Financial Satisfaction and the Influence of FinancialLiteracy in Malaysia

Azwadi Ali • Mohd Shaari Abd Rahman • Alif Bakar

Accepted: 16 February 2014� Springer Science+Business Media Dordrecht 2014

Abstract Achieving a state of being financially satisfied is a more feasible aim than

becoming debt-free, which requires well strategized economic behaviors over one’s life

cycle. Furthermore, financial satisfaction can describe an individual’s perception con-

cerning his/her current financial situation. In this study, we developed and tested a con-

ceptual model to predict the level of financial satisfaction among Malaysian working

individuals. Specifically, the model explains how financial planning (FP) directly affects

financial satisfaction and mediates the effects of financial literacy (FL) and basic money

management (BMM). The hypotheses were tested using survey data from 1,957 respon-

dents who attended investment seminars across Malaysia. The results from partial least

squares analyses suggest that FP is an important determinant of financial satisfaction,

whereas BMM does not affect satisfaction directly. In addition, FL and attitude towards

money were found to be significant antecedent variables of FP. The study also found that

the current FL level in Malaysia is moderately high at 66.7 % based on tier one financial

quiz questions. From the findings, with the increasingly complex financial systems, we

conclude that everyone should manage and plan their financial activities well ahead

because people will face many differing financial commitments at certain points in their

lives.

Keywords Personal finance � Financial planning � Satisfaction �Partial least squares

A. Ali (&) � M. S. A. Rahman � A. BakarSchool of Maritime Business and Management, Universiti Malaysia Terengganu,21030 Kuala Terengganu, Malaysiae-mail: azwadi@umt.edu.my

M. S. A. Rahmane-mail: shaari@umt.edu.my

A. Bakare-mail: alif_akhtar@yahoo.com

123

Soc Indic ResDOI 10.1007/s11205-014-0583-0

1 Introduction

In any country, personal finance has become more complex than ever before. As a result,

people are becoming increasingly concerned about managing their own financial matters.

Personal finance encompasses the simple daily activities including saving money and

paying bills, and challenging tasks such as conducting tax planning and assessing future

risks. As such, not everyone will fare comfortably when it comes to making the best use of

one’s own income. The danger of poor self-financial management is that one may spend

more than his/her earnings, leading to the person owing too much debt and possibly going

bankrupt. For example, in Malaysia, the statistics on non-performing loans (NPL) as a

result of credit card uses and personal loans have deteriorated from year-to-year [Bank

Negara Malaysia (BNM) 2012].

Being concerned with this national problem, many related agencies are gearing up

towards educating the public about financial matters, both formally and informally. For

example, BNM has introduced online portals including www.bankinginfo.com.my, www.

insuranceinfo.com.my and www.duitsaku.com to help the public gain access to important

information about personal finance. In addition, in 2006, BNM set up a credit counseling

agency, known as Agensi Kaunseling dan Pengurusan Kredit (AKPK) to help individuals

take control of their financial situation and gain the peace of mind that comes from the wise

use of credit. Through AKPK, individuals wishing to learn about managing their own

finances can register in their scheduled programs, which are conducted throughout

Malaysia. In the same spirit, Permodalan Nasional Berhad (PNB), a government-linked

fund manager has been organizing its 360 days investment seminar every year since 2008

to educate the public in general financial planning (FP), as well as focusing on unit trust

investment. These efforts indicate that the government means business in providing an

adequate education platform to make the public aware of the importance of financial

management.

Achieving personal financial wellbeing is important not only to individuals, but also at

an aggregate level, it contributes to the efficiency and prosperity of the national economy.

In July 2010, the federal bank of Malaysia (BNM) responded to the invitation by the

International Network on Financial Education (INFE), which is a network of the Orga-

nisation for Economic Co-operation and Development (OECD) to provide internationally

comparable statistical indicators on FL (BNM 2010). In the participating countries, the

survey is to be conducted following the standardized questionnaire and guides proposed by

OECD/INFE (2011). Through this cooperation, comparisons between the participating

countries concerning the current level of FL can be made, while at the same time, room for

improvement can be identified that paves the way for better policies. These policies may be

tailored towards empowering individuals to be well-informed when making financial

decisions that fit the circumstances of their own lives. Therefore, being financially literate

would give them choices, helps to protect them from unexpected events, fraud and scams,

and enables them to have a voice as consumers and citizens of a nation.

As improving the level of FL among the public is a national concern, views from

different organizations will be useful for the related parties to plan future actions.

Therefore, this study was conducted to contribute additional views on the present condition

of FL in Malaysia. In evaluating the results of the study, we propose an index that measures

the current level of FL among Malaysian working individuals. The index can complement

any existing or future literacy levels for the purpose of benchmarking overtime. In addi-

tion, this study has modeled financial satisfaction as a dependent variable that is predicted

directly by basic money management (BMM) and FP, and indirectly by the attitude and

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literacy level. Financial satisfaction was deemed to be an appropriate outcome of being

financially literate, and the aim of following a set financial plan. In contrast, being debt-

free is less feasible and can only be accomplished after following strategic financial

planning, which may not be an easy task for many individuals.

The results of the study were based on the data gathered from volunteering participants

of investment seminar programs organized by PNB throughout Malaysia. These individ-

uals can represent considerable segments of the Malaysian population, while, at the same

time they are suitable for the study since participants of such programs can be considered

as being concerned about improving their financial well being. By selecting this highly

involved survey sample, this study offers findings that are useful to many related parties.

Specifically, this study has answered whether or not the financial satisfaction of certain

segments of the Malaysian public can be predicted by several pre-identified variables

through a proposed conceptual model, which can be improved in future research.

