impact of compound interest; (2) the effects of inflation on investment decisions; (3) diversification benefits; and (4) home loan trade-offs.
Financial anxiety, the dependent variable (3 items; adapted from Xiao & Meng 2024), was measured as an overarching construct that could be associated with financial capability. Financial anxiety consisted of three items derived from previous literature and can be summarised as: (1) feeling anxious about a financial situation; (2) worrying about one’s financial future; and (3) struggling to stick to a savings or an investment plan.
The operationalisation of these multi-dimensional constructs was based on the scholarly studies discussed in the literature review. The full survey questions are available from the authors upon request.
Data analysis procedure
Data analysis involved using SPSS 26.0 and LISREL 8.80. Initially, an exploratory factor analysis (EFA) evaluated discriminant validity among the theoretical model’s variables. Cronbach’s alpha assessed reliability. The theoretical and empirical models were then evaluated using covariance structural equation modelling (SEM), a multivariate technique enabling simultaneous assessment of variable relationships in an empirical model. SEM was recommended as a pioneering data analysis technique to be used in future consumer finance studies (Goyal & Kumar 2023).
Ethical considerations
Ethical clearance to conduct this study was obtained from Stellenbosch University and Social, Behavioural and Education Research Ethics Committee (Ref. No. 26316), and informed consent was obtained from all the participants. The data were collected in Stellenbosch, South Africa, over a period of 2 weeks in March 2023.
Results
Validity assessment
Given the study’s innovative nature and the absence of previously validated scales, an EFA was performed using SPSS to assess the discriminant validity among the variables in the model, as advocated by Cronbach and Shavelson (2004). The direct quartermin oblique rotation technique was used, given the assumption that the variables would be correlated to some extent. Firstly, the sampling adequacy of the data was assessed by reviewing the Kaiser–Meyer–Olkin (KMO) score and Bartlett’s test of sphericity. Sampling adequacy indicates whether it is justified to conduct an exploratory factor analysis (EFA), given the nature of the data (Zikmund et al. 2013). A KMO score above 0.5 and close to 1.0 indicates sampling adequacy. Additionally, Bartlett’s test of sphericity compares the correlation matrix to an identity matrix, with significance levels of less than 0.05 indicating a significant difference in variances, suggesting sampling adequacy. In this study, the KMO score was 0.841, and the significance level of Bartlett’s test of sphericity was 0.000 (see Table 1), suggesting the data were suitable for conducting an EFA.
| TABLE 1: Kaiser–Meyer–Olkin and Bartlett’s test. |
Secondly, an EFA also helps to identify the underlying variable structure in a dataset (Hair et al. 2014). This study considered factor loadings of 0.35 and above as significant. The EFA extracted eight factors, measured by 30 items (see Table 2 for the final factor matrix), with item codes (e.g. FINI1) corresponding to specific survey questions.
| TABLE 2: Exploratory factor analysis: Pattern matrix. |
Following the EFA, the construct financial capability was operationalised as a collective term incorporating perceived financial knowledge and financial capability (FINI1 and FINI2), educating or empowering oneself in money management (FINI3), and having the main financial planning building blocks in place (FINI4, FINI5 and FINI6). The six items loading onto Factor 1 (financial capability) were originally intended to measure three constructs: financial attitude, information-seeking and financial planning. The variable financial capability can thus be described as the interaction between healthy money perceptions, attitudes and habits and the agency to put financial security measures in place. In short, financial capability consists of self-perceived financial acumen (the possession of financial knowledge to manage financial affairs), information-seeking (education on money management before financial decisions are taken) and financial planning (emergency funds, assets covered and death cover).
As was expected, items DIST1, DIST2, DIST3 and DIST4 loaded together onto financial distress intolerance (Factor 2). Factor 2 was designed to measure the degree to which temporary or permanent financial stressors affect a person’s daily functionality in life and work. Similarly, items FAM1, FAM2, FAM3 and FAM4 loaded together onto family financial socialisation (Factor 3). Factor 3 measured the role of money skills, beliefs and habits that were learned from caregivers while growing up. Also, as expected, items DIG1, DIG2, DIG3 and DIG4 loaded together onto digital savvy (Factor 4). Factor 4 measured the inclination towards technological advancements and the use of electronic devices often encountered in the financial world.
Items EXP1 and EXP2 loaded together to form the construct, cautious spending (Factor 5). These two items were regarded as measures of the (intentional) deliberation or evaluation that takes place before a purchase is made or before money is spent. Similarly, FINF1 and FINF2 loaded together to form the construct, financial foresight (Factor 6). These two items were regarded as measures of the awareness to exercise restraint and sensibility when handling finances to secure a financially sound future.
