financial behaviour research paper

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Impact of financial behaviour on financial well-being: evidence among young adults in Malaysia

Mohamad fazli sabri.

1 Department of Resource Management and Consumer Studies, Faculty of Human Ecology, Universiti Putra Malaysia, 43400 Serdang, Selangor Malaysia

Mervin Anthony

Siong hook law.

2 School of Business and Economics, Universiti Putra Malaysia, 43400 Serdang, Selangor Malaysia

Husniyah Abdul Rahim

Nik ahmad sufian burhan, muslimah ithnin.

3 Southeast Asia One Health University Network (SEAOHUN) Secreteriat, Muang, Chiang Mai, 50200 Thailand

Associated Data

The high cost of living and prolonged lockdowns due to the COVID-19 pandemic made the financial well-being of individuals vulnerable, especially young adults. This paper examines the impact of financial behaviour on financial well-being (FWB) among young Malaysians during the COVID-19 pandemic. The study collected variable data on financial literacy, financial behaviour, financial socialisation, self-control, financial technology and FWB. To collect a representative sample of Malaysian young adults, a multi-stage random sampling method was used, and 360 young adults aged 18–29 years old completed the questionnaires. Structural equation modelling was adopted to investigate the factors influencing young adults' FWB. The empirical findings revealed a significant mediating effect of financial behaviour in the relationships between financial literacy, financial socialisation, self-control, financial technology, and FWB. The research concluded that the mediation analysis yields a clear and firm conclusion that financial behaviour is important in empowering young adults’ FWB. Thus, the present study adds value to the existing literature on the relationship between financial behaviour and FWB. Furthermore, the paper’s findings will assist government agencies and non-governmental organisations in developing outreach programmes for young adults per the strategies outlined in the Twelfth Malaysia Plan and the aspirations pledged in the Malaysian Youth Policy 2015–2035.

Supplementary Information

The online version contains supplementary material available at 10.1057/s41264-023-00234-8.

Introduction

Recently, the financial well-being of Malaysian young adults has been affected due to the COVID-19 pandemic, where their savings and income opportunities have declined. As a result, underemployment has become common among young people not only in Malaysia, but also around the globe. Ideally, individuals in Malaysia are expected to have a job by the time they reach the age of 24. This study focuses on young adults aged between 18–29 years old because the benchmark of “young adults” is based on this classification. The Malaysian Department of Statistics ( 2019 ) revealed that young adults constitute a reasonable proportion of the country's 32.6 million population. From the official estimates, youths in Malaysia constitute 45.8% of the total population (Department of Statistics Malaysia 2020 ), a clear indication that the financial well-being of young adults is still ambiguous, and if correctly addressed, will have a significant impact on the country’s economic outlook in the years ahead.

Young adults' financial well-being has been significantly impacted and they have encountered a number of problems after the COVID-19 pandemic in Malaysia, including job loss, housing and rental issues, and credit card debt. First, young adults are one of the most rapidly declining groups in terms of income. Due to the pandemic, some young adults have lost their jobs or had their working hours curtailed. Thus, it has been challenging to pay for bills, rent, and other living expenditures. Second, young adults also face an even greater financial strain as they attempt to pay off their student loan debt, which is already a major financial burden for many. Third, many young individuals are finding it difficult to meet their monthly payments due to job loss and decreased income. Fourth, many young adults are finding it difficult to make ends meet or afford housing. Finding affordable accommodation has proven to be a challenge for young adults due to the high cost of housing. Fifth, many young individuals have turned to credit cards to pay their bills and make ends meet as a result of the economic downturn. Credit card debt has increased as a result, which can be challenging to pay off. In addition, the young adults' retirement funds have also been affected where the government allowed the contributors to withdraw their savings to pay for living expenses. The economic recession due to the pandemic has had a significant impact on young adults' finances, and it may take time for them to recover from these financial issues. Therefore, recent developments have led to a renewed interest in the financial well-being of young adults of Malaysia, whereby much of the research up to now has been descriptive in nature.

According to Kumar et al. ( 2022 ) and Vargas and Sanchez ( 2020 ), the COVID-19 crisis has made many young adults psychologically and financially vulnerable, and their financial well-being is worse, particularly for low-income young adults. Malaysia is not an exceptional case, where the gross domestic product (GDP) growth for the year 2021 has been revised downward to 4.0% from an earlier anticipation of 6.5–7.0%, which is bound to affect young adults' contributions to the GDP on a macro basis. Based on the historical data, this GDP growth is the lowest growth rate since the 1997–1998 Asian Financial Crisis that shackled the global financial markets. Correspondingly, the Malaysian economy posted its second-worst GDP growth in 2020 at − 5.58% (World Bank 2021 ). Before this, Malaysia's real GDP growth was at an average rate of 6.1% per year from 1970 to 2018. In terms of debt, Malaysian households aggregated debt was 93.3% of the GDP as of December 2020 (Bank Negara Malaysia or the Central Bank of Malaysia 2021 ), which increased from the previous years.

Young adults start their careers and often depend on debt to fuel their consumption, particularly vehicle and home purchases. Therefore, they should learn to differentiate between needs and wants, prioritise their consumption within their budget, and save money not only for the transaction but also for precautionary purposes. Undeniably, young adults have been among the hardest hit by the economic consequences of the pandemic, such as youth employment dropping and the rising cost of living. Therefore, youths need to find new opportunities and keep pace with the current economic condition, which has a variety of sophisticated financial products. In addition, having good money management abilities, financial decisions and money management are crucial in order to deal with various financial difficulties and financial responsibilities.

This study examines the determinants of the financial well-being of young adults, considering financial behaviour as a mediator. The multi-disciplinary nature of well-being is often explored from many dimensions. According to Ryff and Keyes ( 1995 ), the absence of theory-based formulations of well-being is perplexing. In determining an individual's financial standing, subjective and objective indicators of financial well-being are used. A young adult's financial situation and subjective well-being are determined by three interconnected factors: life satisfaction, pleasant affect, and unpleasant affect (Diener 2009 ). Young adults with similar earning capabilities will differ in their assessment of their financial standings and other aspects of life, such as their health or relationship with a significant other, thus indicating their well-being differently. Van Praag et al. ( 2003 ) highlighted that financial well-being is one of the six major contributors to well-being. Brüggen et al. ( 2017 ) pointed out that in the analysis of well-being, researchers should go further than just relying on the financial standings of an individual, with most studies on the multidimensional concept of well-being focusing on financial well-being as this is the most important component of well-being.

