Exploring the Association Between Objective Financial Literacy and Perceived Change in Financial Well‐Being: An Ordered Probit Analysis

Abstract

This study examines the association between objective financial literacy and perceived change in financial well‐being using nationally representative cross‐sectional data from the 2022 Survey of Household Economics and Decision Making (SHED), administered by the Federal Reserve Board ( N = 8643). Grounded in the Human Capital Theory (Gary Becker 1962), the study employs an ordered probit model to assess how financial literacy is associated with individuals' perceived change in financial well‐being over the past year. Among the three objective financial literacy measures, inflation knowledge, interest rate knowledge, and risk diversification knowledge, only inflation knowledge shows a statistically significant association with perceived change in financial well‐being. Respondents who correctly answered the inflation item were more likely to report being financially worse off compared to 12 months earlier. This association is consistent with the high‐inflation environment of 2022, during which greater awareness of rising prices may have coincided with heightened perceptions of financial strain. Interest rate knowledge and risk diversification knowledge do not exhibit statistically significant associations. Socio‐demographic characteristics show consistent associations with perceived change in financial well‐being. Higher levels of education, full‐time employment, and greater household income are associated with a higher likelihood of reporting being financially better off relative to 12 months earlier, whereas older age is associated with a lower likelihood of reporting being financially better off. Overall, the results suggest that objective financial literacy is not uniformly associated with perceived change in financial well‐being and that these associations vary across knowledge domains and socioeconomic characteristics. While awareness of inflation may coincide with greater perceptions of financial strain during periods of rising prices, socioeconomic resources such as education, employment, and income are associated with a higher likelihood of reporting positive perceived change in financial well‐being relative to 12 months earlier. For practitioners, these results emphasize the importance of contextualizing financial education and tailoring guidance to clients' circumstances. Financial planners and financial therapists may draw on this evidence to tailor their guidance to individuals navigating structural economic conditions and personal financial decisions.