The Effect of Financial Literacy on Emergency Fund Adequacy

Abstract

Analyses of the 2016 Survey of Consumer Finances (SCF) dataset found that 33% of households had comprehensive financial assets (excluding retirement funds) sufficient to cover 3 months of spending. We conducted a hierarchical model and found that objective literacy (score on a financial knowledge test) was positively related to the likelihood of meeting an emergency fund guideline, but subjective literacy did not have a significant effect. Tests of the effects of financial overconfidence showed that even though overconfident respondents were less likely to meet the guideline than those with high objective financial literacy, subjective financial literacy had no separate effect in terms of a definition of overconfidence. The influence of objective financial literacy predominated that of subjective financial literacy. In addition, many household characteristics were related to meeting guidelines in ways similar to effects found by previous researchers.

Keywords: Financial literacy, Emergency funds, Survey of Consumer Finances

JEL Classification: D12, D14, D83, E21