The construct financial anxiety was operationalised as a collective term incorporating financial anxiety (ANX1 and ANX3) and the ability to stick to a savings or an investment plan (ANX2). These items loaded together onto Factor 7 (financial anxiety), which refers to feeling anxious and worrying about the struggle to follow sound financial planning principles.
The items (FINC1, FINC2, FINC3, FINC4 and FINC5) that are loaded onto Factor 8 (financial control) refer to active money management techniques used daily.
The objective financial knowledge construct was removed from the model because of insufficient evidence of discriminant validity. In other words, the four items that were used to measure objective financial knowledge did not group to form a meaningful construct.
Discriminant validity was further assessed using the heterotrait–monotrait ratio of correlations (HTMT), as recommended by Henseler, Ringle and Sarstedt (2015), with values below 0.85 indicating acceptable discriminant validity. The measurement model’s discriminant validity was evaluated, with results presented in Table 3. Heterotrait–Monotrait ratios between constructs were below the 0.85 threshold (Henseler et al. 2015), indicating acceptable discriminant validity.
Discriminant validity was also assessed using the Fornell–Larcker criterion (Fornell & Larcker 1981), with results in Table 4 showing the square root of each construct’s average variance extracted (AVE) exceeding its correlations with other constructs, indicating acceptable construct validity. This method entails comparing the square root of the AVE for each pair of constructs with their correlation. The conclusion of discriminant validity is supported when the square root of the AVE is higher than the correlations.
In summary, the factors that demonstrated sufficient discriminant validity were Factor 1: Financial capability; Factor 2: Financial distress intolerance; Factor 3: Family financial socialisation; Factor 4: Digital savvy; Factor 5: Cautious spending; Factor 6: Financial foresight; Factor 7: Financial anxiety; and Factor 8: Financial control.
Reliability of variables
Reliability was assessed using internal consistency evaluation. Following Nunnally and Bernstein’s (1994) recommendation, Cronbach’s alpha (CA) of 0.6 per variable was considered acceptable, rather than the typical 0.7 threshold.
Table 5’s first column shows the EFA-derived model variables, the second column shows the number of items measuring each variable, and the third column contains item codes. No items were removed because of the CA assessment (CA ≥ 0.6 (fourth column in Table 5). The descriptive statistics for all the factors are provided in Table 6.
| TABLE 6: Descriptive statistics for all variables. |
Model fit
Most multivariate techniques evaluate single relationships between dependent and independent variables, whereas SEM examines variable interrelationships by assessing multiple relationships simultaneously (Hair et al. 2014). Assessing model fit depends on the data’s distribution properties.
To assess the multivariate normality of the data, the following null hypothesis was addressed:
H0: The data are normally distributed.
Ha: The data are not normally distributed.
Because of a p-value of 0.000 (p < 0.05), the null hypothesis could be rejected. The data were thus not normally distributed. Owing to the non-normality of the data, the Satorra–Bentler Scaled Chi-Square was preferred as an estimation method, as it is robust against mild violations of multivariate normality (Hair et al. 2014).
To assess whether the data fitted the theoretical model perfectly, the following null hypothesis was addressed:
H0: The data fit the theoretical model perfectly.
Ha: The data do not fit the theoretical model perfectly.
The Satorra–Bentler Scaled Chi-Square test p-value was 0.000 (p < 0.05), so the null hypothesis was rejected; the data did not fit the theoretical model perfectly. Additional fit indices are thus needed to assess model fit (Schermelleh-Engel, Moosbrugger & Müller 2003). Table 7 reports these goodness-of-fit indices: Normed Chi-Square (Chi-Square degrees of freedom), Root Mean Square Error of Approximation (RMSEA), Normed Fit Index (NFI), Expected Cross-Validation Index (ECVI), Critical N (CN) and Comparative Fit Index (CFI), as 3–4 indices are recommended for evaluating model fit.
| TABLE 7: Fit indices of the measurement and empirical model. |
A good model fit is indicated by a small χ2/df ratio (Taylor 2008), ideally between 2 and 3. Alternatively, Wheaton et al. (1977) suggest that a value of ≤ 5 shows a good fit. The normed Chi-Square values were 2.27 (for the measurement model) and 2.56 (for the empirical model). These results, therefore, suggest that the data fit the theoretical models reasonably well. The RMSEA values were 0.05 for both the measurement and the empirical model, which also confirmed the conclusion of a reasonably well-fitting model (Browne & Cudeck 1992).