The observed well-being values for Malaysia based on Malaysia’s level of GDP per capita or income per capita from a cross-country dataset of 150 countries indicated that Malaysia is ranked in the middle (OECD 2021 ). However, the poverty rate is slightly below average compared to other countries. Gross national income (GNI) per capita, household income, and the Gini coefficient are clear indications of Malaysia’s progress in terms of financial well-being (Ann 2020 ).

A young adult is considered to have good financial well-being when they can meet their current financial commitments and have sufficient buffers for the longer term. Individuals who can absorb a financial shock are also financially well-off. These people can deal with emergencies and unexpected life challenges. Those who are on track to meet their financial objectives benefit from a formal or informal financial plan. Consumer Financial Protection Bureau (CPFB) further demonstrated that the factors that influence financial well-being are social and economic environment, which interact with a person’s personality and attitude, decision context, knowledge and skills, financial behaviours, and available opportunities to achieve personal financial well-being.

It is documented that to achieve financial well-being, an individual’s personality and attitude (how they tend to think, feel, and act) play a key role (CFPB 2015a ). It was reckoned that knowledge alone does not automatically equate to behaviour. Hence, determinants of a young adult’s financial well-being include personality traits. As discussed in the following sub-sections below, financial literacy, financial socialisation, self-control, financial technology, and financial well-being were thought to be mediated by financial behaviour.

Theoretical framework

This study identifies the mediating role of financial behaviour on the financial well-being of young adults. The conceptual framework is built using the four most commonly used theories. The research framework was founded on the Systems Theory, the Unified Theory of Acceptance and Use of Technology (UTAUT), the Social Learning Theory, and Self-Control Theory in explaining young adults' financial well-being. Deacon and Firebaugh ( 1988 ), using the underpinnings of systems theory, highlighted the link between factors (financial literacy, financial socialisation, self-control, and financial technology) and young adults' financial well-being.

To get an even better understanding of the underlying relationships of financial technology and its relationship to financial behaviour, the UTAUT theory is adopted, which is considered one of the unique contributions to literature. The researchers attempt to identify financial technology as the key driver of financial well-being among young adults. The theory of Social Learning is part of the model as the financial socialisation variable can best be explained through it. Owing to that explanation, this theory will explain the use of parental influence on a young adult's financial well-being based on what was learned as a child in their own families. As for the theory of self-control, the implications for young adults' financial well-being with the ability to control themselves are clear. The literature highlights that young adults with better self-control are more likely to have better financial well-being and that ability among young adults is investigated based on the young adults' financial behaviours.

This study contributes to the body of knowledge in terms of the role of technology adoption among young adults to attain financial well-being. From the framework presented, the new relationship of financial behaviour through the use of financial technology (fintech) to attain financial well-being is explored by the UTAUT theory. Financial technology has impacted financial well-being (Frame et al. 2019 ) and as such, this would be a relevant theoretical contribution. Past studies in Malaysia which studied the financial well-being of young employees/youths/young adults/emerging adults have not dealt with the use of financial technology and how it could aid financial well-being. In all fairness, the availability of financial technology methods that could contribute to youths’ financial well-being is relatively new in Malaysia, which is why it has not been explored by other researchers previously. This study would add to the literature which suggests that fintech plays a crucial role in young adults’ financial well-being.

Furthermore, to measure the personality trait variable of self-control in the theoretical underpinnings, the theory of self-control is incorporated in this study. The self-control theory has not been used in any preceding studies on financial well-being of young adults in Malaysia. The inclined relationship with self-control and financial well-being delves away from the current state of literature of financial well-being of young adults in Malaysia. Additionally, as only a few studies on young adults have explored the mediating role of financial behaviour, this study potentially contributes by examining the mediating effect of financial behaviour in the relationship between financial literacy, financial socialisation, self-control and financial technology (Fig.  1 ).

Research model

Hypotheses formulation

Financial literacy.

Financial literacy is the ability to manage everyday financial affairs and the ability to allocate money for the future (Muñoz-Murillo et al. 2020 ). A previous study by Sabri et al. ( 2020 ) acknowledges that financial capability is related to financial well-being. Those with good financial management skills (i.e. having financial goals, savings, investments and insurance) tend to have higher levels of financial well-being. According to O’Neill et al. ( 2005 ), when people receive basic personal financial education, they manage their finances well and thus improve their financial well-being. As a result, this study proposes the following hypothesis:

The relationship between financial literacy and financial well-being is mediated by financial behaviour.

Financial socialisation

According to Albeerdy and Gharleghi ( 2015 ), financial socialisation is based on both internal and externally observed behaviours. Financial socialisation agents provide useful financial information about personal financial management to achieve personal financial well-being. Parents, it was found, are key socialisation agents (Drever et al. 2015a , b ; Lanz et al. 2019 ). Parents tend to be as thrifty as possible, but as studies have shown (Grohmann et al. 2015 ; Pinto et al. 2005 ), children would have better financial well-being if their parents discussed everyday financial matters with them. The researchers consequently hypothesise that:

Financial behaviour acts as a mediator between financial socialisation and financial well-being.

Self-control

Self-control is the ability to control oneself and overcome immediate needs for better outcomes in the future (Baumeister 2002 ; Fujita et al. 2006 ). This idea is supported by previous research, which shows that people with higher self-control save more (Pirouz 2009 ) and have better financial behaviour in general (Strömbäck et al. 2017 ). Because self-control is defined as the ability or capacity to reshape one's response (Baumeister 2002 ), young adults who can change their behaviour in response to control stimuli will be more financially well-off. This study consequently hypothesise that:

The relationship between self-control and financial well-being is mediated by financial behaviour.

Financial technology

Financial technology, better known as “FinTech,” refers to an innovative financial service that emerged in tandem with the new technologies' advancements to allow consumers to conduct financial activities through digital means (Micu and Micu 2016 ). Agarwal et al. ( 2019 ) found that when fintech is used, as reminders are sent, an individual is more alert to make payments on time. Medina ( 2016 ) found that these reminders are stimuli for reducing credit card late payment fees. This finding further collaborated with Karlan et al. ( 2016 ), who showed that text message reminders helped consumers avoid penalties. One common finding in all of these studies is that financial technology provided some form of stimulus for individuals to change their behaviours. This study consequently hypothesises that:

Financial behaviour serves as a mediator between financial technology and financial well-being.

Financial behaviour and financial well-being

Financial behaviour is how an individual decides what to do with money, including everyday financial decisions that will make them feel satisfied with their actions (Kamakia et al. 2017 ; Bilal and Zulfiqar 2016 ). This study uses financial behaviour as the mediating variable, as it defines how young adults behave financially, which is the cornerstone of financial well-being (Gudmunson and Danes 2011 ; Xiao et al. 2009 ). Positive financial behaviours have been found to be extremely beneficial to financial well-being (Sabri et al. 2021a , b ; Shim et al. 2009a , b ; Xiao et al. 2007 ).

