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  • 296 THE JOURNAL OF CONSUMER AFFAIRS

    SANDRA J. HUSTON

    Measuring Financial Literacy

    Financial literacy (or financial knowledge) is typically an input tomodel the need for financial education and explain variation in finan-cial outcomes. Defining and appropriately measuring financial literacyis essential to understand educational impact as well as barriers toeffective financial choice. This article summarizes the broad rangeof financial literacy measures used in research over the last decade.An overview of the meaning and measurement of financial literacyis presented to highlight current limitations and assist researchersin establishing standardized, commonly accepted financial literacyinstruments.

    Increasing consumer financial literacy is a public policy objective toimprove welfare through better decision making (U.S. House of Rep-resentatives, Financial Services Committee 2009). The recent mortgagecrisis, consumer overindebtedness and household bankruptcy rates pro-vide evidence to support this goal. To assess current levels of financialliteracy and explore means to improve it, a construct is needed to mea-sure consumers ability to make effective financial decisions. Despiteits importance, the academic literature has given little attention to howfinancial literacy is measured.

    The terms financial literacy, financial knowledge and financial educa-tion often are used interchangeably in the literature and popular media.Few scholars have attempted to define or differentiate these terms. Unlikehealth literacy, which is typically measured using one of the three stan-dardized tests, there currently are no standardized instruments to measurefinancial literacy. Marcolin and Abraham (2006) identified the need forresearch focused specifically on measurement of financial literacy. Typ-ically, financial literacy and/or financial knowledge indicators are usedas inputs to model the need for financial education and explain variation

    Sandra J. Huston (sandra.huston@ttu.edu) is an Associate Professor of Personal FinancialPlanning at Texas Tech University. The author would like to thank Michael Finke for his helpfulsuggestions in writing this paper. As the principal investigator of the Financial Literacy AssessmentProject at Texas Tech University, the author would like to acknowledge research team membersVickie Hampton, Dorothy Durband and Michael Finke for their contributions, along with formergraduate assistants Hyrum Smith and Sonya Britt.

    The Journal of Consumer Affairs, Vol. 44, No. 2, 2010ISSN 0022-0078Copyright 2010 by The American Council on Consumer Interests

  • SUMMER 2010 VOLUME 44, NUMBER 2 297

    in financial outcomes such as savings, investing and debt behavior. Farfewer studies specifically emphasize measurement of financial literacy asan objective.

    The purpose of this article is to examine previous literature to identifyobstacles, and propose an approach, to develop a more standardizedmeasure of financial literacy. Previous literature that attempts to measurehuman capital specific to personal finance is reviewed to identify howfinancial literacy is currently conceptualized and measured. A commonlyaccepted, standard construct is particularly important in future stud-ies to provide the consistency needed for comparison studies and/ormeta-analyses.

    BACKGROUND

    Selection

    Seventy-one individual studies drawn from fifty-two different datasets were identified for analysis. Selection was based primarily onwhether a study used a measure to capture an individuals human capitalspecifically related to personal finance, including terms such as financialliteracy, financial knowledge or a closely related measurement construct.1

    Although several studies assessed financial literacy education, they werenot included because the purpose of this article was to establish elementsof a financial literacy measure, and not a financial literacy educationprogram (see Fox, Bartholomae, and Lee 2005 for an overview offinancial literacy education programs).

    Where appropriate, analysis was on the data sets (N = 52) rather thanthe individual studies (n = 71) to avoid overrepresenting data sets usedin multiple studies. The seventy-one individual studies were from fiftyunique (first-listed) authors/organizations. The majority of the fifty-twodata sets used U.S. samples. The studies were published in a wide vari-ety of outlets including academic journals and conference proceedings.Although the compilation may not be exhaustive, it should represent themajority of research published between 1996 and 2008 that includedfinancial literacy/financial knowledge measures.

    Method of Analysis

    Prior studies were analyzed emphasizing information related to con-struct validation. According to Pedhazur and Schmelkin (1991, p. 59),

    1. Some of the selected studies such as economic knowledge/literacy have a wider scope, whereasothers are more narrow, focusing on credit, debt or investment knowledge and/or literacy.

  • 298 THE JOURNAL OF CONSUMER AFFAIRS

    the logical analysis approach to construct validation involves four mainfacets: definition of construct, item content, method of measure and scor-ing procedure. The first, and arguably most important, aspect definesthe construct to allow for operationalization that is complete and mutu-ally exclusive from other constructs. The second element determines theinstrument content and often involves using items from each relevantdomain as indicators of the given construct. Measurement proceduresinclude structural concerns such as how the data were collected (inter-view, rating scales); the number, wording and order of items included inthe instrument and the conditions of administration. Instrument scoring isan important means of rating, communicating and providing consistencyin testing and interpreting results from an instrument.

    Financial literacy constructs from previous literature were assessed bywhether a definition was provided and whether multiple terms were usedto represent the same construct. The specific codes used are explained inAppendix 1. However, generally a construct was coded based on whetherit was defined, at least somewhat conceptually discussed beyond theoperational measure, or a definition could be implied.

    Each study also was coded based on the financial domain contentof each construct. After examination for commonality, four main cate-gories emerged: personal finance basics, borrowing, saving/investing andprotection. More details about the coding are in Appendix 1.

    Instrument structure was addressed by examining the number of instru-ment items and the data collection method. The data collection methodwas coded as described in Appendix 1.

    To address rating issues, the instrument was examined and coded toindicate if and how a criterion was applied to determine if an individualwas financially literate (see Appendix 1 for details). Finally, the samplesize and target audience for the instrument were noted.

    Summary of Information

    Table 1 provides information about each data set (A through AZ) andstudy (one through seventy-one) and shows results for each instrumentevaluation categoryconstruct, content, structure, ratingas well as fortarget audience and sample size.

    RESULTS

    Table 2 presents a summary of the instrument evaluation categoriesfrom each of the fifty-two data sets used by the seventy-one studiesselected for this analysis.

  • SUMMER 2010 VOLUME 44, NUMBER 2 299

    TAB

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    261A

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    G3,

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    lan

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    elpa

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    No

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    S78

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    (200

    3)SW

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    arth

    and

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    Yes

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  • 300 THE JOURNAL OF CONSUMER AFFAIRSTA

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  • SUMMER 2010 VOLUME 44, NUMBER 2 301

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    N56

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    den

    etal

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    (200

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  • 302 THE JOURNAL OF CONSUMER AFFAIRS

    TABLE 2Summary of Measures Used in the Compilation of Studies

    Category Frequency

    ConstructDefinition included

    Yes 13%No 72%Discussed somewhat 15%

    Knowledge = literacy? (mixed constructs)Yes 47% (76%)a

    No 15% (24%)Only one (or neither) included in study 38%

    ContentBasic concepts 63%Borrowing concepts 52%Saving/investment concepts 69%Protection concepts 33%Single focus (one content area) 35%Comprehensive (all four content areas) 25%

    StructureNumber of items (N = 46, 8 not reported)

    Mean 16Median 13Mode 10Minimum 3Maximum 68

    Data collectionInterview 38%Telephone 36% (95%)b

    In person 2% (5%)Self-report 58%Internet 22% (38%)c

    Paper (either mail/in person) 36% (62%)Not reported 4%

    RatingProvided 6%Not provid

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