FINANCIAL LITERACY AND FINANCIAL BEHAVIOR

AMONG UNIVERSITY STUDENTS

key words; financial literacy, financial behavior, OLS, higher education, Puerto Rico

ABSTRACT

This research aims to determine the level of financial literacy, both objective and subjective,
among university students, as well as to identify the factors that may affect or contribute to
student’s financial knowledge. Furthermore, the research looked to understand the financial
behavior of university students, particularly in the areas of budgeting and expense control, and to
determine whether student’s behavior and motivation regarding their financial matters affect their
level of financial literacy. Results show that university students have a low level of financial
literacy. The analysis show there is a statistically significant difference in the level of knowledge
between students from different backgrounds. Furthermore, this research contributes to the small,
but growing body of literature on financial literacy on the Island. Our work adds to the literature
on student financial literacy, especially for Puerto Rico that is not usually included in
national studies or research.
INTRODUCTION AND LITERATURE REVIEW

The vast majority of young people in their beginnings as university students have begun to
manage their own money in one way or another (Bidwell, 2015), either receiving financial aid
funds, such as the Pell Grant, through student loans, through their work or even through the use of
credit cards. Regardless of where the main source of income comes from to pay for tuition, lodging,
and other expenses associated with their university studies, it is important to question whether
students adequately manage their money and if in fact whether they have some kind of knowledge
in basic aspects of finance. Research studies conducted in the United States and other countries
have shown the majority of students lack the necessary knowledge or expertise in basic aspects of
personal finance, such as budget preparation, credit card management, among others (Chen &
Volpe, 1998; Eitel & Martin, 2009; Lusardi, Mitchell & Curto, 2010; Laborde, Mottner &
Whalley, 2013; Ergün, 2018).

For example, Chen & Volpe (1998) concluded that the low level of financial knowledge of
university students would preclude them from making informed decisions. Although not focused
on university students, Lusardi, Mitchell, & Curto (2010) found that young people have a low level
of knowledge about basic financial concepts. Only 27% of the young people surveyed correctly
answered three questions that covered topics on interest rates, inflation, and risk diversification.
The vast majority (80%) correctly answered the question about the interest rates, which supposed
some knowledge in financial arithmetic. Fifty-four percent correctly answered the question about
inflation, while only 47% responded correctly the question about risk diversification, a
fundamental element in making informed investment decisions.

Research has shown that individuals need to have an adequate level of financial knowledge
as well as to demonstrate a good financial behavior (Hilgert, Hogarth & Beverley, 2003; Mien and
Thao, 2015). Good financial behavior can range from thinking carefully before buying a product
and paying debts on time, to establishing a plan to meet personal goals (Valencia & Valenzuela,
2017). Therefore, it can be stated that presenting positive financial behavior is intrinsically linked
to making good decisions. This is important since making good financial decisions contributes to
the increase of wealth, avoids or decreases indebtedness and protects against any adverse outcome
(Grohmann & Menkhoff, 2015). That is, the economic well-being of people depends on how they
behave financially in the short, medium and long term.
So, to the extent that students acquire more financial knowledge, more opportunities will have to
make good financial decisions (Herawati et al., 2018). Existing research has demonstrated that a
well-educated population on personal financial matters may contribute to a country’s economic
growth as well as promoting stability of the financial sector (Lusardi & Mitchell, 2014; Sundarasen
et al., 2016). Having adequate money management skills allows students to be responsible in their
decision-making and promote a better well-being while achieving a better standard of living
(Hussain & Sajjad, 2016). It is worthwhile to note that adequate levels of financial literacy reduce
the financial stress faced by individuals, including university students (Taft, Hosein, Mehrizi, and
Roshan, 2013; Heckman, Lim and Montalto, 2014)

In Puerto Rico, there is limited evidence from studies aimed at evaluating the level of financial
literacy of university students and the population in general. Some of the research has focused on
the use of credit cards among students (Madera, 2010; Castro, Delgado & Rodríguez, 2014),
knowledge in financial and retirement planning (Castro, 2014), and planning and personal
financial management (Rodríguez, 2013). This research provides an opportunity to contribute to
expand research on financial literacy in Puerto Rico.

