Globally, individuals strive to improve their financial lives. They make financial decisions (spend, save, borrow, etc.) to grow their assets and protect their resources in pursuit of improving their financial status/well-being/health. However, financial decisions can prove to be particularly challenging. Individuals in today's world are witnessing a rapid change in the financial system because of a growing global economy, technological advancement, and proliferation in financial products and services (for instance easy availability of loans). Individuals can easily find themselves caught up in an unpropitious economic situation if it is not handled with a responsible financial behavior (FinB). Financial problems have the potential to negatively impact not only an individual but the economy at large. The World Bank (2013) notes that globally policymakers are concerned with how the financial well-being (FWB) of households can be improved to enhance the financial sector and increase its stability. It is essential to identify specific personality traits, knowledge, or behaviors that help some individuals to endure difficult times and flourish in good times as compared with others in similar situations. Such knowledge can be useful for various stakeholders to facilitate and coordinate their efforts to improve the FWB of individuals (Netemeyer et al., 2018; Riitsalu and Murakas, 2019). Despite the growing need to understand the antecedents of FWB, limited research has been conducted so far in this area (Collins and Urban, 2020). Holistic research on factors elucidating diversities in FWB is still in a nascent stage (Brüggen et al., 2017). Brüggen et al. (2017); Netemeyer et al. (2018); Collins and Urban (2020); and Riitsalu and Murakas (2019), among others, called for a more comprehensive and integrated approach to understand how FWB operates vis-à-vis various FinBs, knowledge, and personality traits.

The purpose of this research is thus 3-fold.

First, existing research in the field of personal finance is restricted to financial inclusion, financial literacy, capability, or specific FinBs. However, FWB is still a novel term in the financial inclusion community (Brüggen et al., 2017; Collins and Urban, 2020). Zyphur et al. (2015) pointed out that research in the area of FWB is still sparser than that of overall well-being. Existing studies either resort to objective measures, such as income, savings, debt-to-income ratio, or a single statement satisfaction question to gauge FWB. However, people in a similar objective financial condition may perceive their FWB differently (i.e., positively or negatively).

Consequently, individuals in an identical objectively measured financial situation may consider their personal FWB more or less positively (Grable et al., 2012). Therefore, the use of any single approach, i.e., subjective or objective, may not be suitable for evaluating a multifaceted and personal phenomenon such as FWB. To the best knowledge of the authors, no study has investigated the interplay between responsible FinBs, financial knowledge, psychological factors, and FWB (subjective and objective). This study aims to empirically test the said interplay in the Indian context.

Second, prior research mainly relies on objective financial knowledge and measurable behaviors while ignoring the role of confidence and motivation (Klapper et al., 2014; OECD, 2016). In contrast, according to their meta-analysis, Fernandes et al. (2014) asserted that financial literacy can predict a mere 0.1% of differences in FinBs. On the other hand, Vlaev and Elliott (2017) and Xiao and Porto (2017), among others, vouched for the higher role of confidence and motivation in explaining key FinBs. Knowledge of the interaction of FinBs with constituents of financial literacy can be instrumental in designing financial education programs to assist individuals in achieving their desired financial goals. This research considers the various constituents of financial literacy, i.e., objective knowledge, awareness, experience, and confidence levels, to throw light on the interplay of these components and their ability to predict FinBs and, ultimately, FWB.

Third, extant literature (Xiao and Dew, 2011; Kempson et al., 2013; Loke, 2017) tends to examine the effects of individual characteristics on one or more selected key behaviors separately. Incorporating various domains of personal financial management is essential since each of these domains has a different but significant impact on the well-being of individuals (Xiao and Dew, 2011). This study incorporates an array of FinBs to factor in various dimensions of personal financial management.

In this research, we aim to comprehensively understand the pathways to FWB and identify key predictors in the context of a developing economy, India. The results of this study can help understand the distribution of FWB across various sections of society, observe trends, and assess the effectiveness of prevalent policies, products, capabilities, and behavioral interventions.

The conceptual model of this study finds its roots in the theory of family management system model as propounded by Deacon and Firebaugh (1988). In this study, a family resource management model is applied to individuals to analyze the components of their FWB, as depicted in Figure 1.

We conceptualize input or resources for throughput (i.e., responsible financial behavior, FinB) as components of financial literacy (i.e., awareness, objective financial knowledge, experience, and confidence) and psychological factors (i.e., time orientation, impulsivity, social status, self-control, and locus of control, LOC). The opinion of including psychological factors as input is supported by Mokhtar and Husniyah (2017). The throughput process has been measured using FinBs, namely, credit aversion, daily ease of meeting financial commitments, informed decision making, monitoring, informed product choices, spending attitudes, planning, and savings. The output component is characterized as FWB (objective and subjective).

