A Financial Literacy Model of Malaysian B40 Households: The Case of Financial Well-Being, Education Level and Socioeconomic Status ^†

Abstract

Financial literacy contributes to the economic well-being of every country. Specifically, the level of low-income households’ financial literacy is crucial in the process of developing and building economic potential. Moreover, the knowledge, attitudes and behaviors of families are essential to the financial sustainability and money wisdom of low-income households. Thus, financial literacy and financial well-being are vital for low-income households to survive in highly competitive marketplaces and sustain their socioeconomic status. This conceptual paper relies on prior research and existing theory to focus on the impacts of financial literacy on socioeconomic status among low-income households. The paper proposes a model for future testing in which the results can provide support for enhancing and sustaining the socioeconomic status of low-income households. This proposed holistic model provides new insights, structure, and suggestions for more research on factors that lead to improving money wisdom and the socioeconomic sustainability of low-income households.

1. Introduction

By 2020, Malaysia aspires to become a developed country following a long-term development plan known as Vision 2020. This goal has recently been extended to 2025 as the government is aware of aspects that seem far from achievable at present. Household financial well-being and socioeconomic status (SES) are key elements in the national development of most countries [1]. Financial education enables every household to recognize its function as an economic actor and its various potentials [2]. B40 households need to gain economic balance by having access to information on personal financial management knowledge and financial well-being as these factors are key in measuring socioeconomic well-being [3,4,5]. Therefore, the Malaysian government through the theme “Tethering People’s Growth” in the Eleventh Malaysia Plan centres on increasing the income and financial well-being of B40 households. This effort is implemented through the first strategic thrust of the 11MP in enhancing a just society [6,7,8,9,10]. In the Financial Education Network (FEN) report, financial education encompasses financial literacy that involves imparting ‘money wise’ knowledge to households to achieve financial well-being and the drive to improve their SES [11,12,13]. To produce a higher number of Malaysians who are financially literate especially among B40 households in Malaysia, various aspects such as poverty, financial management, financial education and financial literacy need to be considered [14,15,16]. It is common for common households that do not achieve financial well-being to have a stronger effect on their socioeconomic status (SES) [17,18,19]. For instance, 40% of Malaysian households earn an average monthly income of below MYR 4830, indicating that their socioeconomic status is still low [20,21]. Thus, as mentioned earlier, the components of the Eleventh Malaysian Plan focus on the B40 household group to improve their living standards alongside their financial well-being and SES [22,23,24].

2. Background of the Study

A pending and prominent issue with regards to the socioeconomic status (SES) of Malaysian B40 households is the low level of financial literacy in this population [25,26,27]. The overall income inequality is reported to continue to decline. The 2016 Family Well-Being Index that measures family well-being found that while well-being has improved, it remains at a moderate level. Despite the reported progress, challenges in strengthening household inclusion still exist including the low economic participation of B40 households, the limited ownership of Bumiputera financial and non-financial assets, the increased growth and population inequality between states/regions as well as between urban and rural areas. The Financial Education Network (FEN) outlined five major challenges faced by Malaysian B40 households with the first issue being the low level of confidence in financial knowledge among B40 households.

B40 households also face the rising costs of living and debt, prompting difficulties in managing finances [28,29]. Ethnic differences have emerged in financial vulnerability among Malaysians where Malays and Indians are more vulnerable when compared with Chinese since socioeconomic factors, financial attitudes and financial behaviours also influence their financial stability [30]. The third issue outlined relates to savings and budgeting: Bank Negara Malaysia and the Financial Education Network found that one in ten Malaysians believe that they are not disciplined enough in managing their finances. Approximately 84% of Malaysians claim that they only regularly save for the short term as they often withdraw their savings by the end of the month to cover their expenses, spending 43% of their income on health care and 39% on groceries [31,32,33].