According to the literature, subjective financial well-being is influenced by financial behaviour, which is a significant predictor of financial well-being. However, only a few studies have looked into financial behaviour as a mediator among Malaysian young adults. As a result, the current study intends to investigate the relationship between financial behaviour as a mediator to generate useful findings for future researchers. In short, financial behaviours have a positive relationship with financial well-being. This means that positive financial behaviour will improve young adults’ financial well-being and vice versa.

Financial behaviour as a mediating variable

The literature available confirms the positive direct impact of financial behaviour on financial well-being. It illustrates that financial behaviour mediates the relationship between financial literacy, financial socialisation, self-control, financial technology, and financial well-being. As found in numerous studies, individuals’ financial behaviour is the primary determinant of their financial satisfaction (Bashir et al. 2013 ; Falahati et al. 2012 ; Xiao et al. 2009 ). Furthermore, when desired financial behaviour is found in young adults, researchers (Gutter and Copur 2011 ; Shim et al. 2009a , b ) concluded that it has a positive relationship with their financial well-being, including non-personal consequences, such as improved physical health, better mental health and life satisfaction (Xiao et al. 2011 ).

Coskuner ( 2016 ) demonstrated that financial literacy is a life skill that is needed among individuals of all age groups. Financial literacy is about applying financial knowledge to make effective financial decisions in optimising resources. Ultimately, financial literacy influences financial well-being in determining decisions (Sabri et al. 2021a , b ; Zulfiqar and Bilal 2016 ). Further, Joo and Grable ( 2004 ) stated that financial knowledge mediates the effects on financial well-being. Better savings behaviour is observed in individuals with better financial knowledge (Henager and Mauldin 2015 ; Jappelli and Padula 2013 ). Having better retirement savings preparation (Lusardi and Mitchelli 2007 ) and lower total amount of debts (Lusardi and Tufano 2015 ) are among positive financial behaviours that is a factor that contributes to a young adults’ financial well-being. Financial well-being correlates with positive financial behaviour (Gutter and Copur 2011 ; Henager and Mauldin 2015 ; Shim et al. 2009a , b ).

Financial behaviour is directly related to financial socialisation (Rea et al. 2019 ; Deenanath et al. 2019 ) and financial well-being. Parental financial socialisation was found to have lasting and profound financial outcomes throughout individuals' lifetimes. In addition, positive financial behaviour is achievable through parental financial socialisation among young adults (Drever et al. 2015a , b ; Otto 2013 ). Parental financial socialisation impacts even financial behaviours (Kim and Chatterjee 2013 ; Sohn et al. 2012 ). Poor self-control causes excessive debt (Achtziger et al. 2015 ), unplanned spending (Gathergood 2012 ), and a lack of funds for retirement years (Kim et al. 2016 ). Because of this, self-control is an essential component and has a significant positive effect on financial behaviour. Self-control has been proven to impact financial well-being through better savings behaviour (Biljanovska and Palligkinis 2015 ) and credit management (Achtziger et al. 2015 ).

Limited literature exists on the influence of fintech and the observed influences among young adults. Nevertheless, Brown and Venkatesh ( 2005 ) found that positive attitude among users is attainable through the usage of technology. Fintech takes many forms in its ability to influence young adults or nudge them with behavioural traits. According to Anderson ( 2015 ), fintech is helpful as it provides a form of reminder mechanism for the end-users, allowing them to alter their behaviour and take action to avoid late financial payment fees. Thus, more significant financial technology usage among young adults is generally associated with healthy financial behaviours, hence increasing the likelihood of better financial well-being.

Research methodology

Population and sample size.

Based on the data retrieved from the Department of Statistics Malaysia, the total population of Malaysia in 2020 was 32.6 million with an annual population growth rate of 0.6% (DOSM 2020 ). The number of Malaysians aged between 15–29 years is 9,187,200 (DOSM 2020 ). As this study focuses on young adults between the ages of 18–29, this constitutes an estimated number of 6,427,000 individuals.

The sampling techniques differ according to the research problem as one technique may not be appropriate for other research problems (Singh and Masuku 2014 ). According to Krejcie and Morgan ( 1970 ), a required sample size of 384 respondents is required for a population equal or more than 1,000,000, with confidence interval of 95% and margin of error of 2.5%. According to Hair et al. ( 2010 ), sample size must be sufficiently large to ensure precise statistically significant results. However, a sample size that is too large would lead to waste of resources which should ideally be avoided. In general, sample size is determined based on several criteria such as the model complexity, expected rate of missing data, and analytical procedures employed (Hair et al. 2010 ). According to Hair et al. ( 2021 ), a minimum of 200 respondents is needed for small to medium size models, with a least ten respondents per estimated path. This study also employed Westland’s ( 2010 ) approach to determine the sample size that meets the minimum requirements for quantitative analysis such as Structural Equation Modelling (SEM). Accordingly, Westland's method ( 2010 ) suggests that the minimum sample size for model structure is N  = 123 based on the anticipated effect size of 0.1 and statistical power of 0.80. This is calculated based on six (6) latent variables (constructs) and 22 observed variables (items) used in this study. The present study considered the sample size rule of thumb suggested by Krejcie and Morgan ( 1970 ), Hair et al. ( 2021 ) and Westland ( 2010 ). Thus, a total number of 400 respondents were decided.

Sampling technique

Multi-stage random sampling was used to sample a total of 400 respondents from five (5) regions in Malaysia (i.e. Northern, Southern, Eastern, Central and East Malaysia) that were randomly selected in the first stage. Firstly, Malaysia was divided into five (5) regions, namely Northern (Perlis, Kedah, Penang and Perak), Southern (Johor, Melaka and Negeri Sembilan), Eastern (Terengganu, Pahang and Kelantan), Central (Selangor and The Federal Territories of Kuala Lumpur and Putrajaya) and East Malaysia (Sabah and Sarawak). Secondly, one state was randomly selected from each region through a ballot. As a result, Penang (Northern), Johor (Southern), Terengganu (Eastern), Selangor (Central) and Sabah (East Malaysia) were determined to be the states for the study location.

The selected state in each region was targeted to obtain 80 respondents each. At the second stage, upon confirming the locations, a list of all youth organisations located in urban areas in the selected states was attained from the Malaysian Youth Council (MYC), the official youth organisation recognised by the Ministry of Youth and Sports, Malaysia. Four youth organisations were randomly selected from the list, requiring 20 respondents from each youth organisation. The leaders of these youth organisations were briefed via an online meeting, and they were to distribute the questionnaires randomly to 20 youths within their youth association. The sample was among youth (i.e. student, self-employed, public and private sector) with the age range between 18–29 years old.