The elaborated conceptual model for this study, with additional interlinkage among the constructs, is illustrated in Figure 2. The model proposes that given a socio-economic environment, individuals with a high level of financial literacy are expected to have responsible FinBs, which are also influenced by the presence of positive psychological factors. Further, responsible FinBs are expected to affect FWB positively. This relationship can be either: (a) direct relationship, where particular FinB will affect perceptions of an individual of their FWB irrespective of how they are actually/objectively doing financially, or (b) indirect relationship, where particular FinBs will affect the objective financial situation, which would then possibly influence perceived FWB.

Socio-demographic characteristics are believed to shape the choices available to a person, how psychological characteristics predict behaviors, and how individuals perceive their well-being. Their effect is examined by correlational investigations unlike the relationships of other independent variables, which are explained as direct or indirect causal relationships. These relationships are analyzed by multigroup analysis (MGA) involving 440 comparisons of the proposed model.

The conceptual model shares many elements with the framework of the Consumer Financial Protection Bureau (CFPB) (2015) and Kempson et al. (2017). Both models conceptualized FWB to be primarily driven by FinBs, which, in turn, are ascertained by the resources of an individual. Further, both models consider knowledge, skills and attitudes, and psychological traits as indirect influencers of FWB through FinBs. In the view of the authors, psychological traits can also affect the perception of being financially well-directly. Further, the socio-economic environment is considered as a direct influencer for all the factors considered except behavior in Kempson et al. (2017), and behavior and well-being in CFPB (2015). In the view of the authors, the effect of socio-demographic variables should be considered in each relationship, i.e., they should be considered as moderators that can influence the strength and even the directions of the proposed relationships among all the constructs of the model. Lastly, unlike the two models, we also explicitly differentiate between the objective situation and the perception of well-being. This is an exploratory relationship proposed by the model to provide further insights into the existing knowledge of the pathways to FWB. The details of the constructs and the operational definitions used in the study are presented in Table 1.

Managing personal finances and coping with financial exigency are essential for the well-being of an individual and their household, and the economy at large. As a response to this need, various stakeholders focus on financial inclusion, i.e., access to various financial products and services (Alliance for Financial Inclusion, 2016, 2017); financial literacy, i.e., building capacity (Lusardi and Mitchell, 2014); and financial capability, i.e., enhancement of knowledge and change in behavior (Stumm et al., 2013; CFPB, 2018). It can be gathered that the common aim of all the above mentioned is toward enhancing the overall FWB of an individual (Kempson and Poppe, 2018). However, FWB is still a novel concept that lacks a conceptual definition and standardized measurement scales.

A handful of studies have attempted to explore comprehensive FWB models. Further, existing proposed models of FWB are predominantly established and examined in developed countries, such as the United States (CFPB, 2015), Norway (Kempson et al., 2017), the United Kingdom (Hayes et al., 2016), Canada (Financial Consumer Agency of Canada, 2018), Australia, and New Zealand (Prendergast et al., 2018a,b). It is important to understand that the theories developed and evidence obtained from data of developed economies may not apply in developing economies (Burgess and Steenkamp, 2006). Xiao et al. (2014) asserted that it is necessary to carry out studies in other developed and developing economies to enhance the understanding of FWB in various socio-economic contexts. Indian studies have largely focused on financial inclusion and financial literacy. However, only few research studies have ventured into the novel concept of FWB.

The gap relating to personal finance and FWB literature could be summarized in the necessity of proposing a holistic model, which can accurately identify the pathways to the FWB of Indians. Hence, in order to fill this gap, this study aims to empirically examine the relationship of responsible FinBs with FWB and how these relationships are determined by various psychological factors, financial literacy components, and sociodemographic factors.

On preliminary analysis of the total 494 responses, missing or invalid responses were observed in 100 survey responses, thus leaving 394 responses for the final empirical analysis. The normality is gauged by comparing the skewness and kurtosis of all the interval scale data. The indicators are under the acceptable value of 2 (skewness) with two exceptions, i.e., credit aversion 3 (−2.164) and ObjFin_1 (−2.649). Further, none of the kurtosis values of an indicator exceeds 7, indicating no significant issues with univariate normality. Following the preliminary analysis, we moved toward the evaluation of measurement and structural models.

