6 CHAPTER II THEORETICAL FOUNDATIONS 2.1 Financial Literacy 2.1.1 Common Definition Even though there is no official definition of financial literacy, it is self- explanatory that “financial” means commonly engaged in dealing with money or credit, and “literacy” means possession of knowledge (Dictionary.com, n.d.). To explain it further, it means someone's ability to manage and handle their finances accordingly to save, invest, and spend (Lusardi and Mitchell, 2013). The financial literacy ability of the citizens of a country positively influences their consumer behavior, which eventually has an impact on the country's financial inclusion. This is in other words a kind of ability provided by the government to offer access to basic financial tools or services, like banks providing credit, saving accounts, money transferring, and offering investment and insurance. Thus, financial literacy is a part of financial inclusion. A country may have high financial literacy among citizens, yet this program has basic errors in citizens' access to financial services. This gap can best be filled through financial inclusion designed by the government. 2.1.2 Importance of Financial Literacy Financial education is taken into great consideration, more so since it relates to the wealth of persons and the community in general. A more educated individual will always be better placed to make good decisions on saving, investing, and borrowing. Financial literacy is an inevitability in this modern-day world. The financial trends and news are spreading quickly, and so is the economy. From a broader scope, financial literacy contributes hugely to the promotion of an economy's financial stability and growth. From an effective point of view, empowered individuals who are educated financially take part actively and effectively in the financial system. Consumers who are equipped with financial education can help themselves save and invest wisely while avoiding making mistakes in managing their money (Lusardi and Mitchell, 2013). Additionally, enhancing financial literacy among the population can help mitigate risks such as engaging in risky financial behavior and excessive debt. 7 Enhancing financial literacy can reduce economic liability, and at the same time increase awareness of financial or economic downturns which can result in economic stability (Hidayatinnisa' et al., 2021). 2.2 Materialism 2.2.1 Common Definition In the new era of technology where social life and lifestyle trends are moving rapidly through social media, there is a social occurrence that happens to be occurring in common society. Materialism is a social occurrence where people believe that material possessions and wealth are key to happiness and social status (Belk, 1985). Some individuals consider the possession of some type of certain material goods to happiness and social status. This phenomenon often influences consumer behavior leading to acquiring more goods and products to measure personal worth or success. This phenomenon commonly occurs in urban areas of developing countries, which is why this research focuses on Indonesia, a developing country. In academics, financial literacy is seen as having a multi-dimension, including various aspects of economic understanding and behavior. Financial literacy includes the ability to read, analyze, manage, and communicate about personal financial conditions that affect everyday living material (Huston, 2010). 2.2.2 Impact on Society's Consumer Behavior In Asia, materialism is considered a crucial culture and could benefit a whole society. This is because people with high materialism value have the potential to be more diligent in obtaining wealth to fulfill their consumptive needs (Awanis, Schlegelmilch, and Cui, 2017). However, this behavior will not always be beneficial as not everyone has their way of achieving the mentioned wealth. In some cases, people in the middle-lower class tend to be materialistic because of a trend or simply their ego to follow their surroundings in society. In many Asian cultures, materialism is not as simple as a personal choice but an expectation from society that influences their daily consumer choices and behaviors. Materialism and financial literacy correlate with each other because, with knowledge of financial literacy, materialism could be eliminated from daily society. People with high financial literacy value could manage their finances and make more 8 justified decisions regarding their transactions. It is proven that people with high materialistic value have more desires to fulfill their needs resulting in higher financial worries and a significant debt (Garðarsdóttir and Dittmar, 2012). The correlation between materialism and financial literacy is now crucial. Consumers need to be educated about financial literacy to mitigate the risks and effects of materialism. Consumers can decide more wisely and effectively financially rather than impulsively or emotionally driven purchases. 2.3 Technological Advancements and Consumer Financial Decisions 2.3.1 Influence of Technology Technological advancements have ultimately affected consumer behaviors and consumer financial decisions, especially in Indonesia. The innovation of smartphones, easy access to the internet, and social media platforms with emerging trends have transformed how consumers interact with products. Indonesia’s younger consumers such as Millenials and Gen Z, who are mainly adopting these technology advancements are the ones who have the most impact on their spending habits and financial decisions. Overspending and impulsiveness in buying are gestures commonly found in a materialistic culture, especially in a society with quick technological advancements (Awanis, Schlegelmilch, and Cui, 2017). This cultural behavior can be classified as one of the consumer behaviors commonly found in society in an advancing nation, in this case, Indonesia. This behavior led to challenges in financial management as the desire to own goods increased. Easy access to technology also includes easy access to financial information, allowing individuals with differences in background to obtain basic financial knowledge easily. Nowadays, individuals can access technology due to the widespread use of the technology needed and this could give individuals an advantage because it can help bridge the gap of financial literacy across different status groups. Basic budgeting to complex stock investment strategies can easily be accessed by individuals using online platforms or mobile applications. 2.3.2 Impact on Financial Decisions The combination of technology and consumer financial decisions got the most impact from the rise of online shopping and digital banking. With the availability of e- 9 commerce platforms and digital wallets or banking, consumers are increasingly making purchases and managing their finances from their own devices. This led to a change in spending patterns with an increase in impulse purchases. As much as technology exposes a wider range of access to financial information and tools, it has its downsides in managing spending and evading any financial risk that comes with it, such as overspending and debt. (Baihaqqy et al., 2020). Because Indonesia’s populations mainly consist of younger generations like Gen Z and Millenials, technology and consumer decisions become a combination (Katadata.co.id, 2021). Quick fashion trend waves followed by quick social media updates by influencers, influence consumer purchasing decisions to be more impulsive and overspending.