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In conceptual terms, to become financially self-sufficient, an individual must acquire financial knowledge, skills and attitudes which in turn will enable autonomous informed decision- making. Studies show there are several processes through which individuals can become exposed to and adopt the necessary skills including financial socialization, financial education and formal financial advice (Danes, 1994; Jin & Chen, 2020; Jorgensen, Rappleyea, Schweichler, Fang, & Moran, 2017; Shim, Barber, Card, Xiao, & Serido, 2010). The term consumer socialization explains the process by which children acquire the appropriate knowledge and skills to allow them to function efficiently in society. It has long been believed that the learnings children are exposed to during their upbringing are the most influential on their financial knowledge and behaviour come adulthood. Several studies identify that children learn the most from their parents during their childhood as compared with other sources such schooling, work experience or formal financial education programs (LeBaron et al., 2019).
Some studies have also found that if children were to receive financial allowances from their parents, they often internalized the financial attitudes and adopted the financial behaviours of their parents (Zhu, 2018).
Although children are unlikely to hold financial responsibilities during their childhood years, exposure to financial concepts and development of financial capability levels is important for their financial behaviour when they enter adulthood (van Campenhout, 2015; Zhu, 2018).
Children can acquire knowledge through the socialization process in two main ways; through observation, and through active teaching. The former situation raises the question of how financially knowledgeable the parents are. Parents who lack financial knowledge are less likely to explicitly educate their children on financial concepts and behaviour. In the latter situation, there is mixed results regarding the impact of the parents on children’s financial behaviour.
Some studies have found that habits that children are exposed to before entering adulthood, both positive and negative, are expected to persist even after the individual has left the environment they were brought up in (LeBaron et al., 2019). In contrast, a study undertaken by the Financial Education and Research Centre, a joint venture between Massey University and Westpac, identified that although parents are attributed as the primary socializers during childhood, financial education is not always through direct teaching. The study found that in some cases, children who identified poor money management behaviour among their parents, displayed higher financial literacy scores than individual’s whose parents modelled good money management (Stangl & Matthews, 2013).
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Financial socialization is a narrower concept, which forms part of the consumer socialization processes. Financial socialization relates to the learning of financial knowledge and behaviours to enable self-management of every-day financial matters as individuals’ transition to adulthood and beyond (Kim & Chatterjee, 2013). It is believed financial socialization is a lifelong process whereby individual’s must continually learn and adapt to the economic environment in which they live (Gudmunson & Danes, 2011). However, the level of knowledge children can gain through financial socialization is limited to the level of financial knowledge their parents maintain and are able to display (Sherraden, 2010). Financial socialization can be either purposive or incidental. Purposive financial socialization is the process where parents intentionally educate their children on financial concepts and behaviours. Incidental financial socialization is a more organic process where children learn through imitation or simply exposure to financial situations they witness during their childhood (Jin & Chen, 2020).
Although incidental financial socialization remains beneficial, of concern is the lack of awareness parents may have on the importance of these learnings. Development of awareness amongst parents would likely increase the regularity of purposive financial socialization and targeted education, improving the development of financial capability of children (Zhu, 2018).
The theory of consumer socialization theory is grounded in the idea that despite having little relevance during their adolescent years, exposure to positive financial behaviours and attitudes during childhood years is highly beneficial as the skills can be called upon in later life. The ideology behind the success of this theory is anticipatory socialization; individuals acquire knowledge and understanding through exposure to concepts and processes without having to take part themselves. Therefore, the theory of consumer socialization is defined as the conscious or unconscious accumulation of financial knowledge and skills as modelled by key socialization agents throughout adolescence. Research to date tends to categorise financial socialization through one of two processes; modelling and discussion. This emphasises the importance of financial parenting and children having parents who model positive financial behaviour. There are a number of processes through which children can become financially socialized including observation, participation in financial behaviours or intentional financial education (Jorgensen et al., 2017). Some researchers have found evidence that the most impactful learnings come from experiential teachings where children are involved in transactions within the marketplace, learning the value of money and forming an understanding of financial responsibility (LeBaron et al., 2019). At the same time, this also highlights the cyclical nature of financial illiteracy in that, if parents lack financial knowledge and behaviour
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in financially inadequate ways, children acquire those poor habits and become ill-equipped financially when entering adulthood (LeBaron et al., 2019; Shim et al., 2010). The transition from childhood to adulthood is the lifecycle stage where the importance of financial understanding is exacerbated. Not only does this transition represent a tangible separation from financial dependence on one’s parents, it also reveals whether the individual has acquired the appropriate knowledge and skills to become financially independent (Jorgensen et al., 2017).
Several studies have found evidence that individual’s acquire knowledge, attitudes and behaviour through exposure and imitation of people they consider to be role models and are regularly around them (Shim et al., 2010). This knowledge can be both subjective and objective, and when possessed promotes an increased internal locus of control over decision- making, and more positive attitudes towards behaving in a financially positive manner (Shim et al., 2010). Studies over time have shown that parents remain the enduring socialization agents for their children both during their adolescent years and to some degree even during their transition to adulthood. There are several reasons which contribute to parents maintaining a strong socializer role including proximity to the children, cultural norms of parents as role models, and the fact that parents usually manage and control economic resources within the household. To this end, it is a natural eventuality that children will learn from the people they are exposed to regularly (Jorgensen et al., 2017). However, financial socialization is unlikely to lead to appropriate financial decision-making when children are exposed to parents/mentors who lack financial knowledge and fail to demonstrate positive financial behaviours (Sherraden, 2010).
