The emerging concept of financial wellbeing and its relevance to the debt-taking behaviour of Australian households: issues and empirical analysis
Creators: name: TAHIR, Muhammad
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350205
subject: Household finance and financial literacy
classificationCode: 350208
subject: Investment and risk management

description: Recent statistics show a steady rise in Australian household debt, which increased by more than 80% from 2003 to 2016, while household assets only increased by 50% and gross household income grew by less than 40%. Research suggests that debt taken beyond means can cause health problems such as anxiety and depression, mental health issues, drug addiction, heart problems, or migraine headaches. Given the negative consequences of rising household debt, it is important to identify factors relevant to the reduction of debt-taking behaviour by Australians.
 
Extant research has found that financial literacy helps to improve financial decisions, including decisions to take on debt. However, given the critique on financial literacy by behavioural finance and bounded rationality theory, money-related behavioural factors (such as non-impulsive behaviour and future-orientation) are deemed more relevant to financial decisions than financial literacy. Impulsivity is linked to the concept of `hyperbolic discounting', a psychological bias which means that impulsive and short-term-oriented individuals make sub-optimal and non-rational financial decisions. In contrast, individuals exhibiting non-impulsive behaviour and future-orientation are more likely to make optimal financial decisions and these factors enhance (mediate) the association of financial literacy with financial wellbeing and financial decision-making.
 
Another factor that could be relevant to improving financial decisions is financial capability. The critics of the financial literacy factor argue that the practical ability of households to carry out financial tasks, referred to as financial capability, matters more than their prior financial knowledge when making financial decisions. In a recent development, the Australian Government has initiated a financial capability program and designed a new website  to promote these practical skills. However, given the global emergence of the concept of financial wellbeing, which is one's perception of personal current and future financial condition, there is still room for improvement in the Australian context. Financial wellbeing is considered a dominant factor because research shows that personal perceptions of financial condition are relevant in determining the effectiveness of financial decisions. A perception of strong financial condition would entail effective financial decisions, both in the short run and long run.
 
Overall, this thesis incorporates the concepts of financial literacy, non-impulsive behaviour, future-orientation, financial capability, and financial wellbeing for the following reasons. First, these concepts are interlinked and related to personal financial management. Second, money-related behavioural factors (non-impulsive behaviour and future-orientation) have emerged with the critique on financial literacy because behavioural finance theory contends that the behaviour of individuals is more relevant to their financial decisions than their prior knowledge. Third, since research in personal finance has progressed from financial literacy to financial capability and from financial capability to financial wellbeing, this thesis is the first to explore their association with debt-taking behaviour. Fourth, no other study has analysed these concepts jointly and explored their association with debt-taking behaviour. Thus, this thesis investigates whether these key variables could reduce the tendency of Australian households to take on debt.
 
Another objective of this thesis is to explore whether financial literacy, non-impulsive behaviour, future-orientation, and financial capability are associated with financial wellbeing in Australia. This is because financial wellbeing is still an emerging concept, and researchers are exploring the factors associated with financial wellbeing. Extant research shows that financial wellbeing is a strong predictor of overall wellbeing and is associated with lower debt levels.
 
Two types of analyses, cross-sectional analysis and panel analysis, were conducted using the nationally representative Australian dataset, Household, Income and Labour Dynamics in Australia (HILDA). In cross-sectional analysis, the 2016 wave of HILDA was analysed, whereas seven waves of HILDA (waves 11 to 17) were employed in panel analysis. The analyses were conducted in three phases. The first phase of the analyses indicated that all the key variables were negatively associated with debt-taking behaviour. The second phase found that financial wellbeing in t-1 and in t time period has a strong statistically significant negative association with debt-taking behaviour. Finally, the third phase highlighted that financial literacy, non-impulsive behaviour, future-orientation, and financial capability are positively associated with financial wellbeing. Overall, all the hypotheses of the thesis were supported by the cross-sectional and panel analyses. Also, the main findings were found to be robust using several robustness checks.

This thesis makes several contributions to the literature on personal, household, and consumer finance. This thesis is the first to study the tendency of households to take on debt where other studies have only used the amount of debt to indicate the debt-level. Furthermore, this thesis is the first to examine the relationships between financial literacy, non-impulsive behaviour, future-orientation, financial capability, financial wellbeing, and debt-taking behaviour. Moreover, no other research has examined the mediating roles of financial capability, non-impulsive behaviour, future-orientation, and financial wellbeing. Overall, this thesis concludes that the ability to manage household finances should be improved to raise levels of financial wellbeing, which in turn can cause a reduction in the debt-levels of households.

The findings of this thesis broaden our understanding of the problem of rising household debt-levels and suggest that households should avoid impulsive behaviour and develop financial capability to raise their level of financial wellbeing, as these variables are negatively associated with debt-taking behaviour. Financial planners can convey the negative consequences of impulsive behaviour to their clients and encourage them to employ self-control and create proper financial plans. Furthermore, the results suggest that curricula which include a financial literacy component should be revised to include teaching of practical aspects of managing personal finances. Finally, as this thesis analyses data collected before the COVID-19 pandemic started in late 2019, it is acknowledged that its findings do not reflect the most recent financial attitudes and behaviour of Australian households.