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Journal of Business Studies Quarterly
2016, Volume 8, Number 1 ISSN 2152-1034
Impact of Financial Literacy, Financial Socialization
Agents, and Parental Norms on Money Management
Sheela Devi D. Sundarasen, Prince Sultan University, Saudi Arabia
Muhammad Sabbir Rahman, International Islamic University Malaysia, Malaysia
Noor Shahaliza Othman, Multimedia University, Malaysia
Jennifer Danaraj, Multimedia University, Malaysia
***The authors would like to acknowledge the financial assistance provided by the Ministry of
Education (MOE), Malaysia via FRGS for this study.
Abstract
This study investigates the impact of financial literacy, socialization agents and parental norms
on money management. Data collected via questionnaire from postgraduate students in both
private and public institution of higher learning (proxy for young adults) are used in this study.
Structural Equation Modeling (SEM) analysis is applied to establish the causal relations between
the constructs of the proposed model. The results from this study indicate that financial literacy,
financial socialization agents, and parental norms play a significant role on money management
of young adults.
Keywords: Financial literacy, financial socialization agents, parental norms, and money
management.
1. Introduction
Financial literacy, financial socialization agents and parental guidance play an important
role on the money management of young adults. Such exposures if well employed may
contribute extensively to the financial freedom of individuals and prosperity of the society at
large. It is imperative that these young adults are financially savvy from the onset of their career
as it will assist in proper money management and thus minimize occurrence of young adults
from being drowned in debts and eventual bankruptcy.
As widely documented, financial literacy has great impacts on money management
(Lusardi, 2008a, NBER Working Paper 14084). Money management is a combination of
individuals’ aptitude to realize, analyse, handle, and communicate personal finances towards
financial wellbeing (Vitt and Anderson, 2001; Atkinson and Messy, 2012 and OECD Working
Paper 15). Money management is pivotal in the current era because young adults, especially
141
those from the medium to low income family are expected to make crucial decision on finance
related matters at every stage of their life cycle. Their expenses are enormous due to high cost of
living, huge study loans and other social expenses to keep up with the Joneses. It is imperative
that these young adults are equipped with appropriate tools to manage their current and future
financial obligations. Otherwise, with all the peer pressure, they may resort to unhealthy
financial practices such us borrowing and extensive usage of credit cards, which is a major
contributor towards escalating level of bankruptcy among young adults.
To this end, we undertook a study amongst the young adults to determine the impact of
financial literacy, socialization agents and parental norms have on money management. These
young adults are represented by part-time postgraduate students (who are working adults) at
different private and public universities in the Klang Valley. Convenience sampling procedure is
adopted and data is collected via university campus intercept procedure; face to face survey
method. This research applies Structural Equation Modeling (SEM) analysis to establish the
causal relations between financial literacy, socialization agents and parental guidance on the
money management. The results from this study indicate that financial literacy, parental
guidance and socialization agents play a significant role on the money management of young
adults. This is an indication that young adults need to be exposed to proper financial and money
management knowledge, thus assisting them in making the right financial decisions and attain
financial freedom at an early stage of their life. At a macro level, social problems arising from
poverty and criminal activities could be reduced, if not eliminated (Boon et al., 2011). In that
context, it is strongly commended that execution of knowledge and awareness among young
adults on financial planning and its impact on money management be taken as an ultimate task
by parents, educational institution, employers and the government. As rightly stated by
Sundarasen et al., “Financial literacy, money management and wealth optimization is a ‘cradle to
grave’ process, whereby individuals need to be educated and guided at every stage of their life-
cycle, so as to ensure minimization of financial mistakes and to ensure financial freedom at the
earliest possible stage of their life”.
The remainder of this paper is organized as follows. Section 2 presents an overview of
previous works in this field. In Section 3, Research Design and Methodology are developed and
a framework is proposed to determine the effects of each factor on money management.
Implication and limitation is discussed in section 4. Finally, the paper concludes in Section 5
with a brief summary and further research.
2. Literature Review
This section focuses on reviewing literatures directly related to our research; money
management, financial literacy, socialization agents, and parental norms.