2 Theoretical Background and Hypotheses

2.1 Financial Satisfaction

Financial satisfaction can be described as a sub-construct of general wellbeing (Campbell

1981) that depicts a state of being healthy, happy and free from financial worry (Zim-

merman 1995). This desirable state can be attained when individuals are content with

material (objective) and non-material (subjective) financial situation (Joo and Grable

2004). Plagnol (2011) argues that financial satisfaction is related to objective financial

circumstances (income and wealth) and perceived financial needs. Because of financial

aspirations have not been fully met by current financial means, individuals will accumulate

debt; and as such, the level of financial satisfaction tend to change over life course.

Furthermore, being financial satisfied is a relative concept when social comparison is

considered (Burchardt 2005). Therefore, residents of different regions or states may have

different levels of financial satisfaction although their level of objective financial cir-

cumstances is similar.

Both single-measure and multi-measure have been used in previous studies to measure

financial satisfaction. A global financial satisfaction measure was commonly anchored by a

single question such as ‘how satisfied are you with your financial situation?’ (Morgan

1992) and ‘how comfortable and well-off are you financially?’ (Greenley et al. 1997). In

more recent studies, a single item measure of financial satisfaction used a Likert scale on

one’s level of living (Plagnol 2011; World Values Survey Association 2009), while Joo

and Grable (2004) used a self-anchoring 10-point stair-step question.

Multiple item measures consist of several key components thought to be important to

indicate the financial wellbeing of individuals. These may include subjective evaluations of

financial adequacy, economic wellbeing and satisfaction with level of living (Draughn

et al. 1994). These components can be further expanded such as economic wellbeing can

comprise the level of financial concerns with regard to level of income, financial security,

savings and amount of debt. Based on a larger view, Hira and Mugenda (1998) used six

measures of financial satisfaction including the amount of savings, money owed, current

financial situation, ability to meet long-term goals, preparedness to meet emergencies and

financial management skills.

Demographic factors such as income, age, education and ethnicity have been proposed

as determinants of financial satisfaction. For example, Joo and Grable (2004) assert that

Financial Satisfaction and the Influence of Financial Literacy

123

income and education has indirect effect on financial satisfaction. Despite these factors

being recognized as determinants, financial behaviors including financial management

practices have more significant and direct effects on financial satisfaction than demo-

graphic factors (Joo and Grable 2004; Robb and Woodyard 2011). Xiao et al. (2006) found

that positive financial behaviors contribute to financial satisfaction among a sample of

consumers who use credit counseling. Similarly, Xiao et al. (2009) found evidence sug-

gesting that students who adopted positive financial behaviors increased their financial

satisfaction.

To achieve a desired level of financial satisfaction requires money management

behaviors in respective to the stages of behavioral change (O’Neill et al. 2000). For

example, when individuals feel ready to overcome financial obstacles, they are likely to

substitute a healthy response such as saving and investing for a problem behavior like

spending and using credit cards. These positive changes can only succeed when individuals

inculcate personal qualities such as determination, discipline, knowledge and positive

thinking. For many people, they would need these personal qualities to manage common

financial behaviors that normally include cash, credit and saving, which form the basic

elements of FP.

Good financial practices related to the major areas of FP including personal finance

basics, borrowing, saving, investing and protection would help individuals achieving a

good state of financial wellbeing (Huston 2010). Robb and Woodyard (2011) used six

financial practices regarded as best practices as the dependent variable regressed against

financial knowledge, financial satisfaction and selected demographic factors. These prac-

tices include setting aside emergency fund, obtaining annual credit report, no overdraft,

credit card payoff, having retirement account and having risk management policies. They

found that income is a dominant demographic factor in influencing financial behavior,

while financial confidence and financial knowledge are significant subjective variables.

2.2 Financial Literacy

Financial literacy can be defined as measuring how well an individual can understand and

use personal finance-related information (Huston 2010). Atkinson and Messy (2011, p. 4)

went further by defining FL as ‘‘a combination of awareness, knowledge, skills, attitude

and behaviors necessary to make sound financial decisions and ultimately achieve indi-

vidual financial wellbeing’’. Hence, when individuals have accessed the right information,

they can adequately analyze it before making a decision regarding a particular financial

need. For example, when obtaining a car loan, one can visit several banks to compare the

interest rates before choosing the one that offers the lowest. Next, he/she can decide

whether to pay larger periodical installments but smaller total loan repayment or smaller

periodical installments but larger total loan repayment. When individuals grow older, their

financial matters expand as they will need to put aside their savings for retirement, while at

the same time preparing for other financial needs, such as paying loans, funding children’s

education and some investment activities.

In empowering individuals to plan and manage their financial matters, most developed

nations have been engaging in various educational programs including introducing spe-

cialized personal finance subjects in schools and conducting periodical quizzes and surveys

to assess the level of FL of individuals across different backgrounds (ANZ 2008; Kempson

2009; Mandell and Klein 2009; Worthington 2006). The effectiveness of such programs

has been evaluated through, among others, individuals’ portfolio diversification (Abreu and

Mendes 2010), extent of the disposition effect (Dhar and Zhu 2006) and retirement

A. Ali et al.

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planning (Lusardi and Mitchell 2007). However, some financial education programs may

improve FL, but not financial behavior (Agarwal et al. 2011). Therefore, the challenge is in

designing good educational programs that trigger the desirable financial behavior.

