Unlocking Financial Well-Being Through Financial Literacy and Capability: A PLS-SEM Analysis of Households in Devchuli Municipality, Nepal

Abstract

Background: Financial literacy plays an important role in enabling individuals and households to make informed financial decisions, manage income and expenditure, develop effective saving and budgeting practices, and improve financial well-being. However, limited financial knowledge, inadequate financial planning, and insufficient income can create challenges for effective household financial management.

Purpose: This study examines the role of financial literacy in the financial well-being of households in Devchuli Municipality, Nawalpur. It explores the financial management challenges faced by households and assesses the relationship between financial literacy, financial capability, and financial well-being.

Design/methodology/approach: The study adopts an explanatory research design and is grounded in Financial Empowerment Theory. Data was collected from 401 households in Devchuli Municipality using purposive sampling. Descriptive and inferential statistical methods were employed, while Structural Equation Modeling (SEM) was used to examine the relationships among the study variables.

Findings: The findings revealed that lack of financial literacy, insufficient income, and unexpected expenses were the major financial management challenges reported by households. The SEM results showed that financial literacy significantly influenced financial capability and financial well-being. Financial capability also had a significant positive effect on financial well-being and partially mediated the relationship between financial literacy and financial well-being.

Conclusion: The study concludes that financial literacy is an important factor associated with household financial well-being, both directly and through financial capability. Strengthening financial literacy, budgeting and saving practices, financial education, and access to inclusive financial services may support more effective household financial management and improved financial well-being.