Additionally, B40 households encounter a challenge that is considered a financial literacy factor, the readiness for unexpected life events [13]. Findings reported by [34,35,36]. align with the issues outlined in the Malaysian National Financial Literacy Strategy (2019–2023). As many as 52% of Malaysians find it difficult to come up with MYR 1000 in the event of an emergency, and only 24% can cover three months of living expenses should they lose their main source of income. Finally, the fifth issue involves ineffective retirement plans. Financial reports by [8,13] confirm that low-income households are less knowledgeable in planning for retirement, which can prevent them from enjoying financial well-being, affecting their SES.

These issues prompt the need for research that incorporates the elements of financial literacy suited to the Malaysian context, especially in measuring the financial literacy (FL) of the target group, B40 households. Furthermore, this necessity also involves the socio-economic status (SES), the mediating role of financial well-being (FW) and the moderating variable of education level (LE) that should be proposed to stakeholders and households to enhance their financial management. Thus, an effective financial literacy model needs to be constructed as an alternative guide to B40 households in managing their finances. Financial literacy is an important aspect that can strengthen the SES status of families indirectly contributing to the progress of the country [37,38,39,40].

Literature Review

B40 households that intend to achieve a strong SES need to focus on effective financial planning, which is affected by factors such as poverty, financial management, financial education and also low financial literacy [41]. Financial literacy is deemed a major factor because households are fundamental decision-makers that are considered the country’s economic growth drivers, highlighting the need for households to be well-equipped with basic financial knowledge [42]. The Malaysian National Strategy for Financial Literacy (2019–2023) implemented by the Financial Education Network consists of several agencies including the Ministry of Education Malaysia (MOE), Malaysian National Bank (MNB), Securities Commission Malaysia (PIDM), Employees Provident Fund (EPF), Malaysia Deposit Insurance Corporation, Credit Counselling and Management Agency (AKPK) and Limited National Settlement (PNB) and stressed the importance of household financial literacy in achieving the aspirations and direction of strong financial well-being and SES for families [43]. Financial literacy, i.e., solid financial knowledge, attitudes and behaviours, leads to strong SES [43]. Furthermore, the Financial Education Network, also further postulates that financially literate households can handle financial management and planning effectively in addition to making relevant financial decisions [43].

A designated set of financial education programmes and initiatives are readily available to increase the level of financial literacy among Malaysians at the national level. This set is in line with the five areas of focus proposed by the Malaysian government to improve the socio-economic status (SES) of B40 households in becoming a middle-class community (M40) instead. The lack of financial knowledge among B40 households triggers various financial issues preventing them from achieving financial well-being and affecting their SES [44]. The B40 group of households often run out of money before the next paycheque, possess no savings with increasing expenses and debt burden. They also tend to disregard proper retirement plans and thus require the need of financial assistance. These conditions and socioeconomic factors will also burden B40 households and affect their financial well-being [45]. The results of this study can go together with the Personal Finance Education Module issued by Bank Negara Malaysia as it involves every Malaysian household. The proposed model in this study can also serve as a baseline for MOE in integrating financial education elements in both the KSSR and KSSM curriculum by providing details to the MOE regarding the socioeconomic status of households that can affect student academic achievements.

This paper first gives an overview of B40 households and the issues they face. Following the outlined problem statement, a conceptual framework involving the main constructs is elaborated. These financial literacy constructs involve three aspects, namely, financial knowledge, financial attitudes and financial behaviour. In this study, financial literacy acts as an independent variable while the socioeconomic status of B40 households (SES) is a dependent variable mediated by two intermediary variables, namely, financial well-being (FW) as the mediator and education level (EL) as the moderator.

3. Developing the Model

3.1. Financial Literacy

Financial literacy is a skill that consumers should possess to operate in the increasingly complex financial landscape [23,24,25,26,27,28,29,30,45]. Therefore, governments nationwide are consistently experimenting with effective approaches to increase the levels of financial literacy among their citizens. The first step to improving financial literacy is measuring and understanding the constructs involved [45]. A financial literacy model was developed among university students which confirms the unique combination of the three dimensions: financial knowledge, financial attitudes and financial behaviour [39,40,41,42,43,44,45]. A review of past literature highlights the limitations in the testing models for literacy in Malaysia, especially when it comes to B40 households. Therefore, the current study aims to improvise the current financial liability model to meet the need for a rigorous literacy assessment that matches the growth of more complex financial products.