The main problem associated with a low level of FL is that individuals can suffer credit

problems, which may lead to bankruptcy due to over-indebtedness (Santos and Abreu

2013). At the other end, individuals may not fully utilize their idle money in profitable

investment opportunities. As the world is progressing, the needs of individuals increase,

and as a result, financial products have become more complex. Therefore, having a high

level of FL can ensure that individuals place greater concern in planning their spending and

savings in order to achieve a satisfactory level of financial wellbeing.

Serious attention should be given to the level of FL among individuals because it affects

one’s welfare, especially when in retirement at which time the benefits of having early FP

and savings would be felt. Moreover, financial illiterate persons are likely to make welfare-

reducing decisions, such as maintaining large outstanding balances on credit cards when

cheaper forms of credit are available (Gartner and Todd 2005) and failing to refinance

mortgages when it would be optimal to do so (Agarwal et al. 2006). The same problem can

also be expected in developing countries because their finance and economic systems are

continually being improved so as to follow those of the developed countries.

In Malaysia, NPL cases are increasing among individuals at an alarming rate. For

example, in March 2012, outstanding credit card balances valued at about RM561.7

million turned NPL, or about 1.7 % of credit card loans, and loans valued at RM1004.9

million for personal use turned NPL, or about 2 % of the loans (BNM 2012). This is the

same problem as was echoed by Santos and Abreu (2013), who iterated that many indi-

viduals find themselves struggling to keep up with payments because of bad financial

choices from taking out mortgages and revolving credit that they could not afford, with

terms and conditions that were not fully understood, and which led to spending beyond

their means.

The implications of low level of FL can be felt dearly during the retirement period in

that an individual’s typical income sources have ceased and they are reliant on contribu-

tions to the pension funds they had made earlier. Although not surrounded by many

financial commitments, this segment of the population is heavily reliant on their existing

savings and support from the government and other related organizations. In their study,

van Rooij et al. (2011) found that those who are more financially knowledgeable are more

likely to plan for retirement; hence, their retirement plans were chosen based on their

expected consumption when they are aged. In addition, a study by Yin-Fah et al. (2010)

reveals that older Malaysians scored low in the FL scale, a variable that is significantly

affecting their financial satisfaction. The result of the latter study clearly indicates poor

planning by individuals when they are younger leads to poor financial satisfaction when

they are aged.

New studies that target population segments that are still in the process of making FP

can provide more insight into the level of financial satisfaction of the Malaysian public

than the results of Yin-Fah et al.’s study. Furthermore, several earlier studies including

Ibrahim et al. (2009), Sabri and MacDonald (2010), and Sabri et al. (2010) only targeted

college students, while Boon et al. (2011) targeted working individuals in only a large

commercial area in Malaysia. Therefore, our study, which targets working individuals

across Malaysia, can provide important additional insight into the issue in question. Fur-

thermore, since the attendees of financial educational programs are considered to be

concerned with their financial matters, they provide a good platform to expand the research

on FL in Malaysia.

Financial Satisfaction and the Influence of Financial Literacy

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2.3 Research Model

The overall research design selected for this study is based on a positivist paradigm by

following a relatively standard survey approach. After the research questions were formed,

a conceptual framework and hypotheses were identified. As this study is exploratory in

nature, we developed a framework that resembles the models commonly used in general

consumer satisfaction studies, and modified it to suit the context of the study. Our research

model does not depart too much from the conceptual framework proposed by Joo and

Grable (2004) also. Indeed, three of their antecedent variables are used in our research

model, albeit, with different terms and slight modifications. In particular, we split the

financial behavior construct to two separate constructs; BMM and FP. In addition, we

distinguish saving behavior from money management as we contend that it forms the FP

construct. The research model used in our study is given in Fig. 1. Research hypotheses are

represented by each single-arrow headed path connecting the latent constructs in the

research model. From the research model, measures of each construct were identified

mainly through related literature. This research model was refined in accordance with the

results of a pilot study performed earlier that examined the reliability and validity of these

variables and their respective indicators, as well as the overall research model.

2.4 Hypothesized Relationships

In many behavioral contexts, attitudes are found to play a significant role in the realization

and extent of the behavior in question. In this study, attitude towards money (AM) was

conceptualized as the main antecedent variable of FL, BMM and FP. In Joo and Grable’s

model, risk tolerance was used to measure the financial attitude of individuals; whereas, we

believe the more general measure of financial attitude is more suitable to represent atti-

tudes of individuals with diverse investment backgrounds. Attitude can be defined as an

affective or evaluative judgment of some person, object or event (Barki and Hartwick

1994). With regard to money, its attitude affects certain risky behaviors. For example, a

gambler’s addiction can be explained by their AM (Keller and Siegrist 2006), while

compulsive buying and use of credit cards are also related to AM (Roberts and Jones

2001). Conversely, individuals who value money tend to exhibit positive money-related

behaviors including savings, tracking expenses, investing and continually improving their

understanding about money matters. For example, budgeting intention and maintaining a

budget were found to be predicted by a positive attitude thereto (Kidwell et al. 2003;

Kidwell and Turrisi 2004). Similarly, positive attitudes towards savings shape the eco-

nomic psychology in individuals with regards to having money put aside for emergency

BMM

FPFL

FS

AMFig. 1 The research model

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(Furnham 1984; Katona 1975). As money is very much the focus of this study, we have

formulated the following hypotheses relating to money attitude:

H1 Attitude to money is positively related to basic money management.

H2 Attitude to money is positively related to financial planning.

H3 Attitude to money is positively related to financial literacy.

Existing empirical evidence shows that adults in both developed and emerging econ-

omies who have been exposed to financial education are subsequently more likely than

others to save and plan for retirement (Bernheim et al. 2001; Cole et al. 2010; Lusardi

2009). Evidence was also found that those with higher FL are better able to manage their

money in common cash flow and credit management as well as more advanced financial

activities, such as investment, retirement planning and risk management (Hilgert et al.