Table ​ Table1 1 presents the definitions of the five variables in this study. The variables were investigated based on the adaptation from De Sena Abrahão et al. ( 2016 ) for financial technology, instruments adopted from Sabri et al. ( 2010 ) for financial literacy, and young adult’s financial socialisation measurement was assessed using Manfrè ( 2017 ). To assess financial socialisation, financial behaviour was measured using Kim ( 2004 ), Ismail et al. ( 2017 ), and Sumarwan and Hira’s ( 1993 ) self-control instruments with internal and external items that determine belief in one's ability to control the situation that occurs, and well-being was measured with the Financial Well-Being Scale developed by CFPB ( 2015b ), which was based on the adaptation of the scale development from the technical report.

Variables definition

Data analysis

Prior to estimation, the exploratory factor analysis (EFA) was performed on all variables (financial literacy, financial socialisation, self-control, financial technology, financial behaviour) measuring the individual constructs, indicating that the Bartletts’ Test of Sphericity is significant ( p value 0.05). Furthermore, the Kaiser–Meyer–Olkin (KMO) measure of sampling adequacy for the individual variables is adequate because it exceeds the required value of 0.6 (Rahlin et al. 2019 ; Bahkia et al. 2019 ). These two results (significant Bartlett's Test and KMO > 0.6) indicate that the data is sufficient to proceed with the data reduction procedure in EFA (Rahlin et al. 2019 ; Bahkia et al. 2019 ). The KMO test has a range of 0–1, with 0.6 being the recommended minimum value. Before conducting a factor analysis, the KMO measure of sampling adequacy and Bartlett’s Test of Sphericity must be met.

Following the recommendations of Awang et al. ( 2018 ), the AMOS in SPSS was used to perform confirmatory factor analysis (CFA) on the items of each scale (financial literacy, financial socialisation, self-control, financial technology, and financial well-being). Absolute Fit, Incremental Fit, and Parsimonious Fit are the three model fit categories (Mahfouz et al. 2019 , 2020 ; Sarwar et al. 2022 ). The index fit categories and fitness index thresholds indicate that the fit statistics were satisfactory.

Reliability

To ensure the precision and accuracy of the items in the questionnaire, a pilot test was run among 30 selected young adults. The reliability coefficients for the six (6) constructs in the pilot test are within the ranges of 0.823 (financial technology) to 0.955 (financial literacy) as shown in Table ​ Table2. 2 . The instrument was improved on the terms and instruction parts as the respondents had problems in understanding them. The result of the actual study is within the ranges of 0.77 (financial behaviour) to 0.906 (financial well-being).

Reliability analysis of scales

Confirmatory factor analysis (CFA)

Like Awang et al. ( 2018 ), this paper used a two-step technique to model and analyse the structural model, namely confirmatory factor analysis (CFA) and structural equation modelling (SEM). As a result, before modelling the structural model and performing structural equation modelling (SEM), the study must test all measurement models of latent constructs for Unidimensionality, Validity, and Reliability (Sarwar et al. 2022 ). Confirmatory Factor Analysis (CFA) is the name given to this procedure.

According to Afthanorhan et al. ( 2020 ), the measuring model of latent constructs must satisfy three types of validity: construct validity, convergent validity, and discriminant validity. The Fitness Indexes of the Measurement Model are used to assess construct validity, the average variance extracted (AVE) to assess convergent validity, and the Discriminant Validity Index Summary to assess discriminant validity. In terms of dependability, the composite reliability (CR) technique, which replaced the previous method of calculating Cronbach Alpha for analysis using structural equation modelling (SEM), is adequate for the study (Asnawi et al. 2019 ). A latent construct's fitness indices are considered valid if they fall into one of three Model Fit categories: Absolute Fit, Incremental Fit, or Parsimonious Fit (Afthanorhan et al. 2020 ).

Measurement model

Figure  2 depicts the pooled constructs. The five constructs, namely financial literacy, financial behaviour, financial socialisation, self-control and financial technology in the model are second-order constructs with a certain number of sub-constructs and every sub-construct is measured using a certain number of measuring items in the questionnaire. The details of the items’ statements are in Supplementary 1. An interval scale which ranges from 1 (strongly disagree) to 5 (strongly agree) is used to measure every item in the given statements (Awang et al. 2018 ). Thus, the measurement model for all constructs is complicated in terms of the number of components and their respective measuring items. For the complicated model, the researcher could elect to assess the CFA for each measurement model of the construct separately and combine them together at the final stage to perform the Pooled-CFA when all individual constructs have achieved the respective thresholds of validity and reliability (Nawal et al. 2020 ; Sarwar et al. 2022 ).

The results of pooled-CFA for all constructs in the study

This study decided to conduct the CFA procedure separately for every second-order construct. Once the individual CFA assessment for second-order construct is completed, the study would perform the item-parceling process to simplify the second-order construct into first order by taking the mean score of items in every component to represent that particular component in measuring the respective construct. At the end of the process, all second order constructs would become first order.

The pooled CFA would combine all first order constructs to assess the discriminant validity among these constructs. Prior to modelling the structural model and executing SEM, the researcher needs to prove that all constructs involved in the model are discriminant of each other or they are not highly correlated, especially between the exogenous constructs (Kashif et al. 2015 , 2016 ; Mahfouz et al. 2019 , 2020 ). If the two exogenous constructs are highly correlated (correlation greater than 0.85), then there exists a serious problem called multi-collinearity, and the study needs to utilise their respective remedial measures.

The assessment for convergent validity and composite reliability

To establish convergent validity, the study computes Average Variance Extracted (AVE). The construct is said to be convergent valid if its AVE exceeds the threshold value of 0.5. (Awang et al. 2018 ; Mahfouz et al. 2019 , 2020 ). To analyse composite reliability (CR), the study computes convergent validity, and its value must be greater than 0.6 for this reliability to be achieved (Mahfouz et al. 2019 , 2020 ). Table ​ Table3 3 shows that all the average variance extracted (AVE) and composite reliability (CR) values are greater than their respective threshold values of 0.5 and 0.6 (Sarwar et al. 2022 ). As a result, the study concludes that all the model's latent constructs have Convergent Validity and Composite Reliability.

The average variance extracted (AVE) and composite reliability (CR)

The assessment of discriminant validity among constructs

The study also evaluates discriminant validity, which is a sort of model validity. The purpose of the discriminant validity assessment is to guarantee that the model does not contain any redundant constructs. A redundant construct occurs when any two constructs in a model are closely related. To measure discriminant validity, the discriminant validity index summary, as shown in Table ​ Table4, 4 , must be developed. The diagonal line in bold represents the square root of AVE, and the other figures show the correlation coefficient between the two constructs. To determine whether the respective constructs achieved Discriminant Validity, the square root of their AVE must be greater than their correlation value with other constructs in the model (Awang et al. 2018 ). Discriminant Validity is achieved if the diagonal values (in bold) are greater than any other values in its row and column, as shown in Table ​ Table4, 4 , and thus Discriminant Validity for the six constructs listed is achieved.

