THE POWER OF FINANCIAL BEHAVIOR IN EMERGENCY FUNDS: EMPIRICAL EVIDENCE FROM A DEVELOPING COUNTRY

Abstract

Emergency funds are considered a buffer against financial shocks, especially for the informal workforce or individuals living in developing countries with a lower middle income. Hence saving money for emergency circumstances is important. This research investigates the role of financial literacy in emergency funds. Financial literacy is approached in this research in three aspects: financial knowledge, financial behavior, and financial attitude. Logistic and order logistic regressions are applied to analyze the data collected from the Southeast region of Vietnam, a developing country in Asia. The results show that those with better financial behavior are more likely to have emergency funds with savings adequate for covering 3 months’ worth of living expenses or more, in comparison with those who have worse financial behavior. Financial knowledge and financial attitude, however, are not found to have a statistically significant impact on saving for emergency funds. In addition, gender is found to not play an important role in emergency funds, but income level is a crucial determinant of the size of emergency funds. These findings provide empirical evidence regarding developing countries with lower middle income to support the literature on personal finance and provide policymakers with suggestions on how to improve individuals’ financial behavior and encourage savings for emergency funds.