2003; Lusardi and Mitchell 2008, 2011; van Rooij et al. 2011). These findings suggest a

direct causal link between financial education and outcomes; this indicates that improved

levels of FL can lead to positive behavior change. Accordingly, our research model pos-

tulates that FL directly affect BMM and FP, and partially mediates the relationship of

attitude to money and the two endogenous variables.

H4 Financial literacy is positively related to basic money management.

H5 Financial literacy is positively related to financial planning.

Basic money management involves simple and routine financial activities that are

recommended to be performed by individuals. These activities may include paying and

comparing monthly utility bills, having a monthly budget for expenditure and using

Internet banking. The extent of these activities may differ according to the differing needs

of individuals and their attitudes to the activities (Borden et al. 2008). Questions on BMM

activities have been asked in many earlier FL surveys and individuals’ responses to them

have been found to provide an indication of their positive effects on more advanced FP

activities (e.g., ANZ 2008; Kempson 2009). These FP activities normally include activities

relating to financial position, adequate protection, tax planning, investment, retirement and

estate planning (FPSB 2011). Based on this proposition, we hypothesized that:

H6 Basic money management is positively related to financial planning.

Financial attainment can be in the range of between being debt-free and accumulating

assets or maximizing net worth. Nevertheless, being financially satisfied regardless of the

amount of wealth and debt is considered the ultimate outcome of good financial wellbeing

(Joo and Grable 2004; Yin-Fah et al. 2010; Xiao et al. 2013). Joo and Grable (2004)

determined that positive BMM behaviors such as paying credit card bills in full each month

and following a monthly budget are positively related to financial satisfaction. Similarly,

maintaining financial record-keeping was found to be a determinant of financial satisfac-

tion (Godwin 1994). Achieving this aim can be well supported by having recommended

financial behaviors through good FP, which is considered crucial in the longer term for

individuals to achieve a desirable level of financial wellness, while at the same time,

avoiding insolvency problems (Boon et al. 2011). Therefore, our research model postulates

that:

H7 Basic money management is positively related to financial satisfaction.

H8 Financial planning is positively related to financial satisfaction.

Financial Satisfaction and the Influence of Financial Literacy

123

3 Research Methods and Findings

3.1 Data Collection

The unit of analysis in this study was working individuals in Malaysia. The labor force of

Malaysia, as at December 2012, was 13,034,700 workers (Department of Statistics

Malaysia 2013). As a surrogate of the Malaysian working individuals, a sample of adults

who are concerned about managing financial matters was selected for gathering the

responses regarding the level of financial satisfaction among the Malaysian public. The

survey was administered across several regions in Malaysia targeting the participants of

investment educational seminars organized by PNB between April 2012 and February

2013. Cooperation from PNB was sought in order to distribute the questionnaire to the

participants of their annual investment educational program. PNB made a commitment to

run investment educational seminars since 2008 through its 360 days investment seminar,

and, since its introduction, this seminar is conducted across Malaysia almost every working

day of the year.

From administering the survey in 14 states in Malaysia, the study managed to receive

1,961 responses. The venues were carefully selected so as to obtain responses from working

individuals from both the government and private sectors in urban and suburban areas. The

preliminary data filtering analysis found two respondents with more than 15 missing answers,

and two respondents with answers found to be outliers on more than 13 items. These four

responses were discarded; hence, the final usable responses were 1,957. The descriptive

statistics on the sample are presented in Table 1. As shown, the majority of the respondents

were below 40 years old; 58 % female; 48 % civil servants; and 71 % earned less than

RM3,000 a month. For testing the reliability and validity of the research model, we randomly

selected 700 respondents after filtering out 386 students, the unemployed and retirees.

3.2 Latent Variable Measures and the Results of the Financial Literacy Quiz

Most measures of each variable in the research model were based on the extant literature

(e.g., Atkinson and Messy 2011; Furnham 1984; Joo and Grable 2004; Kempson 2009;

Lusardi and van Rooij 2010; Worthington 2006; Yamauchi and Templer 1982). However,

some of the items were modified and some were specially created to suit the context of the

study. These measures were first piloted in the first two investment seminars in early 2012

to test their validity and reliability relating to being complete in terms of depth, unam-

biguous and simple for respondents to answer. The refined measures used in the actual

survey are given in ‘‘Appendix 1’’ and ‘‘Appendix 2’’. The FL level was based on the

Table 1 Sample descriptive

Age N Gender N Education N Job N Income N

B20 100 Male 825 Secondary 698 Government 950 BRM1,001 478

21–30 923 Female Diploma 441 621 RM1,001–3,000 905

31–40 550 1,125 Bachelor 708 Private 386 RM3,001–6,000 492

41–50 240 Postgraduate 110 Students/

unemployed/

retired

RM6,001–10,000 58

[50 137 [RM10,000 10

Total 1,950 1,950 1,957 1,957 1,943

Missing 7 7 – – 14

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respondents’ scores of their correct answers to the simple financial quiz given in

‘‘Appendix 1’’, while the measures for other variables were based on a 7-point Likert scale

(1 as strongly disagree and 7 as strongly disagree). It should be noted that the quiz only

contains ten questions, which, although may not be exhaustive, are deemed sufficient to

measure the literacy level for our study since the target respondents are common working

individuals, who are not active investors. These literacy measures can be regarded as tier

one literacy level or basic FL, as used by Lusardi and Mitchell (2007).