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PURPOSE AND RESEARCH QUESTIONS

This research aims to determine the level of financial literacy among university students, both
objective and subjective, as well as to identify the factors that may affect or contribute to student’s
financial knowledge. Furthermore, the research looked to understand the financial behavior of
university students, particularly in the areas of budgeting and expense control, and to determine
whether student’s behavior and motivation regarding their financial matters affect their level of
financial literacy.

To reach this objective, this investigation attempted to answer the following research
questions: What is the level of financial literacy among university students? Does the level of
financial literacy vary between business and non-business students? Are there differences in
financial literacy between graduate and undergraduate students? Are there differences in financial
literacy between female and male students? What are the main determinants of financial literacy
among university students?

SAMPLE AND METHODOLOGY

Data for this research was collected via a self-administered questionnaire using Qualtrics
online. A link to the survey was emailed to all active students (undergraduate and graduate) at one
campus of a higher education institution between spring and fall of 2018. After four follow ups,
out of 243 responses, 156 questionnaires were fully completed. The distribution closely resemble
the student composition of the official enrollment by fall 2017.

The survey was created using questions from existing research (Avard, et. Al, 2005; Lusardi,
2008; Sabri et al, 2010; Gilligan, 2012; Cullen, 2013). The survey has different type of closed-
ended questions: rating scale questions (Likert-scale) and multiple-choice questions. Questions in
the areas of general knowledge, credit, savings and investments, as well as demographics to
identify our student profile were included. In addition, some questions to identify student’s
behavior and motivation regarding management of their personal finances were also available in
the survey.

Following Chen and Volpe (1998), to determine the level of financial literacy, the average of
correct responses in the areas of general knowledge, credit, savings and investments was
calculated. A composite average of all the areas represents the level of financial literacy of this

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population of university students. Once done, we classified the level of literacy of university
students into three groups: low level (less than 60%), intermediate level (between 60% and 79%)
and high level (80% or more). To measure the level of subjective financial literacy we followed
the same procedure, using the average of responses on three questions: assessment of knowledge
about personal finance, assessment of knowledge about personal finance (against peers) and
student’s level of confidence in managing personal finances, and develop a score.

Several statistical tools were used to analyze the data and answer the research questions. An
analysis of variance (ANOVA) helped us determine whether there was a significant difference in
the level of financial literacy between business and non-business students. In addition, ANOVA
was used to determine whether there was a significant difference in financial literacy by area
(measured in this research by general knowledge, credit, savings, an investments) among the four
academic colleges (Business Administration, Arts & Sciences, Engineering and Agricultural
Sciences). A two-tailed t-test allowed us to analyze if there was a significant difference in the
level of financial literacy between men and women. A one-tailed t-test helped us determine if the
level of financial literacy of the graduate students was significantly higher than that of the
undergraduate students.

A multiple regression analysis allowed us to identify the determinants of financial literacy

among university students. For this analysis, the dependent variable was financial literacy and
among the independent variables, we have academic background, academic level, year of study,
grade point average, student’s income level, parent’s income level, gender, age, among others).
The variables were chosen based on prior research that found certain student characteristics might
influence the literacy level among university students (Chen and Volpe: 1998, 2002; Lusardi and
Mitchell, 2008; Ford and Kent, 2010; Hanna, Hill, and Perdue, 2010; Falahati and Paim, 2011;
Chinen and Endo, 2012; Rodríguez, 2013; Alhenawi and Elkhal, 2013)

RESULTS AND DISCUSSION

More than half of the participants were female students, with about 80% of the responses
being from full-time undergraduate students. More than one-third of the participants are from the
College of Arts & Sciences; more than a fourth were from the College of Engineering and about a
one fifth from the College of Business. About 39% of the respondents had a part time job, which
explains why about 73% stated their income levels were less than $5,000.