The discriminant validity index summary for all constructs

The assessment of normality for all constructs

SEM is a parametric statistical approach to modelling, thus the normality distribution of all items measuring their respective constructs must be assessed. According to Awang et al. ( 2018 ), the skewness values for all items should not deviate from normalcy. As a result, skewness levels between − 1.5 and 1.5 are acceptable. Table ​ Table5 5 reports the normality distribution assessment results for all elements. The model's components all have skewness values between − 1.5 and 1.5, indicating that their distribution is normal (Awang et al. 2018 ). As a result, the data distribution meets the criteria for normality distribution when using parametric statistical analysis. The completion of the CFA indicates that the validity criterion has been met. After the study has satisfied the requirements for reliability and normality distribution, it can move on to modelling the structural model.

The assessment of normality for all components of the constructs

The structural model and structural equation modelling (SEM)

Once the CFA report is completed and all results meet the required thresholds for validity and reliability, it can be concluded that the measurement models for all latent constructs in the model have been validated (Sarwar et al. 2022 ). Table ​ Table6 6 shows the statistical analysis employed for each hypothesis statement. To run Structural Equation Modelling (SEM), the constructs should be arranged from left to right, beginning with the exogenous constructs on the far left, followed by the mediator constructs in the middle, and the endogenous construct on the far right (Awang et al. 2018 ). Based on the hypothesis direction, this study uses the single headed arrow to connect the exogenous construct to its associated endogenous construct.

The hypothesis statement for mediator effect for this paper

Finally, as shown in Fig.  3 , the double-headed arrow connects all exogenous constructs. The single headed arrow represents the causal effects of an external construct on the respective endogenous construct being evaluated. If the structural model contains more than one exogenous construct, the double headed arrow should be used to quantify the correlational effects between all exogenous constructs. The study must examine the strength of correlation between the exogenous constructs to analyse and prevent the multi-collinearity problem in the model where the two exogenous constructs are highly linked. When the correlation between two exogenous constructs exceeds 0.85, the constructs are highly correlated, and the multi-collinearity problem exists (Sarwar et al. 2022 ).

The structural model for the study

The assessment for construct validity

The Absolute Fit category, RMSEA, is 0.046 (less than 0.08), the Incremental Fit category, CFI, is 0.964 (greater than 0.90), and the Parsimonious Fit category, Chi-square/df ratio, is 1.749 (achieved the threshold of less than 3.0). As a result, the Construct Validity criteria were met by the measurement model for all latent constructs (Afthanorhan et al. 2020 ).

Results and discussion

Profile of respondents.

The study was conducted on a total of 400 subjects. Three hundred sixty questionnaires were completed (response rate: 90.0%), and as there were no missing data, all completed questionnaires were included in the analysis. Table ​ Table7 7 summarises the demographic profile of the survey respondents. The respondents profile includes gender, age, educational level, employment status, ethnicity, marital status, monthly income, number of family members and if the COVID-19 pandemic has impacted their income.

Sociodemographic characteristics of respondents ( N  = 360)

The majority of the participants were females (59.4%), Malay (79.7%) and over 80% of the respondents were between the ages of 20–25. The vast majority of respondents were either enrolled in or had completed college tertiary education. Education has been shown to improve personal financial management and improve financial well-being (Anderloni et al. 2012 ). Only 15.3% of the respondents have SPM/STPM or no formal education. The majority of respondents are single (91.7%), and this is because the respondents are young adults.

Most of the respondents have a monthly income lesser than RM1,500 (75.0%), and the remaining 25% of them have a monthly income greater than RM1,500. However, despite this, it is noted that the young adults have had their allowances reduced with 42.5% of the respondents indicating a drop of income in view of the COVID-19 pandemic. A whopping 64.2% of respondents also indicated that the number of family members in their household is between 5–8, which is significantly higher than the average national household size. The average household size in Malaysia stands at four persons as of 2019 (Department of Statistics Malaysia 2019 ). This may indicate that many young adults are living with an extended family member.

The relationships between variables

Table ​ Table8 8 displays the relationships between variables of the non-mediation model. The details of the findings are discussed in the following sections.

Regression path coefficient and its significance

The relationship between financial literacy and financial well-being

This study discovered that financial behaviour has a significant positive influence on financial well-being ( β  = 0.48, t  = 3.10, p  < 0.05) in the non-mediation model. This finding is consistent with recent local studies (Mahdzan et al. 2019 ; Sabri et al. 2022 ), which discovered that being financially healthy and happy necessitates positive financial behaviour, such as regular savings and proper credit management. Interestingly, the researchers discovered that financial literacy has no significant influence on financial well-being ( β  = 0.09, t  = 1.82, p  > 0.05), contrary to previous research that found financial literacy to be important in determining financial well-being (Koposko 2013 ; Rahman et al. 2021 ; Taft et al. 2013 ). Taft et al. ( 2013 ), however, proved a positive impact of financial literacy on financial well-being among Iranians, while Rahman et al. ( 2021 ) confirmed a significant influence of financial literacy on financial well-being among B40 households in Malaysia. These studies sampled the general population and low income households as opposed to the young adults population.

The relationship between financial socialisation and financial well-being

Financial socialisation was found to have a significant influence on financial well-being ( β  = 0.31, t  = 2.93, p  < 0.05). This is consistent with the findings of Jorgensen and Savla ( 2010 ), who discovered that youths acquire their financial learning experiences through positive or negative reinforcement, observations, participation and practise, or family instructions. Young adults' intermediate outcomes, such as their attitude towards money, are primarily influenced by their family members and are strongly related to their financial behaviours and well-being. Prior research has found a causal significant relationship between parental financial socialisation and the well-being of young adults, which supports the findings of this study. Children whose parents who have set a good financial example and educated them well in childhood will be able to manage personal finances well in adulthood (Friedline et al. 2013 ; Sirsch et al. 2019 ). This research also discovered that the majority of young adults' financial socialisation was heavily influenced by their parents. Furthermore, because of proper financial socialisation agents during childhood, respondents strongly believe that they can effectively manage numerous difficulties and achieve successful outcomes.