The FL level was assessed through the correct answers by respondents of the ten FL

questions. Although the more representative benchmark of FL should include questions of

higher tiers, we contend that these ten simple questions can be a good surrogate and

suitable to the demographics of the respondents who attended the investment seminars.

Table 2 reports the mean score of FL as 6.67 out of a maximum literacy score of 10. Many

of the respondents managed to answer seven questions correctly. On individual questions,

less than a quarter of the respondents answered question 5 correctly. This question relates

to the compound interest earned in a savings account. The second hardest question was

found to be question 9 on the legal ownership of automobiles while still in the loan period.

Nevertheless, most of them correctly answered the four simple mathematical questions

relating to typical daily economic activities (question 1–4).

Exploratory factor analysis was not performed on the measures of latent variables

because they had been piloted earlier and many were found to load on the respective

expected variables. Some of the measures were used in the previous studies; hence, we

only tested their reliability and validity through the partial least squares algorithm in the

assessment of the measurement model. The construct of FP is conceptualized as a variable

formed by its measures because these are common FP activities which are not necessarily

co-vary. Therefore, it was modeled in a formative mode. The SmartPLS program (Ringle

et al. 2005) has made it easy for researchers to model the constructs of both modes,

reflective and formative.

3.3 Measurement Model

In assessing the measurement model and structural model, 700 respondents were randomly

chosen from the total respondents to mitigate the problem of the model becoming overly

sensitive to detect significant effects (Hair et al. 2006). First, a measurement assessment of

the formative construct was first performed. Table 3 shows the statistics for the formative

Table 2 Score for financial literacy

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10

Correct 1,715 1,819 1,835 1,720 431 1,207 1,316 923 514 1,598

Wrong/noanswer

242 128 122 237 1,526 750 641 1,034 1,443 359

Correct (%) 87.6 92.9 93.8 87.9 22 61.7 67.2 47.2 26.3 81.7

FL score 0 1 2 3 4 5 6 7 8 9 10

N 2 2 6 41 107 252 453 520 347 175 52

Percent 0.1 0.1 0.3 2.1 5.5 12.9 23.1 26.6 17.7 8.9 2.7

Mean 6.67

Median 7

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123

indicators of FP from using Hair et al.’s (2013) three-step procedure. In the first step, FP12

was treated as a global measure of FP while the other items were considered forming the

FP latent variable. In the process, FP6, FP7, FP8, FP10, FP11 were found to have low

weights and loadings as well as not significant; hence, they were discarded in the final

model. By retaining six formative indicators, the model yielded the path coefficient of 0.39

for the relationship between the FP construct and the global-measured construct. This beta

value is lower than the threshold benchmark of 0.80. Further, the FP construct could only

explain 0.15 of the variance in the global-measured construct, which was also lower than

the acceptable benchmark of 0.64. Next, the results from regressing the retained indicators

on the global measure showed that none of the items exhibited a high variance inflation

factor above 5.0 to indicate any collinearity issue. Third, all the outer weights of these

indicators were all well below 0.408 (1/Hn); hence, they are not highly inter-correlated.

Moreover, from a 5,000 re-sampling bootstrapping procedure, three items were found to be

non-significant. Nonetheless, these FP2, FP3 and FP4 were found to have outer loadings

greater than 0.50; thus, all of these six retained indicators contain an absolute contribution

to its construct (Hair et al. 2013).

Despite failing to meet two of the benchmark levels suggested in Hair et al.’s three-step

procedure, we believe that the retained items are typical of the FP activities currently being

followed by a common individual. Dropping or even adding an item is not desirable as it

may change the conceptual domain of the construct (Jarvis et al. 2003). Nevertheless, we

are in the position to believe that the level and completeness of FP activities performed by

residents of different countries can be relative to the state of the economic development in

the respective countries as well as to the level of awareness among them. In our findings,

the discarded items were due to inconsistent responses related to equity investment,

insurance contribution and estate planning, which can be considered as more advanced FP

activities among Malaysians. Therefore, it is likely that the majority of the respondents

were not yet actively engaging in these relatively highly risky financial activities.

The measurement model for all other reflective constructs was evaluated through the

convergent validity and discriminant validity. The convergent validity of a construct is

established when the items measuring the construct have levels of item reliability above

0.70, and both the composite reliability and average variance extracted (AVE) of the

construct exceed 0.70 and 0.50 respectively (Henseler et al. 2009). Further, the discrimi-

nant validity of a model was assessed by comparing the square root of the AVE of each

construct against its bivariate correlations with other constructs, and checking for cross-

loading cases (Chin 1998).

Table 3 Formative measurement model assessment

FP ? FP12 Beta R2 t-value VIF0.387 0.150

Items Outer weight Outer loading

FP1 0.379 0.861 3.070 2.056

FP2 0.103 0.639 0.931 1.583

FP3 0.164 0.797 1.243 2.389

FP4 0.083 0.750 0.635 2.191

FP5 0.393 0.864 3.119 2.385

FP9 0.221 0.340 2.326 1.035

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In this study, the measurement model was evaluated by running a PLS algorithm (300

maximum iteration, standardized values and centroid weighting scheme). An early analysis

revealed that several items needed to be discarded due to low loadings among the reflective

indicators. The reflective items, which were subject to low loadings, were AM7, AM8, FS2

and FS4. The two attitudinal items failed to load high because they could be considered as

irregular in the Malaysian culture (lending money to others and fantasizing about owning

money), while the failure by the respondent to fully understand items FS2 and FS4

(negative statements) may be the reason for their low loadings. The final results of this

analysis are displayed in Table 4, which shows that the majority of the constructs are

reliable with loadings above the desired level of 0.60. In addition, the minimum construct

composite reliability is 0.832 for financial satisfaction, while the minimum construct

average variance extracted is 0.521 of AM. Since most of these retained reflective mea-

sures are above the stated thresholds, we concluded that the research model has achieved

acceptable convergent validity.