Money Management
Money management has gained significant importance as being a vital part of financial
stability and development (OECD, 2012), as unsatisfactory money management may cause “ill-
informed” financial decisions. A report by the OECD (2009) shows that this has been brought
about by the shifts in demographic profiles, continues challenging economic and financial
conditions, contraction in private and public support systems and the continues developments
within the financial markets. Money management among young adults has become an important
issue globally and continues to be a major concern for financial well-being. This is particularly
142
significant amongst young adults in higher learnng institutions (Knight & Knight, 2000), with
the repercussions being seen in the high financial debts among students (Lea, Webley, & Walker,
1995; Lunt & Livingstone, 1992; Ranyard & Craig, 1995a; Walker, 1996). In that context,
effectiveness of educational awareness has been documented as a pivotal component of financial
improvement (Carsky, Lytton, & McLaughlin, 1984; Knight & Knight, 2000). Developing
operational and suitable approaches will influence budgeting behavior among these young adults.
This is an alternative educational effort so that individuals will outwit the undesirable effects of
financial debt due to improper or non-existence of appropriate money management (Kidwell,
Brinberg, & Turrisi, 2003). Budgeting could be improved by laying out a proper financial plan
which will help to improve and/or minimize the likelihood of financial debt (Lunt &
Livingstone, 1992; Ranyard & Craig, 1995b). A well designed and detailed financial plan is
needed to ensure a proper money management execution platform amongst young adults.
Financial Literacy
Financial literacy refers to, ‘understanding finance and the capability to utilize it to make
sound personal financial decision’, (Hogarth and Hilgert, 2002). Financial education facilitates
literacy, i.e., mastery of finance related knowledge and expertise, which are essential in
undertaking daily transactions and wealth accumulation investments. It empowers people to
manage their own finances and give long lasting financial security for themselves and their
families. These information and abilities are essential to handle financial encounters and
judgments in daily life, such as managing the allowances, maintaining a bank account, investing
and saving (Kotlikoff and Bernheim, 2001;Johnson and Sherraden, 2007). Formal financial
education is believed to play a vital role in financial literacy (Bernheim et al., 2001;Varcoe et al.,
2005) and it is important to equip oneself with this knowledge of financial literacy at an early
stage of one’s life as it affects the financial behaviour (Beverly and Burkhalter, 2005; Martin
and Oliva, 2001).
Financial literacy has been linked to savings and portfolio decision. For example, people
with low monetary education are more inclined to face issues with financial obligation (Lusardi
and Tufano, 2009, NBER Working Paper 14808), less likely to take an interest in value ventures
(Van Rooij et al., 2007; Christelis et al., 2010), less plausible to pick performing trust funds with
lower expenses (Hastings and Tejeda-Ashton, 2008, and NBER Working Paper 14538), less
inclined to aggregate and oversee riches successfully (Stango and Zinman, 2007; Working Paper,
Mimeo, Dartmouth College; Hilgert et al., 2003), and less inclined to antedate retirement
(Lusardi and Mitchell, 2006; NBER Working Paper 17075, 2007 and 2009 and NBER Working
Paper 15350). It cannot be denied that financial literacy is an imperative part of sound financial
decision making, and many youngsters wish they had more money related information (Lusardi
et al., 2009, NBER Working Paper 15352). It is thus widely documented that a positive
relationship exists between financial literacy and financial decision-making.