The Current State of Financial Literacy in Malaysia

The current level of financial literacy in Malaysia can be understood via five aspects namely, [1] level of financial knowledge, [2] savings and budgeting, [3] readiness in facing unforeseen situations, [4] planning for retirement and [5] awareness of investment risks and returns.

• Level of Financial Knowledge

The Malaysian National Financial Literacy Strategy (2019–2023) reported that Malaysians have a low level of confidence in their own financial knowledge: one in three Malaysians perceived that they have low financial knowledge. This situation tends to hold true among low-income Malaysian households and in the B40 group [13,14,15,16,17,18,19,20,40,41,42,43,44,45]. Approximately 5% of Malaysians are aware of the rising living cost, but only 38% are able to relate the impact of investment on their purchasing power. Although 76% of Malaysians possess a budget, 2 out of 5 Malaysians find it difficult to keep up with their budget. Furthermore, 43% of Malaysians understand the concept of compounding money over time, while 22% believe that wealth can steadily increase. Furthermore, while 92% of Malaysians have deposit products, not many possess other types of investment products [13,14,15,16,17,18,19,20,45].

2.

Cost of Living and Debt Burden

The high level of indebtedness among B40 households impacts their financial positions as they tend to take out personal loans to cover their daily expenses. In the year 2014, the indebtedness level of households earning MYR 3000 a month or less is seven times their annual income. Meanwhile, households earning MYR 5000 a month and below reported a level of indebtedness that is 3 to 4 times their annual income [16]. Additionally, the B40 household debt ratio to GDP was 89.1% in 2016 [6]. Economic factors such as financial well-being and social factors of education level are significant contributors that shape the households’ attitudes towards debt [46].

3.

Savings and Budgets

According to the Malaysia National Financial Literacy Strategy report, 2019–2023), one in ten Malaysians believe that they lack discipline in financial management. Despite 84% of Malaysians claiming that they practice regular savings, their savings are considered short term, as these savings are usually withdrawn by the end of the month to cover their daily expenses. Statistics also reported that one in five working Malaysian adults has not made savings in the previous six months, and three out of ten working Malaysian adults have to borrow money to buy basic necessities [46].

4.

Willingness to Face Unexpected Events

The Financial Education Network also reported that 52% of Malaysians find it difficult to come up with MYR 1000 in the event of an emergency, and only 24% can afford to cover their living expenses for 3 months if they lose their main source of income (10% can last for more than 6 months). In terms of insurance and takaful coverage, only 17% of Malaysians subscribe to such plans.

5.

Planning for Retirement

When it comes to retirement preparations, 41% of Malaysians rely on their EPF funds as their primary source of income, and almost 50% of Malaysians are unsure that they will have enough money to live on in their golden years. Since 68% of EPF members do not save the minimum amount of money per age group, 16% of Malaysians are extremely concerned about household expenses in old age. The suggested minimum savings amount for people 55 years and older is MYR 240,000, which allows for a withdrawal of MYR 1000 per month for 20 years following retirement. The majority of Malaysian workers—six out of ten—are self-employed and do not have access to any kind of institutional retirement or pension scheme [13,14,15,24,25,26,27,28,46].

3.2. Financial Well-Being (Economic Factor)

Financial well-being involves living a meaningful, comfortable and stable life that is free from prolonged financial problems in addition to being able to cope with unexpected financial problems and emergencies as well as changing living circumstances. It also refers to an individual’s ability to meet current financial responsibilities and be secure about their financial future. The advent of increasingly sophisticated and accessible digital financial products and services further increases the importance of financial literacy. This prompts the need for Malaysians to understand the products, services and channels used to make the right financial decisions. Toward this aim, the National Financial Literacy Strategy (2019–2023) is a holistic five-year plan involving key strategies and comprehensive action plans that aims to provide guidance so that future efforts can produce a collective impact. The main goal of this strategy reinforces the role of financial education in improving financial literacy among Malaysians, as one of the prerequisites in strengthening their financial well-being [13,45,46].

