What are the determinants of financial well‐being? A Bayesian LASSO approach

Abstract

The financial well-being (FWB) of individuals is a topic that is becoming increasingly important across a multitude of disciplines. In this study, we use the 2016 National Financial Well-Being Survey administered by the Consumer Financial Protection Bureau to assess the determinants of an individual's FWB. We identify 144 potential covariates that could explain variation in the FWB score of individuals. The statistical methodology of choice is the Bayesian LASSO, which is a covariate selection algorithm that also allows for the importance ranking of covariates. Out of the 144 potential covariates, we find that 26 have 95% credible intervals that do not contain zero. Broadly speaking, the results show that objective measures of financial competency and psychological and sociological factors contribute the bulk of the explanatory power that help explain an individual's FWB score.

Digital financial literacy and financial well-being

“…Readers should be cautious as our findings may not be generalizable to older adults or marginalized populations with limited mobile service access. Another limitation is that our regressions could not account for variables reflecting the potential capability and inclination of participants to achieve financial well-being, such as financial goal setting and savings habit (Lacombe and Khatun, 2023). Our identification strategy could also benefit from more exogenous instruments that are independent of the error term.…”

“…The link between financial literacy and financial well-being is rooted in the idea that individuals with financial knowledge are more likely to access financial services, engage in positive financial behaviors, and achieve higher financial well-being (Fan and Henager, 2022;Lee et al, 2020;Utkarsh et al, 2020). Financial hardship and stress were found to predict financial well-being (Lacombe and Khatun, 2023), and mediate the effects of financial literacy and financial behaviors (Fan and Henager, 2022;Zhang and Chatterjee, 2023). Digital financial literacy was associated with increased use and awareness of mobile financial services (Long et al, 2023;Yoshino et al, 2020), positive financial behaviors (Rahayu et al, 2022a), and ultimately financial well-being (Jhonson et al, 2023;Rahayu et al, 2022b).…”