Table 5 provides the results of the discriminant validity analysis of the reflective con-

structs. As can be seen, the square roots of the AVE on the diagonal elements are greater than

the bivariate construct correlations on the off-diagonal elements, suggesting that the model

has achieved acceptable discriminant validity. In other words, these variables are distinct

from each other and can be modeled separately. In addition, item cross-loadings were

examined (not reported here) and although several cases of cross-loadings were found, they

were not considered as a major concern to the measurement model validity.

3.4 Structural Model

The results of the structural model are displayed in Fig. 2 and Table 6. The variance of the

financial satisfaction construct that can be explained by the model is 12 %. This coefficient

of determination (R2) of a model is acceptable in exploratory, consumer behavioral studies

(Hair et al. 2013). To test the significance of each of the relationships, a bootstrapping

Table 4 Convergent validity of reflective constructs

Construct Items Loadings Composite reliability AVE Alpha

BMM BMM1 0.818 0.901 0.603 0.868

BMM2 0.802

BMM3 0.728

BMM4 0.767

BMM5 0.796

BMM6 0.746

AM AM1 0.598 0.865 0.521 0.812

AM2 0.715

AM3 0.838

AM4 0.795

AM5 0.775

AM6 0.568

FS FS1 0.711 0.832 0.554 0.733

FS3 0.772

FS5 0.738

FS6 0.756

Financial Satisfaction and the Influence of Financial Literacy

123

procedure with no-sign changes and a re-sampling of 5,000 was followed. The t-values are

reported in the parentheses in Fig. 2 and Table 6. All relationships except the money

management-satisfaction relationship were found to be significant with the strongest

relationship being expected from the literacy-money management relationship. Despite a

poor direct effect on financial satisfaction, BMM has a positive significant effect on FL.

Therefore, its total effect on financial satisfaction is 0.124 (0.263 9 0.322 ? 0.039) and is

significant at the 5 % confidence level.

3.5 Effect Size

Cohen (1988) suggested that effect sizes of 0.02, 0.15 and 0.35 are considered small,

medium and large effects, respectively. As reported in Table 7, by omitting attitude to

money, the resulting reduction in the R2 and predictive relevance (Q2) for BMM are

considered small. Further, excluding money management will also result in small effect

sizes for the R2 and Q2 of FP. Conversely, if FL is removed, the effect sizes of both R2 and

Q2 for money management are expected to be large, while the resulting effect sizes for FP

are both small. Small effect sizes of R2 and Q2 for FP can also be expected should money

management be removed from the model, while the reduction in R2 and Q2 of financial

satisfaction are negligible. Lastly, if FP is excluded, the effect size of R2 and Q2 for

satisfaction can be expected to be small. Therefore, we can conclude that all endogenous

variables, particularly FL are important to the modeling of financial satisfaction.

3.6 The Mediating Effect of Financial behaviors

The research model postulates that financial behavior variables fully mediate the effect of

attitude and FL. The results in Table 8 provide support for this mediating role of financial

Table 5 Results of discriminant validity

BMM AM FL FP FS

BMM 0.777a

AM 0.316 0.722

FL 0.691 0.163 Single-item

FP 0.587 0.366 0.585 Formative

FS 0.228 0.204 0.203 0.345 0.744

a Diagonal elements in the bold type are the squared roots of AVE

BMMR2 = 0.52

FPR2 = 0.45

FL R2 = 0.03

FSR2 = 0.12

AM

0.263(6.502)

0.65

7(3

1.24

5)

0.163(4.558)

0.367(9.438)

0.208(7.811)

0.223(7.455)

0.322

(7.341)

0.039(0.825)

Fig. 2 The structural model

A. Ali et al.

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behaviors on financial planning–financial satisfaction relationship, while no mediation can

be expected for AM. When a no-mediation model is evaluated, the AM ? FS path has a

coefficient of 0.183 (t = 7.921) and the FL ? FS path has a coefficient of 0.177

(t = 8.345), which resulted in a 4.5 % reduction in the variance explained of financial

satisfaction. However, when a partial mediation model is evaluated, the direct effects of

attitude and FL on financial satisfaction significantly decreased to 0.094 and -0.004,

respectively, while it only increased the variance explained in financial satisfaction by

0.9 % (effect size = 0.07). In contrast, the full mediation model used earlier in the study

resulted in many significant relationships with moderate variance explained in the financial

satisfaction construct.

4 Discussion and Conclusion

Financial literacy has been the main focus in many earlier studies that explored the role of

national education and economic systems in shaping the level of national FL. The OECD

also stresses the importance of financial education that can improve the economic and

social wellbeing of people around the world. For example, in 2011 it released a ques-

tionnaire and guidance notes on conducting a FL survey to standardize the comparison of

the levels of FL between countries (OECD/INFE 2011). Without denying the importance

of FL, this study has gone further to assess the level of financial satisfaction among

Malaysian working individuals.

Financial satisfaction can be achieved by many people, whereas financial freedom may

not be an easy aim. This study has modeled that financial satisfaction can be expected

when individuals manage their money and plan their financial needs well. In the same

model, FL acts as an antecedent of money management and FP; hence, it has an indirect

influence on financial satisfaction itself through the mediating role of financial behaviors.

