What, Me Worry? Financial Knowledge Overconfidence and the Perception of Emergency Fund Needs

Abstract

We examined the association between financial knowledge overconfidence and the perception of emergency fund needs using the 2016 Survey of Consumer Finances (SCF) dataset. Only 28% of respondents reported a perceived amount of emergency funds needed that would cover at least 3 months of estimated spending. We conducted an OLS regression analysis on the log of the ratio of perceived emergency fund needs to household monthly expenditure. Overconfident respondents perceived a ratio 21.4% lower than those who had objective and subjective financial knowledge above median levels. Overconfident respondents might be underestimating emergency fund needs, suggesting the importance of not only increasing objective financial knowledge but also making consumers aware of the limitations of their financial knowledge.

Keywords: Emergency Fund, Financial Knowledge, Overconfidence, Subjective Emergency Fund, Survey of Consumer Finances

JEL Classification: G51;G53; G40;D14;D15