The NFI ranged between 0 and 1, with values closer to 1 indicating a better fit (Hair et al. 2014). The NFI scores in this study were 0.85 (measurement model) and 0.84 (empirical model). These indices confirmed a reasonably good fit between the data and the theoretical model. The ECVI indices (the smaller the better) in both models provided evidence of some external validity and the potential for attaining similar results in future follow-up replication studies (Browne & Cudeck 1992; Diamantopoulos & Siguaw 2000). The CN statistics were 266.12 (measurement model) and 244.05 (empirical model), indicating the required sample size for model fit. According to Diamantopoulos and Siguaw (2000), CN values > 200 represent adequate data representation. The CFI for both models of 0.91 (measurement model) and 0.89 (empirical model) was slightly below the norm of 0.95. In conclusion, the measures of fit indices adequately confirmed construct validity of the models (Hair et al. 2014).
The next step in the data analysis process was to assess the empirical relationships in the empirical model.
Assessment of the empirical model
The next SEM phase involved specifying relationships between dependent and independent variables. Table 8 reports path coefficients and t-values for these relationships.
| TABLE 8: Path coefficients and t-values of the specified relationships. |
Hypotheses
Four of the six hypotheses tested (Table 8) showed statistically significant relationships (p < 0.05) between financial capability (dependent variable) and financial factors (independent variables), namely (1) financial control; (2) financial foresight; (3) family financial socialisation; and (4) financial distress intolerance (inverse). Additionally, the hypothesis that tested the negative relationship between financial capability and financial anxiety (the dependent variable) also proved significant.
Figure 2 presents the empirical model, illustrating significant relationships between financial factors, financial capability and financial anxiety, with path coefficients indicating the strength of relationships.
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FIGURE 2: Empirical model of financial capability and financial anxiety, showing significant relationships and path coefficients (p < 0.05). |
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Discussion
The key finding of this study is that financial capability leads to reduced personal financial anxiety. This result is consistent with that reported by Xiao and Meng (2024), who found that financial capability alleviates financial stress. Actively participating in sound financial planning lessens anxiety and concerns about one’s financial future and inspires a commitment to keep to one’s investment or savings plan (Lind et al. 2020).
Financial capability is characterised by individuals who perceive themselves to be financially literate and knowledgeable, as well as capable of managing their financial assets optimally, and who repay their debt timeously. Additionally, financially competent individuals prepare and plan for life’s anticipated events (such as retirement or death) as well as unforeseen events (such as theft, illness or the sudden loss of a job). Based on the empirical results, it can be concluded that financial capability can be improved by:
- Financial control. Consistent with Hilgert and Hogarth (2003) and Dew and Xiao (2011), we found that financial control is positively related to financial capability. Engaging actively in daily money management and having control over one’s finances predicts financially intelligent and welfare-improving behaviour, such as collecting information and soliciting guidance before making a financial decision and planning for certain eventualities (both expected and unexpected).
- Financial foresight. Financial foresight positively influences financial capability, supporting findings reported by OECD (2018) and Santini et al. (2019). Self-awareness cultivates a calculated, deliberate and considered approach towards financial decision-making that is beneficial in the long run. Conversely, an attitude and philosophic belief that today must be enjoyed regardless of the potential detrimental consequences in the future, and by giving in to short-term desires, will lead to irresponsible financial choices and possibly to eventual financial destruction.
- Family financial socialisation. Family financial socialisation is positively related to financial capability, consistent with the results reported by Kim and Chatterjee (2013) and LeBaron and Kelley (2021). Direct exposure to sound financial management principles and practices from a young age seems to predict a continuing pattern of sound financial practices during adulthood.
Conversely, it was found that financial capability was negatively impacted by low financial distress tolerance. In other words, the absence of the capacity to effectively regulate emotional turmoil caused by financial stressors reduces the financial capability of consumers (Chapman et al. 2011; Simons & Gaher 2005). As hypothesised, the greater the extent to which the respondents believed that they had sufficient financial capabilities, the lower their levels of financial anxiety about their future financial prospects.
Contrary to expectations and the literature (Hilgert & Hogarth 2003; French et al. 2020), cautious spending and digital savvy did not influence the respondents’ financial capability. In other words, the respondents did not believe that cautious spending in other domains (such as retail buying) would improve their financial capability. Similarly, they did not seem to believe that being technologically skilled would necessarily improve their financial capabilities. The variable objective financial knowledge (e.g. understanding the benefits of diversification or the effects of inflation) did not meet the validity requirements to be included in the empirical model measuring the association between financial factors and financial capability, and its indirect impact on financial anxiety. Perhaps the way in which objective financial knowledge is measured should be revisited in future studies.
Despite extensive financial literacy research, empirical evidence on factors driving financial capability and reducing anxiety remains scarce. Identifying the factors (based on financial literacy theory) that are simultaneously associated with financial capability and financial anxiety is the key contribution of this study. We now know that financial anxiety (and its effect on the well-being of people concerned about their financial future) can be reduced by enhancing their financial capability. We also know that their ability to make sound financial decisions (financial capability) can be improved by giving consumers control over their financial affairs, by alerting them to the consequences of poor financial decision-making, and by creating a financial learning environment at an early life stage. At the same time, consumers should be trained to deal with the psychological impact of financial difficulties and financial distress.