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 Our results show that university students at the selected campus have a low level of (objective)
financial literacy, 49.61% of correct answers. The mean scores per area were for general
knowledge a 49.59%, credit with a 50.97%, savings with a 55.98% and investments with 41.88%.
All areas reflect a low level of financial literacy, with scores lower than 60%. Our results are
similar to Chen and Volpe (1998) as well as Beal & Delpachitra (2003); Lusardi, Mitchell & Curto
(2010); Laborde, Mottner, & Whalley (2013); Lantara & Kartini (2015). It could be argue that
these results are because there is no formal requirement of personal finance courses at university
or high school levels [Insert Table 1]. Regarding the level of subjective financial literacy, the
scores showed students’ have an intermediate level of financial literacy with a 63.81%. Students
believe they have a higher knowledge than what responses to factual questions reflect (objective
financial literacy) [Insert Table 4].

The ANOVA results show there is a statistically significant difference in the level of financial
literacy between business and non-business students, and the Tukey-Kramer multiple comparison
test allowed us to identify which group is significantly different. Although the level of financial
literacy of business students is higher than the level of financial literacy of nonbusiness students,
the results were only significant when compared to students of Arts & Sciences and Agricultural
Sciences. Test results showed there is a significant difference between students of Business
Administration and Arts and Sciences, between students of Business Administration and
Agricultural Sciences and between students of Agricultural Sciences and Engineering. For each of
these comparisons, the p-value is less than 5%. Once again, our results are similar to those of
Chen and Volpe (1998), Hanna, Hill and Perdue (2010); Chinen & Endo (2012); and Rodríguez
(2013). Engineering students seem to have a higher level of financial literacy than students from
agricultural sciences. [Insert Tables 2 and 3]

The regression analysis allowed us to identify the determinants of financial literacy level
among university students. The OLS results showed that nonbusiness students have a lower level
of (objective) financial literacy as compared to business students (this validates the ANOVA
results). According to the results, undergraduate students with income levels lower than $10,000,
enrolled in their third year or less have lower levels of financial literacy. Although the results
showed that male students have a higher level of financial literacy than female students, results are

5
not statistically significant, which contrasts greatly with prior studies (Chen & Volpe, 2002;
Lusardi & Mitchell, 2008; Ford & Kent, 2010; Falahati & Paim, 2011). [Insert Table 5]

The t-test results showed there is statistical significant difference in the financial literacy level
between male and female students, with male students having a higher level of financial knowledge
(55.85%) than females (45.85%). Our results were similar to existent research [Chen & Volpe
(1998); Chen & Volpe (2002); Oanea & Dornean (2013); Ergün (2018); Jacobsen & Correia
(2019). When comparing the level of financial knowledge between undergraduate and graduate
students, results reflected that graduate students have a higher level of financial literacy with a
61% against a 47% for undergraduate students [Chen & Volpe (1998); Beal & Delpachitra (2003);
Thapa & Nepal (2015) .

To describe student’s financial behavior in the areas of budgeting and expense control,
students were ask to identify the frequency, using a 3-point Likert scale (never, sometimes,
always), on how they performed certain activities. According to their answers, on average, around
73% of the students sometimes or always prepare a budget, and around 93% said that they monitor
their expenses. When including behavior to explain financial literacy, results showed that
preparing a monthly budget contributes positive and significantly to the level of financial
knowledge of university students. We wanted to understand how motivated students were
regarding certain financial decisions and they were ask about how motivated they were into
pursuing financial planning, savings, debt management, spending control and investments. More
than 65% of students strongly agree on being motivated to save for the future, on increase their
savings and understand on how to invest their money. To determine whether their motivations
determine the level of subjective financial literacy, results showed that those motivate to save for
their future have a higher and slightly significant level of financial literacy.

IMPLICATIONS AND NEXT STEPS

This research allowed us to conclude that university students in the selected higher institution
have a lower level of objective financial literacy and an intermediate level of subjective financial
literacy. There are significant differences in the level of financial knowledge between business and
non-business students; female and male students; and undergraduate and graduate students. It
seems that financial behavior and motivation have a slightly impact on the level of financial
literacy of university students. .Although limited in nature, the aforementioned results help to

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justify the need to enforce personal financial education among university students to expose
students to critical money management awareness. Furthermore, this research contributes to the
small, but growing body of literature on financial literacy on the Island. Our work adds to the
literature on student financial literacy, especially for Puerto Rico that is not usually included in
national studies or research.

