The Impact of Financial Literacy on Perceiving The Need to Create an Emergency Fund

Source: [6]

Basic personal finance extends beyond mere financial understanding, delving into essential concepts within the financial system. Meanwhile, money management focuses on the nuanced art of personal financial stewardship, teaching individuals how to effectively manage their monetary resources. Credit and debt management intricately interweaves activities related to bank loans, emphasizing a systematic approach to repayment. Saving delineates a portion of income reserved for future use, while investing involves the strategic use of those savings for economically beneficial activities, coupled with a keen awareness of the risks associated with uncertainty.

The broad scope of financial literacy extends to critical areas such as spending and credit, insurance, and saving and investing. Developing a meticulous spending plan and sticking to it are essential to avoiding financial deficits. The prudent use of credit as a sound financial tool, rather than excess cash to indulge desires, underscores the importance of responsible financial behavior. In the face of escalating financial uncertainty, insurance takes on greater importance, providing a safety net by guaranteeing compensation for unforeseen losses. The concept of saving is not only about short-term consumption security, but also a cornerstone of sound financial planning.

Recognizing financial literacy as an essential need becomes paramount to averting financial difficulties. Beyond the confines of income levels, financial challenges can arise from mismanagement, credit abuse, and a lack of comprehensive financial planning. The impact of these challenges extends beyond monetary concerns, contributing to increased stress levels and diminished selfesteem [2].

Consistent with this urgency, findings from Bankrate's Annual Emergency Fund Report highlight the prevailing concerns. The report reveals that 68% of people express concern about being able to cover their living expenses for just one month if they lost their primary source of income. This concern is particularly pronounced as 57% of U.S. adults currently cannot afford to cover a $1,000 emergency expense [4].

Delving into generational perspectives, it is clear that younger demographics, such as Gen Zers (85%) and Millennials (79%), exhibit heightened concerns about covering unforeseen expenses. This interconnected web of financial challenges across age groups underscores the critical need for widespread financial education to empower individuals to effectively navigate and overcome these concerns [4].

The interplay between financial literacy and the perceived need for an emergency fund is complex. Statistics reveal a landscape where only about 38% of respondents reported having an adequate emergency fund. This finding underscores a critical gap in financial preparedness and echoes concerns about the general lack of emergency savings among individuals.

The respondents' performance on the financial literacy test illustrates the challenges. On average, respondents scored 60%, revealing significant room for improvement in financial literacy.

One of the most interesting findings relates to the paradox between people's objective financial knowledge and their subjective confidence in their financial understanding. Despite moderate levels of financial literacy, a significant proportion of people expressed high levels of confidence in their financial knowledge. This discrepancy highlights the importance of addressing not only the actual financial literacy gap, but also the subjective perceptions individuals have about their financial acumen.

Looking at demographic patterns, key characteristics associated with individuals who have established an emergency fund have been identified. Older individuals, males, those with higher levels of education, those who are married, and those who are employed or retired are more likely to have emergency savings. These demographic nuances suggest that targeted financial education interventions may be more effective when tailored to the specific needs and characteristics of different demographic groups.

Additionally, a correlation was found between financial risk tolerance and the presence of an emergency fund. Individuals with established emergency savings had slightly higher financial risk tolerance. This finding suggests a complex interplay between risk attitudes and financial preparedness, and warrants further exploration of how individuals' perceptions of financial risk influence their decisions to establish and maintain emergency funds.

Given the increasing prevalence of financial uncertainty, understanding how to secure emergency funds is critical. It's important to consider options such as creating an emergency fund, thinking about other sources of income, and evaluating the financial assistance programs that are available. This comprehensive strategy dovetails with the overarching goal of improving financial literacy, as people who know how to manage and save for emergencies are better equipped to deal with unforeseen financial difficulties.

When faced with urgent financial needs, individuals can explore various options to obtain emergency funds promptly. Small personal loans, available through traditional banks or alternative lenders, serve as a viable solution for short-term financial needs. These unsecured loans serve various purposes, from debt consolidation to unexpected expenses, with fixed interest rates and repayment terms. However, the application process can be time-consuming and require extensive paperwork.

Another option is to use credit cards, especially for those with existing cards that offer instant approval. However, this option can come with high interest rates, around 25%, and potential fees. Maintaining a good credit score is critical to securing favorable credit card terms. In addition, individuals can take advantage of pawn shop loans, where personal items such as jewelry or electronics serve as collateral for quick cash. The borrowing process is expedited, and credit score considerations are minimal.

Title loans use the borrower's vehicle as collateral and are a short-term secured option. These loans can be easier to obtain, although they don't require as much paperwork or credit checks. To mitigate potential risks, such as the loss of the collateral, it is imperative to carefully evaluate the borrower's ability to repay. Making informed decisions while navigating financial uncertainty is ensured by comparing partner lenders and researching the best emergency loan solutions [9].