Implications
The traditional belief that financial knowledge is the main contributing factor to developing optimal financial decision-making behaviour is called into question in this study. Consumers often cannot fully consider intricate interrelated factors and make tough trade-offs when deciding on financial matters. Financially inexperienced or financially illiterate people require skills to make sensible and informed financial decisions that are in their best interests in the long run, because inappropriate decision-making can leave them financially vulnerable.
The inability to exercise financial control in daily money management, a lack of insight into the potentially irremediable consequences of one’s financial choices, and the absence of tools or mechanisms to help one deal with financial stressors and setbacks could cause one to fall into a debt trap that could spiral out of control and that could even lead to financial destruction and despair. On the other hand, cultivating the principles of financial control and financial management from childhood, obtaining the necessary information to plan proactively for the future, not giving in to impulses, and effectively dealing with daily stressors could set an individual on the path to accomplishing financial freedom in adulthood. Financial education is the premise of financial progress as it builds a bridge between financial misery and hope (Annan 1998). Early intervention is key, as open communication about money matters and having a savings account from early on in life pave the way for and strengthen neural pathways in the brain to develop sound financial behaviour. Financial capability requires active involvement in managing daily finances by drawing up and keeping to a budget, by considering the long-term consequences of expensive purchases, and by cultivating the awareness and ability to regulate negative emotions originating from memories, habits, biases, vices, values and beliefs about money. Financial know-how can empower individuals to collect financial information and carefully consider their options before making important financial decisions. Planning for undesirable contingencies (such as death, theft and other emergencies) will liberate individuals from fear and anxiety. Planning can furthermore contribute to a confident and stable society with the ability to make responsible financial decisions, the discipline to follow through on their financial planning strategies and the resilience to withstand financial setbacks, with the end goal of attaining financial satisfaction and overall well-being.
Conclusion
Key findings
This study highlights the importance of financial capability in reducing financial anxiety. Key findings show financial control, foresight and family socialisation boost capability, while low financial distress tolerance reduces it. Cautious spending and digital savvy did not significantly impact financial capability.
Recommendations
The findings of this study call for the cooperation and commitment of influential role players, such as educators, caregivers, advisers and counsellors in the financial industry, to enhance financial capability and, in this way, reduce financial anxiety. To address these issues, financial education should be prioritised, focusing on developing financial control, foresight and coping mechanisms to deal with financial stress. Policymakers and educators should promote financial literacy and provide resources for financial planning, targeting individuals from a young age. Financial institutions and advisers should support initiatives fostering financial capability, moving beyond the narrow transfer of financial knowledge. These role players should initiate the upskilling of people and introduce effective financial planning strategies that can be adopted from a young age, laying the foundation for a financially competent society.
Limitations
The financial factors associated with participants’ financial capability and financial anxiety were empirically investigated. The study’s low response rate (0.4%) presents a potential limitation of non-response bias, impacting generalisability. Adapting questionnaire items also limited comparability with similar studies. A limitation is the exclusion of objective financial knowledge because of its low validity, historically central to financial capability. Future research could revisit how objective financial knowledge is operationalised and measured to refine the construct and better capture the scope of financial capability.
Future research directions
Given the study’s limitations, future research using larger and/or different samples could examine financial capability’s role in the quest for a financially fulfilling life. Future studies could explore other financial literacy factors influencing financial capability and validate financial capability’s impact on diverse populations, contributing to the literature on optimal financial behaviour. Ongoing research is crucial for informed debates on financial decisions, ultimately underpinning societies’ financial security.
Acknowledgements
Competing interests
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
CRediT authorship contribution
Jeannie de Villiers-Strijdom: Conceptualisation, Data curation, Formal analysis, Investigation, Methodology, Project administration, Resources, Visualisation, Writing – original draft, Writing – review & editing. Christo Boshoff: Conceptualisation, Data curation, Methodology, Supervision, Visualisation, Writing – review & editing. All authors reviewed the article, contributed to the discussion of results, approved the final version for submission and publication, and take responsibility for the integrity of its findings.
Funding information
This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.
Data availability
The data that support the findings of this study are available from the corresponding author, Jeannie de Villiers-Strijdom, upon reasonable request.
Disclaimer
The views and opinions expressed in this article are those of the authors and are the product of professional research. They do not necessarily reflect the official policy or position of any affiliated institution, funder, agency or that of the publisher. The authors are responsible for this article’s results, findings and content.
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