The ultimate goal of financial education is to educate consumers so that they can make
appropriate decisions and be responsible for them, assess their current financial situation and
manage their finances in such a way as not to be a burden to their families or society. A
financially knowledgeable and cultured citizen is highly competent in handling money and is
adept to managing his own/family budget, including managing financial assets and obligations
pertaining to a shift in life-long attainments. Furthermore, understanding the extent of financial
literacy level of the young is particularly imperative when observed from the viewpoint that
financial knowledge and expertise developed early in life as it generates an underpinning for
143
impending financial conduct and happiness (Beverly and Burkhalter, 2005; Martin and Oliva,
2001). Linking financial literacy and personal financial behavior have shown positive correlation
in most researches (Bernheim et al, 1997, NBER Working Paper 6085; Hogarth and Hilgert,
2002; Hilgert et al., 2003; Courchane and Zorn, 2005; Lusardi and Mitchell, 2007; Lusardi,
2008b, OECD Working Paper 18, Boon, Yee, & Ting (2011)). Based on the preceding
discussion, the following hypothesis is tested:
H1: Financial literacy has a positive impact on money management
Financial Socialization
In addition to formal financial education and its commitments towards financial literacy,
interaction of an individual with socialization proxies, for example, parents, friends, educators
and media is important amongst young adults towards money and wealth optimization. A process
by which individuals obtain necessary skills, information and attitude to maximize their ability in
the financial marketplace is called financial socialization (Ward, 1974). Previous research has
demonstrated that individuals acquire monetary information from formal instructive systems as
well as from associations with socialization proxies (Hilgert et al., 2003). Theoretical and
empirical results recommend that people look into money related instruments through social
cooperation by means of informal correspondence or from recognizable learning (Brown et al.,
2008;Hong et al., 2004; Osili and Paulson, 2008). Researchers have additionally noted that the
impact of peers is imperative in forming an individual’s money related conduct (Kretschmer and
Pike, 2010; Masche, 2010; Moore and Bowman, 2006). Thus, peers verifiably assume a vital part
in deciding an individual's monetary behavior (Delfabbro and Thrupp, 2003; Moore and
Bowman, 2006; Kretschmer and Pike, 2010; Masche, 2010).
Media is an alternate essential socialization machinist for youngsters and teenagers. In a
study by Lyons et al.(2006), approximately 33% of secondary schools stated that they had
utilized mass media and the internet as bases to secure financial information. Research has also
demonstrated the extent to which television has an impact on teenagers’ buy appeals, brand
distinguish, materialistic demeanor, and monetary practices (Buijzen and Valkenburg, 2003;
Churchill Jr and Moschis, 1979;Loibl and Hira, 2005;Schor 2004). Loibl and Hira (2005) found
that individuals who utilized media (e.g., pamphlet, distributions, programming, and Internet) as
a data hotspot for money related engagements seem to have better monetary practices and
financial fulfillment. They contended that media sources assist as a significant basis towards
one’s self learning for monetary matters. Lusardi et al. (2010) also demonstrated that financial
literacy is intensely associated to socio-demographic features and domestic financial
complexity. Thus, the following hypothesis will be tested based on the extant literature.
H2: Socialization agents have a positive impact on money management.
Parental Norms
Apart from media and peers as money related socialization agents, parents are
recognized as one of the prime socialization proxies for adolescent and adults (Clarke et al.,
2005;Rettig 1985) and monetary related facts accumulations (Lyons et al., 2006). Current
144
research has recommended that parents are additionally persuasive in imparting money related
education to their children (Ivan and Dickson, 2008; Clarke et al., 2005; Dennis and Migliaccio,
1997; Neul and Drabman, 2001; Shim et al. 2010; Shim et al. 2009; Xiao et al. 2007). A
comprehensive study by Shim et al. (2009) concurs that adults who are confident with their
transactions with financial choices tend to have sufficient guidance from their parents since
childhood, in addition to formal financial literacy education from different sources. Similarly,
Lyons et al. (2006) who undertook a study on high school and college students conjectured that
almost 77% of the students turned towards and relied on their parents to endow them with the
information on financial knowledge and proficiency.
Recent evidence suggests that an individual’s mother’s education had a way with
financial literacy, particularly if a respondent’s mother has university education. Respondents
whose mothers were not deprived of university education had superior outlooks than those
whose mothers advanced only from high school. This difference is statistically significant
especially in terms of inflation, interest rates and risk diversification (Lusardi et al., 2009).