The results provide support for the proposed conceptual model, and major findings emerge

from this study. First, the proposed model can explain 12 % variance in the financial

Table 6 Results of hypothesis testing

Hypothesis Weight(t value)

Result(p \ 0.01)

H1 Attitude to money is positively related to basic money management 0.208(7.811)

Supported

H2 Attitude to money is positively related to financial planning 0.223(7.455)

Supported

H3 Attitude to money is positively related to financial literacy 0.163(4.558)

Supported

H4 Financial literacy is positively related to basic money management 0.657(31.245)

Supported

H5 Financial literacy is positively related to financial planning 0.367(9.438)

Supported

H6 Basic money management is positively related to financial planning 0.263(6.502)

Supported

H7 Basic money management is positively related to financial satisfaction 0.039(0.825)

Not supported

H8 Financial planning is positively related to financial satisfaction 0.322(7.341)

Supported

Financial Satisfaction and the Influence of Financial Literacy

123

satisfaction among the respondent, which can be considered as moderate. A further

mediation analysis found only 0.9 % increase in the explained variance of the financial

satisfaction variable in the partial mediation model, while it deteriorated in the no-medi-

ation model. Despite no mediation support for the relationship between AM and financial

satisfaction, we contend that our original research model postulating full mediation effects

of financial behaviors can explain financial satisfaction variable satisfactorily.

Second, the findings provide support for seven out of eight stipulated hypotheses. The

first three hypotheses relating to AM as an antecedent of financial behaviors and FL are all

supported. That is to say, an individual’s predisposition towards owning money and

spending it motivates him/her to be financially literate, concerned about spending income

wisely and having a sound strategy to achieve a long term financial aim. Since attitude is

formed throughout one’s life, parents are encouraged to show a good example of tracking

expenses and not spending unnecessarily. As stressed by Otto (2013), skills and attitudes

towards savings among children are indirectly related to parenting behaviors that lead to

higher self-efficacy beliefs, better self-regulation and more independent economic behavior

in general. Similarly, Webley and Nyhus (2006) found a clear relationship between par-

ents’ influence and children’s current economic behavior as well as future economic

behavior in adulthood. In addition, educating children to save money early during their

childhood would motivate them to appreciate their current assets and be wary about

spending money on things based on priority.

Table 7 Effect size

BMM(Rincluded

2 = 0.52)(Qincluded

2 = 0.31)

FP(Rincluded

2 = 0.45)(Qincluded

2 = 0.25)

FS(Rincluded

2 = 0.12)(Qincluded

2 = 0.065)

Beta f2

Effectsize

Q2

Effectsize

Beta f2

Effectsize

Q2

Effectsize

Beta f2

Effectsize

Q2

Effectsize

AM 0.208 0.083 0.043 0.223 0.073 0.027

FL 0.657 0.875 0.362 0.367 0.144 0.053

BMM 0.263 0.073 0.027 0.039 0.011 0.006

FP 0.322 0.080 0.039

Table 8 Mediating effect of financial behaviors

Full mediation(R2 = 0.12)

No mediation(R2 = 0.075)

Partial mediation(R2 = 0.129)

Beta t value Beta t value Beta t value

AM ? FS 0.183 7.921 0.094 3.823

AM ? BMM 0.208 7.881 0.209 13.020 0.209 12.878

AM ? FP 0.223 7.455 0.214 11.982 0.221 11.936

FL ? FS 0.177 8.345 -0.004 -0.139

FL ? BMM 0.657 31.245 0.656 52.738 0.656 52.121

FL ? FP 0.367 9.438 0.373 16.541 0.366 16.697

BMM ? FS 0.039 0.825 0.027 0.875

FP ? FS 0.322 7.341 0.299 10.445

A. Ali et al.

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Financial literacy was found to be an important determinant of BMM and FP; hence,

both hypothesis 4 and 5 are supported. Respondents that scored relatively high on ten tier

one FL questions demonstrated positive BMM and FP activities. In fact, if it is removed

from the model, the resulting reduction in the variance explained and predictive relevance

of the model are expected to be large effect sizes. In addition, the current level of FL of the

Malaysian public was found to be moderately high at 66.7 of the 100-index point. In other

words, many Malaysians can be regarded as financially literate in basic financial matters

with the exception of compound interest. This poor understanding on compound interest

can explain the high failure rates of individuals assessing the risk of credit card loans. This

concern was echoed by BNM, which reported worsening NPL cases (BNM 2012).

Therefore, to help the public achieve a desirable state of financial welfare, efforts from

related organizations are needed to combat the problem of financial illiteracy by improving

FL and behavior through introducing financial educational programs.

Next, our findings on the predictors of financial satisfaction found support for two of the

three related hypotheses. Hypothesis 7 is not supported suggesting that BMM cannot

explain the level of financial satisfaction. Conversely, FP significantly influences the level

of financial satisfaction. This finding can be further explained through the view that FP is

more important in ensuring financial satisfaction in the long term, while BMM relates very

much with typical daily activities, which may make individuals more aware of planning

financial matters in advance. As such when long term financial objectives have been

identified and strategies to meet them are planned, individuals would feel more confident to

achieve a desired level of financial satisfaction.

With regard to the common FP activities, many respondents were comfortable with

typical activities such as saving for emergencies and retirement. Furthermore, filing tax

returns was also considered easy; this could be due to the introduction of e-filing since

2004, which resulted in individuals becoming more informed about the tax return filing

process over this period. Nevertheless, inconsistencies in responses were found among the

more advanced FP activities, such as equity investment, insurance and estate planning.

This result could be due to low confidence in equity shareholdings and risk management.

