How to Measure Financial Well-being in Latin America
As is widely known, financial inclusion is a concept that includes, on the one hand, the supply of financial products by different organizations and, on the other, the demand for such products by individuals. Most countries have tools to measure access, use and quality of financial products and services, but few assess their impact on people’s well-being.
To remedy this situation, CAF joined Finagro, the Financial Superintendency of Colombia and the University of Los Andes, to conduct a study that provides a first measurement of financial well-being in Latin Americans, based on research by the Consumer Financial Protection Bureau (CFPB) and the results of CAF’s financial skills surveys in Argentina, Bolivia, Chile, Colombia, Ecuador, Paraguay and Peru.
The CFPB defines financial well-being as the state in which a person can fully meet their current and ongoing financial obligations, can feel confident about their financial future, and is able to make decisions that allow them to enjoy life.
On the other hand, CAF surveys assess people’s financial abilities, namely knowledge, skills, attitudes and behaviors as regard financial issues. While these questions are not identical to those proposed by the CFPB, we identified a number of questions from CAF’s financial skills measurement surveys that best fit the financial well-being elements raised by the CFPB.
The following table shows the financial well-being elements proposed by the CFPB, as well as the CAF survey questions that match the definition of financial well-being proposed by this institution.
|
CFPB Index Component |
CAF Survey Question |
|
Control of daily and monthly finances |
*Before buying something I carefully ponder if I can afford it
*I pay my bills on time |
|
Ability to absorb a financial shock |
*Sometimes people find that their income is not enough to cover their expenses. Over the past 12 months, has this happened to you?
*In the event of losing your main source of income, how long would you be able to continue to cover your expenses without borrowing money? |
|
Financial freedom to make decisions that allow you to enjoy life |
*I’d rather spend money than save for the future
*Would you say that your household’s total monthly income is regular and stable? |
|
Meeting financial goals |
*How often do you meet your budget? – Always
*I set long-term savings goals and strive to meet them |
The country analysis shows the following highest scores: Chile (66) and Colombia (63), followed by Bolivia (59) and Peru (58), and finally Ecuador (57), Paraguay (56) and Argentina (55).
Our main results show that, firstly, the financial well-being index provides information beyond traditional financial measures. This means that, even when a person is a member of a relatively disadvantaged group, there may be compensating factors or strategies that provide opportunities for them to improve their financial well-being.
Secondly, the differences in average financial well-being were greater based on saving behavior than borrowing behavior. This finding suggests that not having or not using formal savings products may be more detrimental to financial well-being than lacking access to formal credit.
Thirdly, people with higher levels of financial knowledge and skills enjoy a greater financial well-being on average.
Fourthly, there are key variables that explain financial well-being, such as previous experience with the financial sector, shopping around before deciding where to acquire a new financial product, and personal participation in household financial decisions.
Our findings suggest some opportunities to improve financial well-being through financial inclusion and financial literacy programs:
- Adequately including attitudes and behaviors such as savings, shopping around before deciding where to acquire a new financial product, and personal participation in household financial decisions in these programs, could have a significant impact on people’s financial well-being.
- Our discoveries also show that financial knowledge is important for financial well-being. It is therefore imperative that both public and private institutions implement programs that effectively promote financial skills through behavior-changing interventions, such as proper teaching times, learning by doing, providing reminders, heuristics, educational entertainment tools, personalization and socialization.
Lastly, more research is needed to understand what drives financial well-being in order to better design inclusion and financial education programs in the different Latin American countries.