Dewi, Prihatsanti, Setyawan, & Siswati, (2015) document that children usually learn the habitual
patterns from their parents. Parents who had pushed valuable monetary conduct and were
involved in unswerving inculcation amongst youth were strongly considered by their youngsters
as financial replicas. The adults eventually undertake financial activities conforming towards
appropriate money management. Thus, a large part of monetary learning that individuals adapt is
through parent’s exhibition of financial knowledge (Clarke et al., 2005; Neul and Drabman,
2001; Shim et al., 2009).
This communication of parental guidance at early stages of one’s life coupled with the
existence of financial education at school acts as a perfect blend and gives a solid establishment
that could prompt better monetary decision-making by young adults. Parental impact, through
primary exposures or deliberate education of cash management appears to be a critical variable
in creating individuals’ money related propensities and practices. To further test on the impact of
parental norm and wealth optimization among young adults, the following hypothesis is tested:
H3: Parental norms have a positive impact on money management.
This paper will focus on the relevance of financial literacy, financial socialization agents
and parental norms towards money management and address the impact of the factors on money
management.
Figure 1: Proposed framework for the impact of parental norms, financial socialization agents,
and financial literacy attitude towards money management
Parental Norms
Money Management
Financial Literacy
Socialization Agents
145
3. Research Design and Methodology
The sample is represented by part-time postgraduate students (who are working adults) at
different private and public universities. Convenience sampling procedure is adopted and data is
collected via university campus intercept procedure; face to face survey method. Three hundred
students were randomly selected to respond to the survey instruments, out of which only two
hundred instruments were used for further data analysis due to incompleteness. Out of the total
selected survey instruments, 60% of the respondents were female, whilst 40% of the respondents
were male. This research applies 5 point Likert scale (1 = strongly disagree, 2 = disagree, 3 =
neutral, 4 = agree, 5 = strongly agree). The instrument used to measure financial literacy is based
on the works of (Boon et al., 2011) with five-item scale, whilst socialisation proxies uses the
scale by Korean Financial Literacy Test (Sohn et al. 2012). Parental norms is represented by the
five-item scale of Shim et al., (2010) and finally money management uses the five-item scale of
Boon et al., (2011).
This research applies Structural Equation Modelling (SEM) analysis to establish the
causal relations between the constructs on the proposed model. Confirmatory factor analysis
(CFA) was performed to examine the constructs’ dimensionality (see Table 2) using AMOS 20
software. Maximum likelihood estimation is applied to account for the nonappearance of
multivariate normality. Chi-square test, goodness-of-fit index (GFI), comparative fit index (CFI)
and root mean square error of approximation (RMSEA) is used to test the model fits (Hair,
Tatham, et al. 2006).
Table I reports the properties of each scale for the five items of financial literacy, four
items of socialisation proxies, five items of parental norms, and five dimensions under money
management. The significant factor loadings under each construct’s items demonstrate the
convergent validity. This research also calculates the average variance extracted (AVE) (Fornell
and Larcker 1981) to determine the discriminant validity of the constructs (see Table 2). The
proposed hypotheses are tested using the structural equation modelling (SEM) as this technique
provides statistical inferences by assessing the relationships in the path diagram comprehensively
(Hair, Tatham, et al. 2006). Comparable model fit indices are tested using GFI, CFI, and
RMSEA (Hair, Tatham, et al. 2006).
4. Data Analysis
Table 1 displays the characteristics of the sample. The age of respondents range from 20
to 40 years old; 70% of the respondents are between 21 and 30 years, 20% between 31 and 40
years and 10% of the respondents were above 40 years. Out of the total respondents, 60% of the
respondents represent private higher learning institution and the remaining 40% of the
respondents were from the public higher learning institutions. In addition, most of the
respondents (80%) were concerned about financial planning and money management. However,
the remaining 20% of the respondents are not aware of financial planning and money
management. Majority of the respondents (48%) agreed that media plays an important role in
creating the awareness on financial planning slogan amongst the young generation. Most of them
(27%) agreed that family can play an important role in promoting the important aspects of
146
financial planning among the young generation. The characteristics of the samples are reported
in Table 1.
