Impact of Financial Planning on Risk Appetite: A Mediation Effect of Financial Literacy

Financial behavior plays a crucial role in shaping individuals' decisions regarding money management and their willingness to accept risk. This research examined how financial planning and financial literacy influence risk tolerance among young adults. Using a structured questionnaire approach, the primary data was gathered from 76 participants in India, primarily young people between 18 and 35. The analysis employed Pearson correlation analysis, regression modeling, and mediation testing techniques. Results demonstrated strong positive correlations between financial planning, financial literacy, and risk tolerance. However, financial literacy showed no meaningful relationship with risk tolerance. Regression findings confirmed that financial planning directly and significantly affects individual risk appetite, while financial literacy demonstrates neither direct nor indirect influence on risk tolerance. Consequently, financial literacy fails to act as a meaningful mediator in the financial planning risk tolerance relationship. Literature suggests that demographic characteristics and behavioral heuristics work alongside financial literacy when assessing risk appetite. These findings offer valuable insights for financial service providers and policymakers seeking to develop educational programs and investment guidance for young adults, emphasizing practical financial planning skills and portfolio diversification strategies aligned with individual risk preferences.