The theory of planned behaviour identifies how an individual’s behaviour will be influenced by attitudes towards the behaviour, subjective norms, and perceived behavioural control. This concept is grounded in the ideology that increased perceived control over financial decisions, is linked to improved financial behaviours contributing to financial well-being (Shim et al., 2010). Therefore, this theory is based on three main factors; the level of desire they have to succeed, the effort they are willing to put in, and the level of confidence they have in their own ability. Each of these factors are directly impacted by the resources they have available to them, namely knowledge, skills and materials. During childhood, parents are the primary source of this knowledge and skill for children. Therefore, financial socialization based on the theory of planned behaviour, is successfully when parents expose their children to adequate financial learnings to develop desire and confidence to act appropriately in financial situations (Zhu, 2018).
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The role of parents in the development of financial proficiency of children is crucial. Studies show a significant link between socioeconomic status and the dissemination of financial knowledge. For example, parents who have gained college degrees and have access to financial resources can facilitate more effective development of financial capital for the child and foster positive financial habits (Kim & Chatterjee, 2013). In many households, the nature of parent- child relationships is identified as bidirectional. The natural expectation of this relationship is that teachings flow from parent to child both through conscious and unconscious methods. The bidirectional nature of these relationships identifies that often teachings can flow the other way, from child to parent (Gudmunson & Danes, 2011). The level of information dissemination is largely determined by the nature of the parent-child relationship. A warm relationship fosters effective socialization and motivates the child to cooperate with their parent. In contrast, cold parent-child relationships foster hostile feelings amongst children meaning they are less open to the absorption of learnings during childhood (Kim & Chatterjee, 2013).
It has also been found that several cultures maintain a strong expectation that parents act as the primary socializers for their children. This aligns with the theory of consumer socialization that parents remain the enduring socialization agents for their children despite other agents also having influence (Gudmunson & Danes, 2011). The process of financial socialization has also been recognised to influence the financial attitudes of young adults transitioning to adulthood as well as their reaction to financial situations. In particular, parental discussions about financial matters during childhood were linked to confidence for young adults when facing independent financial situations (Kim & Chatterjee, 2013).
Formal education sources
Literature suggests that despite the prominence of financial socialization in the development of financial capability, it does not appropriately prepare individuals entering adulthood for financial decision-making (Sherraden, 2010). One of the other major pathways for developing financial capability is through financial education. These financial education programs take on a range of different variations and target various demographic groups. Several partnerships have been formed between financial institutions and education providers to provide education to school-age children and college students. In some states in America, financial education has been incorporated into their respective state education system. This is particularly important as, combined with the learnings they have gained through financial socialization, formal financial education provides a sound foundation for the transition to adulthood and consequently financial independence (Jin & Chen, 2020).
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Over recent years, there has been a pertinent shift with the responsibility of retirement planning now falling on the shoulders of the employee rather than the employer. This shift explicitly highlights the requirement for workplace financial education programs to ensure individual are adequately equipped to manage their finances in preparation for retirement (Jin & Chen, 2020).
Unsurprisingly, workplace programs tend to provide tailored financial education, aiming to improve financial knowledge and encourage effective retirement planning.
Despite increased efforts to provide formal financial education opportunities both within the community and the workplace, there is mixed evidence on whether these programs have positive effects on financial behaviours and decision-making (Jin & Chen, 2020). Several studies have identified that traditional financial education programs tend to focus on the development of financial knowledge and the understanding of everyday concepts. The limitation of many of these financial education programs is that they fail to effectively educate participants on the applicability of these concepts in everyday financial decision-making. The concern is that improved financial knowledge levels is not sufficient to drive effective behaviour change (Gudmunson & Danes, 2011; Jin & Chen, 2020; National Endowment for Financial Education, 2006). Further, there is evidence to suggest that society imbeds misconceptions about money and money management into the minds of individuals. This often means that despite efforts to improve financial knowledge, individuals will remain swayed by societal norms and practices. In response, financial education programs should include efforts to correct financial misconceptions and provide information on effective money management practices (Gudmunson & Danes, 2011).
Research objective and hypotheses
It is important to understand the nature of the relationship between financial capability levels among young adults and the financial socialization experience they were exposed to during their childhood years. Although it is believed financial socialization practices are common amongst households in the present day, the degree to which these processes are appropriately preparing individuals for financial independence is in question. It is clear that a significant portion of financial education is undertaken through the socialization process. The aim of this analysis is to understand whether discussion of financial practices and concepts is enough, or whether experiential learning is more conducive financial independence come adulthood. It is clear that a significant portion of financial education is undertaken through the socialization process.
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Using the financial capability index, explore and seek to better understand the link between financial socialization during childhood and adolescence and financial capability The above research question prompts the development of a series of hypotheses to be tested.
Literature has identified the importance of financial socialization in influencing individual’s development of appropriate financial knowledge and money management practices. Although the nature of this relationship remains in question. In some cases, studies have shown that individuals who are exposed to financial socialization acquire financial knowledge and tend to demonstrate positive financial behaviours. In other cases, children who identified poor money management behaviour among their parents, achieved financial literacy scores higher than those whose parents modelled good money management. The literature explored above, and the research question developed for this essay has resulted in the development of the two hypotheses below which will be tested using the new financial capability index.
H1: Individuals who acquire knowledge through financial socialization during childhood demonstrate higher levels of financial capability than individuals who did not
H2: Individuals who acquire knowledge through financial socialization during childhood demonstrate higher levels of financial capability than those who experience formal financial education only
Methodology: Financial socialization and financial capability
Details regarding analysis for this essay are yet to be finalised however there will be some exploratory analysis utilising t-statistics.
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