Financial and social savvy amongst earned income tax eligible households: The influence and importance of social knowledge, program participation and financial capability in household wealth-building behaviors

Financial capability for Americans is low overall (Lusardi, 2010). When paired with the added challenge of poor financial resources, low- and moderate-income households face significant challenges in meeting the demands and personal responsibility inherent in long-term wealth and financial planning (Lusardi & Tufano, 2009). Social policies aiding families through tax credits serve to raise familial income, improve work effort and earnings, and improve school performance. By providing a refundable credit, these types of programs help to offset regressivity in the tax code (Marr et al., 2015). Additionally, these types of credits are needed for low- and moderate-income households because those households face financial challenges since the end of the Great Recession that are more complex in terms of navigating the current financial landscape to build overall financial well-being and wealth (Campbell, 2006). There is no current research pairing financial capability with social program policy in attempt to gage how financial decision making is influenced by either. I seek to fill this gap by creating two indices measuring financial understanding and ability from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation's 2012 National Financial Capability Study, State-by-State Survey. My two indices-- the financial savvy index (FSI) and the social, program and experiential ability financial savvy index (SAFSI), provide the first index score for financial capability for American adults. I pair these financial capability measures with the use or availability of the Earned Income Tax Credit (EITC) program to measure influences on wealth building behaviors, including homeownership, educational account ownership and understanding of the level of retirement funds needed, and on wealth detrimental behaviors, including spending more than income and over drafting the personal checking account. I find that financial capability, rather than EITC level or level of taxation, has the greatest influence on wealth behaviors for low- and moderate-income households. These indices and their influence point to different possibilities in service provision, education and policy for low- and moderate income households to meet the demands of the current financial structure. They also create a different approach to poverty intervention by providing a new perspective toward wealth-building strategies.