For example, the retail equity trading value in 2012 was reported to be 23 % of the total

equity trading value of RM408 billion (BM 2013), while the net asset value of private unit

trust funds stood at 20 % of the RM1,465 billion Bursa Malaysia market capitalization

(FiMM 2013). In addition, insurance contributions among the Malaysian public are cur-

rently low, with the reported life insurance sums in force in 2012 being 113 % of GDP

(BNM 2013), whereas the same sums in force in Singapore were 227 % (Monetary

Authority of Singapore 2013).

For pragmatic consideration, the FL index found in this study is cross-sectional in

nature. As such, it can be used for over-time benchmarking. It will be useful if this index

and future annual indexes can provide indications as to whether or not improvement in the

levels of FL and financial satisfaction has taken place. As the model may not be com-

prehensive, future interested researchers should use it with care when doing a bench-

marking analysis.

Variables making up the research model in this study were gathered from the pertinent

literature; nonetheless, the model is not without flaw. Through measurement model ana-

lysis, we have found four reflective measures that failed to load reliably on the anticipated

constructs. In addition, many items forming the FP variable were discarded in the final

analysis due to low reliability and inconsistencies found among the respondents. However,

the retained measures were sufficient and valid to explain the target behavioral outcome,

which is financial satisfaction. Due to the moderate level of R2 found in this study on

Financial Satisfaction and the Influence of Financial Literacy

123

financial satisfaction, future researchers may identify additional or competing variables as

well as potential moderating variables to improve the model’s prediction on the targeted

behavioral outcome.

Overall, the research model has been validated through the examination of the reliability

of its measures and validity of the constructs. The findings of this study in respect of 1,957

respondents provide a glimpse of the present FL level among certain segments of the

Malaysian public and their state of being financially satisfied. However, since the

respondents were those attendees of the investment seminars, the results may not represent

the opinions and perceptions of the Malaysian working individuals and the public as a

whole. We encourage future researchers to examine the literacy level on more advanced

financial matters by not sacrificing other important variables, such as FP and money

management. These additional studies would make findings comparison possible, espe-

cially those relating to movements in the literacy level. We hope that our study can expand

the knowledge on the related fields and become a benchmark for FL studies in Malaysia.

Acknowledgments The authors would like to thank Permodalan Nasional Berhad for its cooperation inadministering the survey. Conflict of interest: No conflict of interest has been declared by the authors.Funding source: This research was supported in part by the Ministry of Higher Education of Malaysia underthe Fundamental Research Grant Scheme.

Appendix 1

The following FL tier one questions appeared in the first section of the survey. Correct

answers carried 1 point, while wrong and no answers scored zero points. The literacy level

ranges between 0 and 10.

Your answer

1. If you spent RM13 on lunch on day 1 but only RM8 the next day, how much did youspend on lunch over the 2 days?

RM________

2. If a prize draw win of RM18,000 is shared equally between six people, how much willeach person receive?

RM________

3. If a person takes home RM1,400 a month and 50 % of this goes on rent, what is theirmonthly rent?

A. RM700 h A

B. RM500 h B

C. RM1,000 h C

4. If a refrigerator priced at RM1,000 is discounted by 10 % at a sale, how much would itcost?

A. RM1,000 h A

B. RM100 h B

C. RM900 h C

5. A deposit of RM200 in a savings account earning an interest of 10 % annually willbecome RM________ after 2 years

A. RM220 h A

B. RM242 h B

C. RM240 h C

6. Suppose that the interest rate on your savings account is less than the inflation rate. Usingthe money in the account after 1 year, you would be able to buy goods less than theamount you could get today

h TRUE

h FALSE

A. Ali et al.

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Appendix 2

Measures of latent variables appeared in the second section of the questionnaire.

Your answer

7. If a person pays the minimum sum of his outstanding credit card balance,he will not have to pay any interest charge

h TRUE

h FALSE

8. Commonly, the outstanding balance on a credit card is subject to a financialcharge (interest charge) of ____ %

A. 1 % per month or 12 % per annum h A

B. 1.85 % per month or 18 % per annum h B

C. 2 % per month or 24 % per annum h C

9. In hire purchase financing, the owner of the car is ______

A. The hirer h A

B. The banking institution h B

C. Jointly between the banking institution and the hirer h C

10. The role of this institution is to provide advice on money managementand assistance to deal with debt

A. Financial Mediation Bureau h A

B. Agensi Kaunseling dan Pengurusan Kredit h B

C. Credit Bureau h C

Basic money management (first order reflective)

BMM1 I always pay bills before the due date

BMM2 I always read the details of my bills to compare monthly usage or rate changes

BMM3 I normally budget my monthly expenses

BMM4 I keep track of my expenses

BMM5 Before I buy something, I carefully consider whether I can afford it

BMM6 On any day, I would know how much money I have to meet the daily living costs

Financial planning (first order formative)

FP1 I save money for retirement

FP2 My monthly pension/EPF contribution is sufficient for my retirement days

FP3 At any time, I have some money saved for emergencies

FP4 I ensure that with every pay, I would save some

FP5 I plan for long-term goals including children’s education fund, houses and vehicles

FP6 My insurance/takaful coverage is sufficient to meet costs related to emergency events

FP7 I invest regularly in unit trust schemes

FP8 I actively invest in shares

FP9 I do not need assistance in filing my tax forms

FP10 I have the right estate properties for my needs

FP11 I have proper estate planning for my heirs

FP12a I am currently following my long term financial plan

Attitude towards money (first order reflective)

AM1 Money brings happiness in life

AM2 At any time, I always know how much money I have in my purse/wallet/pocket

Financial Satisfaction and the Influence of Financial Literacy

123

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