The relationship between self-control and financial well-being

This study found that self-control is insignificantly related to financial well-being ( β  = 0.15, t  = 1.81, p  > 0.05). Self-control alone cannot guarantee financial well-being. Young adults who exercise self-control but take no action to improve their financial circumstances would not be able to attain financial well-being. Nonetheless, to a certain extent, some practice of self-control will help young adults to have more savings, but this does not guarantee in ensuring that upon exercising such a personality trait, their financial well-being will improve. This disparity arose because young adults are feeling troubled by the global outlook caused by the pandemic and as a result, believe that despite exerting self-control, they may be unable to achieve financial well-being. However, as illustrated by other highlighted studies, there is a strong relationship between self-control and financial well-being.

The relationship between financial technology and financial well-being

The study found that financial technology (fintech) is insignificantly related to financial well-being ( β  = 0.03, t  = 4.21, p  > 0.05). As there are many applications that prey on young adults to spend their money, this research found that there is no causal positive relationship between fintech and young adults’ financial well-being. Applications such as Buy Now Pay Later (BNPL) do not aid in wealth preservation or debt reduction (Wolla 2017 ). Garg and Singh ( 2018 ) discovered that young adults nowadays face greater difficulty managing their money due to the variety of options available in the market. Furthermore, young adults are thought to be more technologically savvy, highly educated, and more talented and motivated to enjoy life through instant gratification (Mahalingam 2017 ; Nga et al. 2010 ). As a result, because young adults do not prioritise personal finance, certain fintech platforms may cause more harm than good (Mahalingam 2017 ).

Using bootstrapping to confirm the results of the mediation test

According to Yusof et al. ( 2017 ), the researcher must use the bootstrapping resampling procedure to confirm the test results once the hypothesis test for mediation has been completed and the mediation effect has occurred in either partial or full mediation. Table ​ Table9 9 reports the findings of the bootstrapping method for examining the financial behaviour as a mediator in the relationships between financial literacy, financial socialisation, self-control and financial technology with financial well-being. The study utilised the maximum likelihood (ML) Bootstrapping using 1000 bootstrap samples, with PC (Percentile) 95% confidence interval and BC (Bias-corrected) 95% confidence interval.

The bootstrapping result for testing financial behaviour as a mediator

Dependent variable: Financial well-being

The combined impact of exogenous factors on endogenous variables is explained by the model's R 2 (coefficient of multiple determination) performance (Hair et al. 2021 ). Out of the five path values, only two path coefficients were found to be statistically significant. Based on the findings, financial behaviour had an R 2 of 0.74 and financial well-being had an R 2 of 0.61. With an R 2 of 0.74, it was clear that financial technology, self-control, financial socialisation, and financial literacy together accounted for 74% of the variation in explaining financial behaviour. Similarly, R 2 of 0.61 indicated that 61% of the variation in describing financial well-being was explained by financial literacy, financial socialisation, self-control, financial technology, and financial behaviour.

The results of this study looked into the mediation effect of financial behaviour in the relationships between financial literacy and financial well-being ( β  = 0.071, p  < 0.05), between financial socialisation and financial well-being ( β  = 0.19, p  < 0.05), between financial self-control and financial well-being ( β  = 0.05, p  < 0.05), between financial technology and financial well-being ( β  = 0.01, p  < 0.05), as well as between financial behaviour and financial well-being ( β  = 0.13, p  < 0.05). The findings demonstrate that every mediation relationship showed a strong mediation relationship. Based on the empirical results, H1, H2, H3, and H4 were therefore supported. Financial behaviour is crucial in empowering young adults' financial well-being, based on the mediation analysis' unmistakable and conclusive conclusion. The study used the approach recommended by Awang et al. ( 2018 ) and Kashif et al. ( 2016 ) for examining the mediation effects in the model.

The mediation effects of financial behaviour in the relationships of the factors on financial well-being are further discussed. Financial literacy underlies the cause of one’s financial well-being through their involvement in financial activities. The mediation effect of financial behaviour is in tandem with Xiao and Porto ( 2017 ), Atkinson and Messy ( 2011 ), and Klapper et al. ( 2013 ). As Xiao and Porto ( 2017 ) pointed out, increased financial literacy is frequently associated with increased knowledge acquisition, confidence, and action-taking, all of which contribute to increased financial well-being. The actions taken in financial activities involving various financial matters and the application of financial literacy in financial behaviour would enhance financial well-being. Both past studies by Atkinson and Messy ( 2011 ) and Klapper et al. ( 2013 ) relate on the significant role of financial literacy in creating an enhanced ability to plan, save and react to financial shocks. These past studies are able to justify the mediating effect of financial behaviour in the relationship between financial literacy and financial well-being. The knowledge on finances alone without the action taken using the knowledge may not improve financial well-being significantly, thus the role of financial behaviour is important.

For the significant mediation effect of financial behaviour in the relationship between financial socialisation and financial well-being, it is about the role of financial socialisation, especially among parents with young adults. Parents play an important role in shaping the knowledge and skills related to financial matters of their children, which is required for a sound financial behaviour. Financial socialisation, especially by parents, contributed to the increase of financial well-being through their involvement in financial activities. A proper saving and monetary arrangement opens for improvement of the financial behaviour of individuals through more family financial socialisation (Jorgensen et al. 2017 ). Similarly, contended by Firmansyah ( 2014 ), the conduct of saving is influenced by parents and guardians’ eagerness. The financial behaviour of children resembles the financial behaviour posed by their parents. Either the positive or the negative financial behaviour of parents or the people around them would eventually show when they grow up, leading to a better or worse financial well-being.

In explaining the mediation effect of financial behaviour in the relationship between self-control and financial well-being, the ability of financial behaviour to mediate the relationship is by amplifying the self-control of young adults. Kiyosaki ( 2014 ) discovered that young adults with better self-control have better financial behaviour and can better manage their financial resources, which leads to financial well-being. In line with the findings of this paper, he discovered that they optimally allocate their resources. High self-control would guide their financial behaviour to a good extent. Furthermore, Kahnemann ( 2011 ) justified that people with cognitive abilities always manage their finances to achieve set goals and foreseeable expenses, emphasising the importance of self-control.

The use of fintech is mediated by financial behaviour in its relationship with financial well-being. Mastering fintech only may not contribute to elevating financial well-being of young adults. Fintech, as it was discovered, benefits young adults as an enabling ecosystem but does not significantly benefit them in terms of financial well-being if they fail to pay attention to their own financial behaviour. Therefore, to benefit from financial technology, young adults must practise responsible financial behaviour. Hence, the mediation result of financial behaviour in the relationship between fintech and financial well-being alleviates the function of fintech in improving financial well-being with the role of financial behaviour in the process.