It is also important to note here that in the proposed model construct “FinB,” responsible financial behavior, is a reflective-formative type hierarchical component model. To obtain the true relationships of the latent variables on higher order constructs (HOC) in the structural path model, the two-stage approach is employed as suggested by Henseler and Chin (2010). In stage one, a repeated indicator approach is used to obtain the latent variable scores for lower-order constructs of “FinB;” and in stage two, these latent variable scores are used for computing the full model. Further, the assessment of the HOC is in line with the procedure followed for other constructs.

It can be concluded that 12 out of the 17 tested effects in the form of eight hypotheses, as proposed in the research model, are empirically supported. Specifically, we provide empirical evidence that responsible financial behaviors (FinBs), psychological factors, components of financial literacy, and objective financial situation have a significant effect on the financial well-being (FWB) of an individual. In addition to establishing these results, the reliability and validity of the constructs were within the threshold limits. Value of the coefficient of determination (R²) extracted for perceived FWB is 26%, and responsible FinB is 22.7%. These are considered as moderate values (Ramalho and Forte, 2019; Castro-González et al., 2020), especially in consumer behavior regarding finances. This value of variance is at par with or above those accounted for by other recent studies formulating complex FinB models by PLS-SEM in developing countries (Ali et al., 2015; Ramalho and Forte, 2019; Zulaihati et al., 2020).

Thus, we confirm the satisfactory level of the model by not just the value of R² but also the effect size and predictive relevance. The empirical evidence confirms substantial to moderate effect size (f ²) of constructs of interest, namely, objective financial situation, responsible FinB, financial awareness, and psychological factors (time orientation and locus of control) (Cohen, 1988). Further, the Q²-values of all the endogenous constructs with an omission distance of seven have a non-negative and above zero value, establishing the predictive relevance of the model.

Among all the factors directly associated with responsible financial behavior (FinB) in the complete model, financial confidence (β = 0.294, t = 5.787, p < 0.001) has the highest effect followed by psychological factors time orientation with a high negative impact (β = −0.166, t = 3.496, p < 0.001) and social status with a positive impact (β = 0.14, t = 1.92, p = 0.05). The strength of these relationships does not observe much difference when indirect effects are accounted for, and the only increase in the β values that is observed is that for financial confidence (β = 0.3, t = 6.021, p < 0.001). The results imply that individuals with higher confidence in their financial skills have higher responsible FinBs. This observation is consistent with the results of Bannier and Neubert (2016), Farrell et al. (2016), and Fernandes et al. (2014), those asserted that greater confidence is linked with responsible FinBs, such as higher investments, savings, the likelihood of retirement planning, and better credit score.

Allgood and Walstad (2016) found the confidence level to have a more substantial influence on the financial behaviors (FinBs) as compared with financial knowledge. Further, based on the meta-analysis of 201 prior studies, a weak relationship between financial literacy and FinBs, with financial literacy merely explaining 0.1% of the variation in FinBs, is observed by Fernandes et al. (2014). A similar result is obtained for the conceptual model in which confidence has emerged as a superior predictor of responsible FinB in contrast to other components of financial literacy, such as objective financial knowledge. The result that factual or objective knowledge is not a sufficient driver of FinBs finds support in the studies of Kiviat and Morduch (2012) and Serido et al. (2013).

While analyzing the significant effects of various psychological factors impacting responsible financial behavior, it is observed that high social status has (β = 0.14, t = 1.92, p = 0.05) the highest positive effect followed by an internal locus of control (β = 0.118, t = 2.358, p = 0.018). The results imply that individuals with high concerns for society, i.e., high social status score and with an internal locus of control, i.e., feeling in control of their destiny, are involved in responsible FinBs. The positive relationship of social status with FinBs is also established by Frederiks et al. (2015), Kempson et al. (2013), and Sundarasen et al. (2016). These findings are also consistent with previous studies that have reported that internal locus of control is linked with positive FinBs, such as high savings rates (Cobb-Clark et al., 2016), better personal financial management (Perry and Morris, 2005; Angulo-Ruiz and Pergelova, 2015; Mien and Thao, 2015), and informed product choice (Hoffman et al., 2003).

Inverse relationship is observed for time orientation (β = −0.166, t = 3.496, p < 0.001) and impulsivity (β = −0.109, t = 2.26, p = 0.024) with responsible FinB. These results imply that individuals with short-term time orientation and high impulsivity show poor FinB. These results are consistent with observations where long-term time orientation is associated with retirement savings (Jacobs-Lawson and Hershey, 2005), less credit (Benton et al., 2007), and higher savings (Howlett et al., 2008). Further, impulsivity is associated with lower retirement savings (DeHart et al., 2016), over-indebtedness, and lower savings (Gathergood and Weber, 2014).