Conclusions. The study began by acknowledging the importance of such funds during periods of economic prosperity. The aftermath of the Great Recession underscored the importance of households adhering to established personal finance guidelines regarding emergency funds. The central goal of the research was to unravel the determinants associated with households' emergency fund allocations.

Based on the objectives and tasks set, the following key findings were identified:

• The study identified five primary dimensions of financial literacy, including substantive financial knowledge, competence in managing personal finances and being able to talk about financial topics, ability to make wise financial decisions, and confidence in effectively planning for future financial needs with emergency funds.

• The lack of a commonly accepted definition of financial literacy contributes to a persistent problem in the literature. The study underscores the need for greater agreement and clarity by highlighting how the concept of financial literacy has changed over time.

• A comprehensive examination of the relationship between financial literacy and the perceived need for an emergency fund revealed a significant shortfall in financial preparedness. Just over 38% of respondents reported having enough money saved for emergencies, suggesting that their financial literacy could use some work.

• Demographic nuances identified key characteristics associated with individuals who have established emergency funds. Older individuals, males, those with higher levels of education, those who are married, and those who are employed or retired showed higher levels of preparedness.

• The study revealed a relationship between financial risk tolerance and the presence of an emergency fund. Individuals with established emergency savings had slightly higher financial risk tolerance, suggesting a complex interplay between risk attitudes and financial preparedness.

• The study underscores the importance of addressing both the actual financial knowledge gap and the subjective perceptions individuals have about their financial acumen. Closing this gap is critical to improving overall financial well-being.

• To improve financial preparedness, the study recommended a multi-pronged approach, including building emergency savings funds, considering alternative sources of income, and assessing available financial assistance programs.

• When faced with urgent financial needs, individuals can explore several options, including small personal loans, credit cards, pawn shop loans, and title loans. However, careful consideration of interest rates, repayment terms, and potential risks is essential when choosing these solutions.

urther research could explore longitudinal studies to closely monitor the development of emergency fund readiness and financial literacy over time. A complementary approach is to conduct comparative assessments across different socioeconomic and cultural settings. Given the different dynamics and barriers that people face in different circumstances, this method has the potential to provide a more thorough understanding of the elements that influence emergency fund readiness.

An important area for future study is to assess the effectiveness of specific financial literacy interventions and education initiatives. This evaluation can provide a roadmap for refining and optimizing interventions to ensure they have a meaningful impact on individuals' emergency fund preparedness. By systematically evaluating the effectiveness of different approaches, researchers can contribute to the development of more effective initiatives that resonate with diverse audiences.

Another direction for future research is the integration of technology. Examining the role of technology in disseminating financial education information and facilitating emergency fund management is a relevant and timely research direction. Exploring innovative technologies, such as mobile applications, online platforms, and digital tools, could provide new avenues for delivering financial education and promoting proactive emergency fund practices.

References

emergency savings financial literacy

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2. Dwiastanti, A. (2015). Financial Literacy as the Foundation for Individual Financial Behavior. Journal of Education and Practice, 6(33).

3. Ghribi, A. (2014, June 23). One in four Americans has no emergency savings. The Wall Street Journal. URL: https://www.wsj.com/articles/BL-NB-1467?responsive=y.

4. Gillespie, L. Bankrate's annual emergency fund report. Bankrate. 2023. URL: https://www.bankrate.com/banking/savings/emergency- savings-report/.

5. Jelley, H. (1958). A Measurement and Interpretation of Money Management Understandings of Twelfth-Grade Students. [Doctoral dissertation, University of Cincinnati].

6. The Latin American Council of Management Schools - CLADEA. (2019). The Evolution of the Financial Literacy Concept: A Literature Review. https://cladea.org/wp-content/uploads/2021/12/CLADEA2019_paper_415.pdf

7. Lee, S. T. & Hanna, S. D. (2018). The effect of financial literacy on Emergency Fund Adequacy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3258056.

8. Lee, S. T. & Hanna, S. D. (2022). What, me worry? Financial knowledge overconfidence and the perception of emergency fund needs. Journal of Financial Counseling and Planning, 33(1), 140-155. https://doi.org/10.1891/jfcp-2021-0045.

9. Morgan, E. (2023, October 26). Emergency cash immediately for bad credit in 2023. Fit My Money. https://fitmymoney.com/emergency-money/.

10. Remund, D. L. (2010). Financial literacy explicated: The case for a clearer definition in an increasingly complex economy. Journal of Consumer Affairs, 44(2), 276-295. https://doi.org/10.1111/j.1745-6606.2010.01169.x.

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