Robustness checks

Robustness checks were carried out to evaluate the sensitivity of the empirical findings to alternative estimation using the Sobel-Goodman mediation test suggested by Sobel ( 1982 ). The variables were constructed using the aggregate (calculated by the combination of several separate elements) for each category. Those with more financial literacy, financial socialisation, self-control, and financial technology, tend to report better financial well-being. A possible mediation explanation is that higher financial behaviour is associated with financial well-being. The theoretical causal process is shown in Fig.  4 , where a and b are coefficients, a  ×  b is indirect effect and c’ is direct effect.

Theoretical causal process

The empirical results are reported in Table ​ Table10. 10 . Based on the Sobel-Goodman mediation results, the findings are robust to the alternative estimation method, where the results are in line with Tables ​ Tables8 8 and ​ and9. 9 . As shown in Models 1–4, all the indirect effect tests ( a  ×  b ) revealed in the first Sobel-Goodman mediation tests table show very small p values ( p  < 0.001), providing support for the explanation that financial behaviour mediates the effects of financial literacy, financial socialisation, self-control, and financial technology on financial well-being. In addition, there is a direct effect from financial literacy on financial well-being as demonstrated by the c’ coefficient. The last row of Table ​ Table10 10 implies that the effects of financial literacy are reduced by about 48.1% after accounting for financial behaviour as shown in Model 1.

Robustness checks using the Sobel Goodman mediation test

Standard errors in parentheses (). 95% confident interval in brackets []

*, ** and *** denote significant at 1%, 5% and 10% levels, respectively

Theoretically, this suggests that about 48.1% of the effects of financial literacy on financial well-being is explained by the indirect effects of financial literacy on financial behaviour. Financial technology accounts for the biggest percentage of these four explanatory factors at 58.8%. This suggests that the indirect impact of financial technology on financial behaviour accounts for around 58.8% of the influence of financial technology on financial well-being. Among the factors being mediated by financial behaviour in these models, financial technology is revealed as the factor that required financial activities to be performed highly, thus the high involvement of financial behaviour for those financial technology savvy individuals would increase financial well-being more than the other factors. Financial literacy is the second factor being mediated highly by financial behaviour, followed by financial socialisation and self-control.

Conclusion and implications

This study examines the determinants of young adults' financial well-being, considering financial behaviour as a mediator, using the structural equation modelling multivariate approach. The empirical findings indicated that financial behaviour was the most important element in influencing young adults' financial well-being. In addition, the study found that financial literacy, financial socialisation, self-control, and financial technology were statistically significant determinants of financial behaviour. Moreover, financial behaviour plays an essential role in mediating the determinants that affect the financial well-being of young adults in Malaysia. Among the mediators, financial technology is ranked first, followed by financial literacy, financial socialisation and self-control. The robustness check using other estimation methods also demonstrated that the mediating results of these four variables were robust and remain unaltered.

Theoretical implications

The study offers few theoretical implications. First, this study had deliberated on the results of the relationships between the independent variables (financial literacy, financial socialisation, self-control and financial technology) and the mediating variable (financial behaviour). The application of Systems Theory, Theory of Social learning, Theory of Self-Control, the Unified Theory of Acceptance and Use of Technology (UTAUT), had successfully explained the current research framework and contributed to the body of knowledge and understanding of financial well-being through the integration of these theories. The systems theory includes structural and process constructs (e.g. input, throughput, and output). Danes and Yang ( 2014 ) explained that these are developmental sequences that are needed in order to achieve successful financial satisfaction or a sense of well-being derived from demands being met (Deacon and Firebaugh 1988 ).

This study also contributed by examining a personality trait variable—self-control, which has not been examined as a variable in preceding studies. The study offers evidence for self-control as an internalised measure that must be practiced by young adults in their pursuit of attaining positive financial behaviour. Moreover, the research findings expanded the existing understanding by integrating the mediating effect of financial behaviour on the relationship between financial literacy, financial socialisation, self-control and financial technology with financial well-being. In addition, this study explains the inconclusive evidences for the effectiveness of financial literacy on financial behaviour, arguing that personality traits such as self-control in determining sound financial behaviour is important.

Practical implications

Financial well-being is an important milestone in a young adults’ life. What happens during these years has profound and long-lasting implications for young adults' future employment and career paths and for their economic security, health, and well-being. Financial missteps early in life of an individual, if not corrected, can have severe consequences in an individual’s lifetime. This study offers important practical implications and offers inferences for young adults, policy makers and other stakeholders. This research has shown considerable evidence that young adults’ financial well-being can only happen with positive financial behaviour. The results of the study could assist government and like-minded organisations to formulate policies for improvement and possible intervention programmes to assist young adults with their financial behaviour in order to achieve financial well-being.

This study reiterated the importance of financial socialisations. A certain level of family financial activities must take place for parents to have confidence and allow children the opportunity to gain hands-on experience in managing their money. Based on the results of the present study, there should be awareness programmes for the parents as well as children. These programmes should highlight the importance of sharing and practising positive financial practices at homes. Financial advisors and consultants may design training programmes which focus on certain skills such as self-control and financial technology.

Fintech and financial literacy may help young adults attain financial well-being. In this regard, policies should be drawn to help young adults attain financial well-being by the right framework of content. The findings could be employed to develop financial education programmes that will help young adults to impart the knowledge and skills to manage their personal finances and thus, improve their overall financial well-being. Precisely, the intervention policies should be geared towards moulding the financial behaviours of young adults. Increasing financial resources of young adults could feasibly work to improve young adults’ financial well-being as an alternative direct intervention. An extensive young adults’ awareness campaign is possible by utilising various communication platforms, primarily platforms that are accessible to young adults. Awareness, coupled with changes in their financial behaviour, will yield actions such as preparing an emergency fund, a retirement plan or purchasing insurance coverage for themselves. One research finding that has been clear is that financial literacy is inadequate of helping young adults’ financial well-being and as such, government agencies such as Credit Counselling and Debt Management (AKPK) or the Financial Education Network (FEN) must look at newer measures of moulding young adults’ financial behaviours.

A move away from a specific programme approach (a one size fits all) may be necessary. The effort to identify the best practice and innovative delivery remains a struggle even for the regulators in Malaysia. Segmenting individuals according to a cohort will help to provide more customised programmes. The approach must be geared to target financial behaviours using appropriate means. In addition, the use of technology-driven educational platforms will ensure that financial well-being could be intensified through the development of more engaging content.