Thus, from the above discussion, we can infer that individuals with higher confidence in their skills to take financial decisions, long-term time orientation, more concern for social status, low impulsivity, and high locus of control are expected to engage in responsible FinB. At the lower order of the construct, savings (β = 0.244, t = 33.912), credit aversion (β = 0.238, t = 30.448), and spending restraint (β = 0.236, t = 31.33) emerge as the most significant and positive relations for responsible FinB. These results suggest that among all the responsible financial behaviors evaluated, active savings, credit management, and spending restraint are the most critical ones.

For objective financial situation, responsible FinB (β = 0.428, t = 9.816, p < 0.001) has the highest significant positive impact followed by financial confidence (β = 0.128, t = 4.879, p < 0.001). This result implies a better objective financial situation for individuals with high financial confidence and responsible FinB. Among the psychological factors, LOC and SS have a significant positive relationship with the objective financial situation. These relationships imply that individuals with an internal locus of control and a high concern for social status have a better objective financial situation. Extant literature supports a positive association of internal locus of control with objective financial situations, such as higher earnings (Heineck and Anger, 2010), wealth accumulation (Cobb-Clark et al., 2016), and financial status (Morgan and Eckert, 2004). Further, impulsivity and time orientation have a significant negative relationship with the objective financial situation. This relationship implies that high impulsivity and short-term time orientation are associated with the poor objective financial situation.

Among all the factors affecting FWB, the direct effect of the objective financial situation (β = 0.205, t=3.6, p < 0.001) and locus of control (β = 0.171, t = 3.178, p < 0.001) is observed to be highest. Positive and significant association of objective financial situation with financial satisfaction, which can be considered a proxy of FWB, is also reported by Shim et al. (2009) and Xiao et al. (2014). The strength of the relationships of various constructs changes when considering the total-effects they have on the construct of interest, i.e., perceived FWB. The strength of the relationship of responsible FinB with FWB increases from 0.122 to 0.21 when considering the total effect. Responsible FinBs positively impact the objective financial situation, which in turn positively and significantly impacts the perceived FWB of an individual (β= 0.21, t = 3.711, p < 0.001), as also evident in the results of Rowley et al. (2012) that adopting responsible FinBs facilitate individuals to take better financial decisions and also helps them cope with changes. A positive direct link of responsible FinB and FWB is also established in the studies of Kempson et al. (2013), Kempson et al. (2017) and Netemeyer et al. (2018).

Among the psychological factors impacting financial well-being (FWB) perception, internal locus of control (β = 0.196, t = 3.798, p < 0.001) has the highest positive impact, consistent with observations of Kempson et al. (2017), Mahdzan et al. (2019), and Prawitz and Cohart (2016). This is followed by self-control (β = 0.156, t = 3.107, p = 0.002), consistent with Strömbäck et al. (2017). Impulsivity (β = −0.145, t = 2.89, p = 0.004), and social status (β = −0.102, t = 1.751, p= 0.08) have significant negative effect on FWB. These results imply that individuals with a high internal locus of control, i.e., they feel they are in control of their destiny, and self-control have higher perceived FWB. On the other hand, individuals with high impulsivity and high concern for society have a negative perception about their FWB, as is evident in the studies of Kempson and Poppe (2018), Shepard and Turner (2019), and Strömbäck et al. (2017).

Surprisingly, none of the components of financial literacy other than financial confidence (β = 0.063, t = 2.987, p = 0.003) has a significant positive relationship with perceived FWB. The empirical results also provide strong evidence to support the relationship between the constituents of financial literacy (awareness and confidence) with responsible FinB, i.e., Awareness –> Finconfidence –> FinB. This implies higher financial awareness results in higher financial confidence, which, in turn, influences the FinBs positively. These results are consistent with the observation by Allgood and Walstad (2016), which reported that financial confidence is the better predictor of FinB as compared with financial knowledge. It can be argued that as confidence and perception are both self-felt phenomena, they need not be associated with the underlying objective knowledge and are more likely to move in the same direction, whereas the other constituents of financial literacy, i.e., objective financial knowledge and financial experience, were more factual. Thus, there is a possibility that an individual may have lower levels of objective financial knowledge while having a higher confidence level.

