How Financial Capability Protects Financial Well-Being during COVID-19: A Pre- and Post-Pandemic Analysis

Abstract

Financial well-being represents both the material foundation and an essential component of overall household well-being. The outbreak of the COVID-19 pandemic at the end of 2019 significantly impacted a wide range of small and large business owners as well as wage earners across the United States, subsequently affecting the financial well-being of many households. In order to mitigate such adverse effects, this study aims to explore whether higher financial capability positively influences financial well-being. Consistent with findings from prior research on financial behavior, which suggest that stronger financial capability leads to improved financial well-being, this study further investigates the mediating effect of financial behavior. The analysis reveals that financial capability affects financial well-being indirectly through its influence on financial behavior. Moreover, a heterogeneity analysis shows that individuals with higher levels of education tend to possess stronger financial capability, which in turn leads to differences in financial well-being. Additional analyses suggest that financial capability serves as a necessary condition for achieving financial well-being.