The Mediating Role of Financial Self-Efficacy in the Financial Capability of Low-Income Families

Abstract

Social work is leading the development and application of financial capability to promote financial security among low-income families, yet little is known how the components of financial capability theory explain savings. This article operationalizes three constructs of financial capability: objective knowledge and financial self-efficacy as two internal factors, and welfare eligibility restrictions as an external factor. Data is drawn from a sample of low-income families using restricted data from the nationally representative 2009 Canadian Financial Capability Survey (N = 15,519). Path models were analyzed to explain three outcomes: saving for children’s postsecondary education, retirement planning, and inability to manage a $500 expense. Financial self-efficacy fully mediated the relationship between objective knowledge and education saving. For retirement planning and a small expense, the best model was partial mediation with the influence of objective knowledge on outcomes passing through self-efficacy. The external factor was not statistically significant in any model. Findings suggest that improving financial literacy through education may not be sufficient to build financial capability. Financial capability interventions can reinforce learning by explicitly targeting self-perceptions of one’s ability to manage finances. More research is needed to better understand the impact of social welfare policies on savings and asset building practices.

Keywords: financial capability, financial self-efficacy, assets, welfare policies, Canada