Effects of Attitude and Background on Students' Personal Financial Ability: A United States Survey

Abstract

This study investigates how abilities to make educated judgments about handling personal finance are affected by a number of hypothesized determinants among college students in United States. Our study contributes to literature of financial literacy by measuring and assessing impact on financial literacy of student attitudes toward financial education, as a subject requirement in high school. We formed index for basic financial education (IBFE), items measuring attitude towards basic financial education requirement for high school students, and index for applied financial education (IAFE), items measuring attitudes toward more applied financial education requirement for high school students. The subjects were 361 college students in United States, each of whom completed a survey that measured main variables. Examining these indexes and scores on financial literacy questions, we found a positive relationship between recommendations that basic courses in finance and economy be a requirement for high school students on one hand and financial literacy on other. However, we found an inverse relationship between financial literacy and recommendations that courses in applied finance, such as asset management, be required in high school. Implications of results for improving financial literacy are discussed. Introduction Financial literacy is an individual's capability to make educated judgments and effective decisions about handling his or her money (NSLP, 2010). Those who have financial capabilities to make right choices about money and to live within their means are less likely to face financial troubles, such as maxing out their credit cards, not making payments on time, or being compulsive buyers, and more likely to display healthy financial behaviors, such as saving for future, paying off credit cards in full each month, or being able to prioritize spending according to needs, not wants. Unfortunately, today's young adults often begin their life in college with limited capabilities of handling their own personal finances. This must be a societal concern because insufficient financial knowledge and skills can create inequality in distribution of income and wealth, inadequate savings for retirement, and, low savings rates and capital formation (Lusardi et al., 2010; Mandell and Klein, 2009). Whether male or female, financial illiterate young adults who have developed 'buy now (with credit card), think later (not necessarily pay later)' consumption behaviors for immediate satisfaction or fulfillment, are easy target and potentially good customers for credit card industry. Warren Buffett, arguably most successful investor, shares his thoughts on overspending habits (Fox Business News, 2009): you develop a good financial habit, it will last a life time and it will make life easier in all kinds of ways. On contrary, if you get a bad financial habit. . . it can ruin your life; it hurts marriage, it hurts health. . . [so] it is really important to get a right idea early. Others agree with Buffett: the financial habits that form during transition to are like to persist throughout adulthood (Shim et al., 2010:1457). Financial literacy is influenced by societal environment, particularly parents' behavior, financial education (Shim et al., 2010), and personal experience with dealing with finance.1 This study adopts notion of financial literacy2 difference among college students and how abilities to make educated judgments about handling personal finance are affected by ages, gender, education of parents, and other behavioral factors among college students across different academic disciplines, using a sample from a state college in Sacramento, California. Our study contributes to literature of financial literacy by adding items measuring attitudes toward financial education while in high school. We formed index for basic financial education (IBFE), items measuring attitude towards basic financial education requirement for high school students, and index for applied financial education (IAFE), items measuring attitudes toward more applied financial education requirement for high school students. …