3.3. Level of Education (Social Factor)

Education level is a sociodemographic factor that impacts financial literacy and reflects the socioeconomic status (SES) of households. A sufficient education level allows a household to adopt a positive attitude in making the right economic decisions [39]. In the current study, education level serves as a moderator between FL and SES B40 households. The second strategy report of the 11MP (2016–2020) and the 2010 Malaysia Millennium Development Goals (MDGs) Report state that the low level of educational attainment has affected the ability of B40 households to obtain high-paying jobs or venture into business activities [17,18,46].

3.4. Socioeconomic Status (SES) of B40 Households

Socioeconomic status is commonly associated with social science studies and refers to a deep understanding of how society should work. The common debate of this term among social scientists revolves around how the term indicates a person’s position in the social hierarchy, how the hierarchy is structured, as well as a person’s life options. In other words, SES refers to a person’s access to a collectively desired resource be it material goods, money, power, friendship networks, health care, leisure, or education, alongside their access to these resources that enable them to function optimally in the social world.

To date, there is still no agreement on a proper definition for this term as it includes political ideologies regarding existing and desired social structures, and political and scientific ideologies often do not complement each other well. Over the past three decades, scholars have defined SES as a modest, measurable variable such as annual income. Some argue that race or ethnicity should be included in the definition, while others believe that financial status should also be part of the definition as these constructs are interrelated. For those who are not in the workforce, such as children, the elderly or those who intentionally drop out of school, SES can be a tricky construct to define [14]. A potential definition is proposed and described SES as a construct that reflects a person’s access to collectively desired resources such as material goods, money, strength, friendship networks, health care, leisure, or educational opportunities [38,40,41,42,43,44,46].

3.5. Research Objectives

In general, this study examines the influence of Financial Literacy in relation to financial well-being and the education level of the socioeconomic status of B40 households. The objectives of the current study are as outlined:

(a)

To examine the role of financial well-being (FW) in mediating the relationship between FL and SES of B40 households.

(b)

To examine the role of the level of education (EL) as a moderator of the relationship between FL and SES of B40 households.

(c)

To examine the effect of Financial Literacy (FL) on the socioeconomic status (SES) of B40 households.

(d)

To examine the mean differences of FL, FW, SES of B40 households based on demographic factors.

(e)

Proposed A Socioeconomic Status (SES) Sustainability Model of Malaysia’s B40 households.

3.6. Research Hypotheses

The following six hypotheses were formulated to achieve the research objectives and test the proposed model:

H1. 

FL has a significant impact and relationship with financial well-being (FW).

H2. 

FW has a significant relationship with the SES of B40 households.

H3. 

FW mediates the relationship between FL and SES of B40 households.

H4. 

FL has a significant effect and relationship with the SES of B40 households.

H5. 

Education Level (EL) has a moderating effect in the relationship between FL and SES of B40 households.

H6. 

Based on these demographic factors, there are differences in the mean scores of FL, FL, SES of B40 households.

4. Conceptual Framework

Figure 1 presents the conceptual framework of the study where four variables or constructs namely financial literacy (FL), financial well-being (FW), level of education (LE) and socioeconomic status (SES) of B40 households are interrelated. Each of these constructs is developed where several dimensions can be tested. For the financial literacy construct, the following dimensions are focused upon: financial knowledge, financial attitudes and financial behaviour. The intermediary variable, financial well-being, includes the dimensions financial situation, future savings, financial resources, financial management, payment of bills and financial position. While the education level of the B40 household’s (LE) serve as a moderating variable in this study, the socioeconomic status (SES) of B40 households served as a dependent variable where the researcher focused on monthly income, employment status, homeownership, car ownership and household composition (household size).

5. Research Methodology

The current study employed a survey design in establishing a reliable model to measure the financial literacy (FL) construct among Malaysian B40 households as well as its effects on the SES of B40 households in Malaysia. Using a quantitative approach, the data of this study were obtained using a self-administered questionnaire where a detailed literature review was conducted to identify items that could measure the FL, FW, and SES constructs. The respondents for this study consisted of B40 households in the urban areas of Johor state who were selected using simple random sampling. According to Cooper and Schindler (2014), random probability sampling is where each population unit has an equal chance of being selected to ensure that the demographic and socioeconomic considerations are represented in the population. Random sampling also has fewer biased results [21,43,44,45,46] and enables study results to be generalised across the study population.