Table 1: Characteristics of the Sample
Characteristics
Frequency (N=200)
Percentage (100%)
Gender
Male
80
40
Female
120
60
Age
21-30 Years
140
70
31-40 Years
40
20
Above 41 Years
20
10
Marital status
Single
152
76
Married
48
24
Respondent academic Qualification
Undergraduate
90
45
Postgraduate
110
55
Parent’s academic Qualification
Non-Graduate
82
41
Graduate
118
59
Race
Malay
56
28
Chinese
122
61
Indian
18
9
Others
4
2
Parents
Self-employed
112
56
Employed
88
44
Monthly household income
Under RM1000
84
42
RM1001-RM2999
48
24
RM3000-RM4999
32
16
RM5000 and Above
36
18
Main source of financial knowledge
Family
54
27
Media
96
48
Peers
32
16
147
School
18
9
Table 2 reports that the construct properties for each scale of Parental Norms, Socialisation
proxies, Financial Literacy, and Money Management. The initial CFA model for all the
constructs are adequate in achieving the acceptable model fit for further data analysis. The
significant factor loadings demonstrate adequate convergent validity of the constructs. In
addition, the results of the construct reliability (CR) also demonstrate adequate internal
consistency of the measured variables. It is concluded that the construct reliability of the
constructs are supported since all composite reliabilities are more than 0.7 (Hair et al., 2010).
Also, Table 2 shows that this model fits the sample data set and also meets the goodness-of-fit
indices.
Table 2: The CFA results of the measures and their construct properties
Item
Constructs
Loading
CR
AVE
Factor 1: Parental Norms
0.89
0.63
χ2=8.49 with 5 degrees of freedom p=0.00; GFI=0.95;
CFI=0.94; RMSEA=0.05
PN1
0.75
PN2
0.82
PN3
0.83
PN4
0.78
PN5
0.80
Factor 2: Socialisation Proxies
0.91
0.68
χ2=8.39 with 5 degrees of freedom p=0.00; GFI=0.94;
CFI=0.96; RMSEA=0.06
SA1
0.79
SA2
0.87
SA3
0.78
SA4
0.85
Factor 3: Financial Literacy
0.93
0.72
χ2=12.49 with 6 degrees of freedom p=0.00;
GFI=0.92; CFI=0.93; RMSEA=0.05
FL1
0.87
FL2
0.86
FL3
0.89
FL4
0.85
FL5
0.79
Factor 4: Money Management
χ2=8.49 with 5 degrees of freedom p=0.00; GFI=0.93;
CFI=0.94; RMSEA=0.06
MM1
0.78
MM2
0.79
MM3
0.86
MM4
0.71
MM5
0.74
148
Notes: χ2: chi square function; d.f.: degree of freedom; GFI: goodness of fit index; CFI: comparative fit index;
RMSEA: root mean square error of approximation.
Standardized path coefficient (β) is applied to check the effects of the proposed model
(less than 0.10 = small effect; around 0.30= Medium effect; value more than 0.50 = large effects)
(Cohen 1988). The final model of the associations is shown in Table 3. We established the
association of parental norms, socialisation proxies, and financial literacy on money
management. The standardized path coefficients (β) support the postive relationship between all
variables and money management at a significant level (see Table 3). Thus, H1, H2, and H3 are
accepted.
Table 3: Overall model fit statistics, path estimate and influence effects between the variables
Overall Model
Fit Statistic
Statistic
Value
Path
Path
Estimate
Significance
P-value of test
0.335
Parental norm to money management
0.782
***
Statistic
0.963
Socialisation agent to money
management
0.625
***
GFI
0.946
Financial literacy to money
management
0.827
***
AGFI
0.056
RMSEA
0.952
Parental norms (β= 0.782, p=0.000) indicate a significant and positive relationship on money
management; implying that parental norms have positive influence on money management of
young adults. This is similar to the findings of Clark et al.(2005), Danes and Haberman (2007),
Neul and Drabman (2001), and Shim et al. (2009). Their study documents that the larger part of
monetary learning that individuals hold is adapted through parent’s exhibition of financial
knowledge. Though financial literacy is to a large extent associated with the financial experience
as it unveils greater financial knowledge, parental involvement and influence could be even more
decisive because financial occurrences that ensues within a family setting is expected to be more
impactful. Role of parents from an infantry stage of an individual is imperative, so as to ensure
that they are taught at every stage of their life on the importance of wealth optimization. This
will mold individuals to be financially savvy and attain financial freedom in the later part of their
lives. As for the socialization agent, the empirical results indicate a significant and positive (β=
0.625, p=0.000) relationship on money management. Financial socialization impacts monetary
practices of individuals (Buijzen and Valkenburg, 2003; Churchill Jr and Moschis, 1979; Loibl
and Hira, 2005; Schor 2004). Loibl and Hira (2005) found that the extent to which individuals
refer to media (e.g., pamphlet, distributions, programming, and Internet) on money related
activities affect the monetary practices and financial fulfillment. The results surmise that
individuals use information obtained from socialization agents, such as friends, peers etc. to
assist in better financial planning and practices.