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Table 1: Financial Literacy Level

Financial Literacy Level

Low Medium High
(<60%) (60-79%) (>80%)
General Knowledge
Use of Financial Planning 55.77
Financial Condition 44.87
Financial Planning 39.74
Expenses 69.23
Debit Cards 79.49
Social Security 28.21
APR 28.85
% of correct responses 49.59
Credit
Use of Credit Cards 91.67
Buying Power 47.44
Credit Card - Penalty for loss 7.7
Credit History 57.05
% of correct responses 50.97
Savings
Savings 45.51
Emergency Fund 71.79
Best way to save 78.21
Worst way to save 44.87
Interest rates 62.82
Interest rates and inflation 32.69
% of correct responses 55.98
Investments
Risk 44.23
Return 49.36
Risk/volatility 48.08
Diversification 47.44
Financial Markets 22.44
Stock Markets 39.74
% of correct responses 41.88
Financial Literacy Level 49.61
Based on Chen & Volpe (1998)

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Table 2: Financial Literacy – Business vs. NonBusiness

Mean
Standard
N Mean Standard
Deviation
Error
Financial
Business 32 .6327 .17539 .03100
Literacy
Level Non-Business 124 .4628 .18057 .01622

Table 3: Tukey Kamer- Multiple Comparisons

Mean
Sig.
Faculty (I) Faculty (J) Difference Std. Error
(I-J)
Business Arts & Sciences .19262* .03905 .000
Administration Agricultural .22583* .04545 .000
(.6327) Sciences
Engineering .10746 .04143 .051
Arts & Sciences Business -.19262* .03905 .000
(.4401) Administration
Agricultural .03321 .04077 .848
Sciences
Engineering -.08516 .03624 .091
Agricultural Business -.22583* .04545 .000
Sciences Administration
(.4069) Arts & Sciences -.03321 .04077 .848
*
Engineering -.11837 .04306 .034
Engineering Business -.10746 .04143 .051
(.5253) Administration
Arts & Sciences .08516 .03624 .091
Agricultural .11837* .04306 .034
Sciences

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Table 4: Financial Literacy Level (Subjective)
Areas Financial Literacy Level

Low Intermediate High

(< 60%) (60-79%) (> 80%)
Assessment of knowledge about personal 58.46
finance

Assessment of knowledge about personal 59.10

finance (peers)
Student’s level of confidence in managing 73.88
personal finances
Financial Literacy Level 63.81

Table 5: OLS Financial Literacy Level

B Std. Error T Sig

(Constant) .967*** .172 5.630 .000
Male .032 .029 1.134 .259
Age .000 .005 .099 .921
Arts & Sciences -.187*** .037 -5.030 .000
Engineering -.110*** .041 -2.656 .009
Agricultural -.208*** .045 -4.610 .000
Sciences
Freshman -.172*** .044 -3.960 .000
Sophomores -.154*** .041 -3.758 .000
Juniors -.118*** .045 -2.652 .009
Seniors -.045 .040 -1.147 .254
Undergraduate -.113** .050 -2.269 .025
GPA2 .042 .029 1.427 .156
GPA3 .033 .038 .856 .394
GPA4 .054 .092 .584 .560
Lives at home -.055** .028 -1.993 .048
Students Income1 -.178** .085 -2.107 .037
Students Income2 -.162* .086 -1.882 .062
Students Income3 -.098 .096 -1.020 .310
Parents Income1 -.028 .044 -.629 .531
Parents Income2 -.016 .047 -.338 .736
Parents Income3 -.104*** .040 -2.612 .010
Parents Income4 .020 .038 .518 .606
2
R .476
F 5.459***
***, **, * are significant at 1, 5 and 10 percent respectively

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