6. Research Instrument

The structured questionnaire used in this study consisted of 53 items rated on a 7-point Likert scale ranging from 1 = strongly disagree to 7 = strongly agree. Financial knowledge was measured using a 17-item scale where a sample item is “A budget is part of financial planning that I need to do”. Financial behaviour was assessed using a 20-item measure, where a sample item for this construct was, “My purchase is according to ability”. Similarly, financial attitude was assessed using a 17-item measure. All these scale items were adapted from [24,39,40,41,42,43,44,45,46]. Financial well-being was assessed using a 12-item measure outlined in [41,42,43,44,45,46], where a sample item is “I am satisfied with my current financial situation,” while the socioeconomic status (SES) and level of education (LE) were measured using a 12-item scale that included monthly income, employment status, homeownership, car ownership and household composition (household size).

7. Discussion

This study aimed to test the relationship between the financial literacy model with financial well-being as a mediator and level of education as a moderator to test the impacts of the socioeconomic status of Malaysian B40 households. The exploratory factor analysis (EFA) methods, as well as the two-level structured equation modelling (SEM) approaches, were used to test the reliability, validity, and testing of hypotheses. B40 households face different financial problems over a long period and would need to possess financial literacy knowledge to manage their finances wisely and subsequently achieve financial well-being and improve their socioeconomic status. Thus, B40 households need to be educated to independently make wise financial decisions in addition to accessing relevant financial management information [36,37,38,46]. This also indicates the need to understand better the issues faced by B40 households in obtaining financial well-being and improving their socioeconomic status [39,40,46] The 11MP Mid-Term Review also highlights the need for further studies that account for government aspirations, economic challenges, and current global trends. Government efforts will be focused on stimulating economic growth for B40 households particular [41,44,46].

These findings highlight the importance of financial education based on financial literacy to encourage consumers to wisely manage their finances in addition to planning and managing the risks associated with financial problems. Meticulous financial planning can take place either through personal financial management or by appointing a qualified financial practitioner where personal financial planning is a more popular choice in Malaysia. Many still lack understanding of the importance of personal financial planning and various benefits that may arise from such planning [42,43,44,45,46]. Therefore, further study needs to be conducted to reveal the current financial literacy levels among Malaysians, especially among B40 households, to identify the impacts on SES of this group [47].

8. Conclusions

The findings of this study will give B40 households possibilities for enhancing their socioeconomic level. B40 households were able to pinpoint important social and economic elements in relation to financial literacy techniques to raise their socioeconomic status by improving the more reliable SES sustainability model (SES). Therefore, this research will provide future scholars with a new scholarly reference. With the help of this study, the knowledge and research gaps will be addressed, adding a wealth of important information to the field of scientific research and education in general. With the addition of information such as financial literacy, financial well-being, socioeconomic status (SES) and financial socialisation, knowledge sharing relating to these topics can continue. The outcomes of this study will be advantageous to multiple stakeholders. To ensure that every household is financially literate and can effectively manage their finances, the Ministry of Education (MOE) can take note of the findings of this study and implement some improvements, such as integrating financial education through KSSR and KSSM subjects in terms of financial literacy by strengthening the role of households in general and B40 in particular as economic actors.

The government’s goals under the Malaysian Education Development Plan (PPPM) 2013–2025 are also met by these admirable initiatives and endeavours, which unmistakably encourage Malaysians to give financial literacy, financial well-being, financial socialisation and household SES their full attention. Because B40 parents’ SES has a significant impact on children’s academic achievement, the MOE can be asked to introduce a new B40 Household SES Sustainability Model and initiatives as a means of achieving this goal in addition to the development of academic achievement among students from B40 family backgrounds. Scholarly references and research practise can be added by other stakeholders like students, researchers and academics. Additionally, this work creates a dynamic and contemporary reference area for future follow-up research.