Similarly, financial literacy also has a significant and positive (β= 0.827, p=0.000) impact
on money management. This concurs with the study by (Stango and Zinman, 2007, Working
149
Paper, Mimeo, Dartmouth College; Hilgert et al., 2003; Lusardi et al., 2009, NBER Working
Paper 15352), who have clearly documented that financial literacy plays a pivotal role in money
management. Young adults with low levels of financial literacy are less probable to accumulate
and manage wealth effectively. Table 4 shows that the three hypotheses are fully supported.
Table 4: Summary of results of hypotheses
No
Hypotheses
Accepted/Rejected
H1
Parental norms play a significant role on money management
Accepted
H2
Socialisation proxies play a significant role on money
management
Accepted
H3
Financial literacy plays a significant role on money
management
Accepted
5. Implication and Limitations
Financial literacy, money management and wealth optimisation is a ‘cradle to grave’
process, whereby individuals need to be educated and guided at every stage of their life-cycle, so
as to ensure minimisation of financial mistakes and to ensure financial freedom at the earliest
possible stage of their life (Sundarasen et al., 2014). It is a relatively new concept in developing
countries due to the absence and ignorance on the awareness of the antecedents to proper wealth
management programme among young adults. Ignorance on finance related matters have
dominated all aspects of human lives in diverse ways, so it is palpable that all relevant parties,
i.e., government, regulatory bodies, institution of higher education, parents and employers
understand the antecedents contributing towards strategic wealth management among young
adults. These stakeholders should assume the responsibility in ensuring that individuals are
equipped with the obligatory techniques of financial planning that would enable them to make
appropriate decision. The factors explored in this paper have strong impacts on financial
decision-making and money management; thus it is envisioned that it would support young
adults’ endeavour in long-term life-changing financial decisions. Limitation of this study may
include the relatively small sample size from a developing country. However, the results from
this study are very similar to other studies that have been undertaken globally.
6. Conclusion and Further Research
This paper empirically investigates the roles of parental norms, socialisation agents and
financial literacy on money management of young adults. Close-ended questionnaires were used
to conduct a survey among young adults who are represented by the postgraduate students
currently studying at both private and public universities.
With the theoretical and empirical support, the results from this study indicate that
parental norms, socialisation proxies, and financial literacy play a significant role on money
management. In conclusion, it is certain that if appropriate financial planning and money
management becomes widespread in a society, economic growth will be motivated (Case and
Fair, 1999) and consequently, social problems arising from poverty and criminal activities would
150
be reduced, if not eliminated (Boon et al., 2011). Thus, it is strongly commended that execution
of knowledge and awareness among young adults on financial planning and its impact on money
management be taken as an ultimate and major task by government.
Future research could investigate and measure an extensive diversity of other questions in
more detail which is presented in the Financial Literacy and Education Commission
Research and Evaluation Working Group (2011). This research measures financial literacy
at two cognitive levels; it is recommended that three different cognitive levels, i.e., Knowledge,
Comprehension, and Application (Cameron et al., 2014) be considered in future work as it may
give a more comprehensive dimension to the study. Also, the variation in the relationship due to
culture, gender and economic status should be further explored.
151
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