Empirical results provide strong evidence of the relationship between responsible FinB, objective financial situation and perceived financial well-being (FWB), i.e., FinB –> ObjFin–> FWB. This result implies that individuals who engage in responsible FinB experience a higher objective financial situation, which ultimately leads to a higher perception of FWB. Responsible FinB encompasses a basket of positive financial management behaviors, such as saving regularly, not overspending, making informed choices, etc. The positive relationship between responsible FinB and objective financial situation indicates that individuals who report engaging in or believing in traits of responsible FinBs can achieve a higher objective financial situation. For example, individuals who believe in saving regularly (responsible FinB) report higher levels of savings in terms of income saved (objective financial situation).

Further, the strong positive relationship between objective financial situation and perceived FWB implies that individuals experience higher FWB when they have a high objective financial situation. This relationship implies that the perception of being financially well is supported by the real objective financial situation of an individual (i.e., savings level, loan due, contingency planning, etc.). Thus, the objective financial situation goes hand in hand with the perception of one's FWB. These results find support in the studies of Shim et al. (2009) and Xiao et al. (2014) that reported good FinB leads to higher subjective FWB, while irresponsible FinB adversely affects the FWB of an individual (Kim and Garman, 2003).

This research study presented results of an empirically tested holistic financial well-being (FWB) model in a developing economy context. The results showed that the objective financial situation of an individual, as measured by self-reported ease of meeting routine financial commitments, level of liquid savings, status of credit due, ability to absorb financial shock, diversification of investment portfolio, and retirement planning, is positively correlated with her/his perceived/subjective FWB (β = 0.205, p < 0.001). However, FWB and objective financial situation are not perfect correlates. This result implies that the subjective FWB of individuals, as captured in the study, not only reflects the well-being of individuals as measured by the traditional objective wellness indicators, but it also reflects other possible contributors of FWB, such as experiences and expectations of individuals.

Financial behavior is associated with financial well-being directly and indirectly via objective financial situation. Although both the relationships are significant, a higher direct positive relationship is observed between FinBs and the objective financial situation (β = 0.428, p < 0.001). This implies that higher responsible FinB (as gauged by credit aversion, informed product choice, active saving, spending restraint, informed decision-making, planning, monitoring, and daily ease) is associated with a better objective financial situation, which, in turn, is related to higher perceived FWB. However, there are still certain aspects of responsible FinB that are not reflected via objective financial situation, but they directly enhance perceived FWB (β = 0.122, t = 2.061, p = 0.039). While this finding is not surprising, it reinforces the existing knowledge of the vital link between responsible FinB and the objective financial situation, i.e., what we do/actions and the results. This result has an important implication for the overall well-being and FWB, specifically.

The empirical evidence provides that psychological factors, namely, high impulsivity and concern for social status have significant negative relation, whereas internal locus of control and self-control have a significant positive relationship with FWB. Further, internal locus of control emerged as the highest impacting factor followed by self-control. High impulsivity and short-term time orientation are inversely related to responsible FinB, whereas internal locus of control and social status are observed to impact responsible FinB positively. Furthermore, short-term time orientation emerges to be the highest impacting factor, followed by social status.

The financial literacy components that significantly influenced responsible behavior are financial confidence and financial awareness. These results support the previous literature that contends limited role of objective financial knowledge in explaining FinBs when compared with factors related to personal characteristics, such as confidence and other psychological traits.

The strength of this study can be concluded in its contribution to the literature by introducing multiple personal, financial literacy, and behavioral components in a single framework and subsequently applying them to a novel context, i.e., South Asian developing country (India). Furthermore, FWB is measured using both subjective and objective measures. Although a sincere attempt is made to analyze and report FWB in a holistic manner, the respondents of this study are from urban areas, leaving scope for further research on rural population or comparative research that could test whether geography plays a role in determining FinBs and FWB. Further, the objective financial situation score in this study is derived from the self-reported data of the respondents. Banks or financial institutions, in the capacity of having access to personal financial data, can conduct research that further enhances the understanding of the relationships by comparing the reported and actual data on the financial situation.

This study is an earnest attempt to contribute to the growing body of scientific literature in the field. However, there remains a scope for further improvement. This study is based on respondents from urban areas, and further research can be conducted on rural population. Also, comparative research that could test whether geography plays a role in determining FinBs and FWB can be conducted. Thus, the results of the study should be interpreted with caution before generalizing them, as they are based on a specific sample without conducting a power analysis for the model.

The raw data (without respondents personal details) will be made available for academic use with due credit given to the authors.

KS was involved in all the steps of the process and was the primary writer of the text. GT was involved in the questionnaire development, data collection and analysis. MV supervised in the research design and analysis as well as write up of the text. All authors contributed to the article and approved the submitted version.

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.