Limitations and directions for future research

There are certain limitations of the present study which deserve attention and could potentially become areas for future research. First, the survey sample is restricted to young adults between the ages of 18–29 only; thus, future researchers need to be cautious while generalising the results of this study. In order to increase the generalisability of the current theme, more coverage to the sample should be given beyond the ages of 18–29 by considering other adult population. Second, the sampling method applied for the current research study was multi-stage random sampling. Therefore, future studies may include responses from all states in Malaysia to yield a more accurate understanding on young adults’ financial well-being. Further, this study used a subjective measure of financial well-being, which is well documented. Future studies may include subjective measures along with objective measures of financial well-being. In addition, this study did not analyse young adults from different backgrounds of education, compared to young adults who come from wealthy families. Therefore, to tackle, understand, and compare young adults’ outcomes from different perspectives, the inclusion of young adults from all socio-economic backgrounds must be examined thoroughly. Even though it is understandable that young adults from high-income families have many advantages, there have been many cases where they had turned out to be problematic to the society, and not all have become successful in the many aspects of their lives, especially their financial well-being. Finally, there are other factors affecting young adults’ financial well-being that were not included in the study which provide opportunities for further analysis. Future studies may also examine the childhood experience and digital financial literacy aspects.

Below is the link to the electronic supplementary material.

Acknowledgements

This study was funded jointly by the Geran Putra Universiti Putra Malaysia (UPM/800/2/2/4-Geran Putra—The Influence of Personal Finance and Psychological Factors on Financial Health among Malaysian Millennial Youth) and the Association of Consumer Interests and Marketing (UPM-AACIM/2020/6380044—Development of Financial Vulnerability Model for Malaysian and Indonesian Civil Servants towards Achieving Financial Sustainability).

Biographies

is a Professor and the Dean, Faculty of Human Ecology, Universiti Putra Malaysia. He holds a Master of Science (Consumer Science) from Universiti Putra Malaysia and holds a doctorate (Ph.D.) from Iowa State University, USA. He actively conducts research in the fields of consumer finance, consumerism and financial education for all age groups. Fazli holds professional qualification as a Certified Financial Planner (CFP) from the Financial Planning Association of Malaysia and the Shariah Registered Financial Planner (SRFP) from the Malaysian Financial Planning Council.

is the Head of External Relations, Research and Publication Department of the Malaysian Financial Planning Council. He graduated from Universiti Tunku Abdul Rahman with bachelor’s degree in Mass Communication and then received his Master’s in Business Administration degree with a specialisation in Corporate Finance from University of Abertay Dundee, UK and a Ph.D. in Family Economics from UPM in the year 2022.

is a Professor in the School of Business and Economics of Universiti Putra Malaysia. He holds a Ph.D. in economics from the University of Leicester, United Kingdom. He was a visiting scholar at Department of Economics, University of California Santa Cruz and Nanyang Technological University of Singapore. Currently he is the Chief Editor, International Journal of Economics and Management (indexed in Scopus). He was listed as top 2% scientists in the world in the field of economics.

is an Associate Professor at the Faculty of Human Ecology, UPM. She holds a doctorate in the field of Family Financial Management and Investment Decision, obtained a Master in Business Administration (Corporate Finance), graduated in Bachelor of Science with Honours (Chemistry) in 1985 and attained a postgraduate Diploma of Education. She is a Certified Financial Planner (CFP) since 2002. Research projects involved and publications were on investment behaviour, consumer credit behaviour, financial risk management, job productivity, personal financial planning, family financial management and financial wellbeing.

is a senior lecturer at the Faculty of Human Ecology, Universiti Putra Malaysia (UPM). He graduated from Sultan Idris Education University in 2009 with a Bachelor Degree in Education (Biology), and followed by completing his Master of Economics degree from UPM majoring in development economics. Dr. Burhan received a Doctor of Philosophy from Universiti Malaysia Kelantan. His research area of interests includes the study on happiness and subjective well-being, cognitive skills, and economic development.

is a Country Liaison (Malaysia) for Southeast Asia One Health University Network (SEAOHUN) Secretariat. Her previous experience was as a Research Officer at the Corporate Communications Unit, Ministry of Health, Malaysia. She received her Ph.D. in science and technology in 2021 from the Faculty of Medicine and Health Sciences, Islamic Science University of Malaysia. She has been conducting research at the intersection of mixed method research, including systematic review, quantitative and qualitative research. Her work covers managing regional knowledge for One Health curricula from multiple disciplines connected to the health of humans, animals, and the environment.

Declarations

The authors declare that they have no conflict of interest.

Publisher's Note

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• Open access
• Published: 18 July 2021

Financial literacy and financial behavior with the mediating effect of family financial socialization in the financial institutions of Lahore, Pakistan

• Sumaira Khawar 1 &
• Aamir Sarwar   ORCID: orcid.org/0000-0003-3227-3188 1  

Future Business Journal volume  7 , Article number:  27 ( 2021 ) Cite this article

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Metrics details

The main purpose of this study was to find out the relationship between financial literacy and financial behavior and to discover the mediating influence of family financial socialization on this relationship. The study also particularizes that how personal knowledge of finance of an employee and whatever they have learned through family socialization will help them to make sound decisions having a financial impact on them and their family.

Design/methodology/approach

Employees of financial institutions employed and residing in Lahore, Pakistan, were the target population of this report. It was a cross-sectional quantitative research study. By using a detailed questionnaire, primary data were obtained. The sample size was 330; through convenience sampling, employees employed in banks were chosen. Descriptive analysis, parametric test, reliability test, and correlational examination with the aid of SPSS 23 and the use of SmartPLS 3.0. are knowledge investigation techniques used in this examination study to infer outcomes.

Results/findings

The outcomes which are created from this exploration include: (1) there was no distinction in the financial conduct of representatives from various socioeconomics gatherings. Financial education has a critical positive relationship with financial behavior. (2) Family financial socialization additionally shows a huge positive relationship with financial education and financial behavior. (3) Financial education demonstrated a remarkable abnormal impact on financial behavior through family financial socialization. (4) Family financial socialization shows partial mediation between financial literacy and financial behavior. We can accomplish that formal, as well as informal, training of finance decides the financial behavior of people.

Originality/value

This study is the first of this kind to examine the association between financial literacy, and financial behavior using family financial socialization as a mediator and employees of financial institutions as the target population.

Introduction

These days, the growth of the global economy is shaping evolution in the financial sense [ 23 ]. It is increasingly important to make better financial decisions because of greater accessibility to new complex financial products, which is why financial literacy is needed as it affects financial choices [ 16 , 17 , 25 ]. The 2008 economic downturn also paid significant attention to financial literacy and shifted government approaches to raise awareness of the long-term financial requirements of the person. This political move expands the significance of families’ capability to take financial obligations and to put something aside for their future needs [ 3 , 22 ].

Workers experience and handle monetary choices, including choices identified with reserve funds and speculations. As monetary components have ended up being dynamically interesting and individuals are given new and forever refined financial terms. There is easy access to the debt than previously and chances to borrow are plenty. So, numerous employees are not prepared to make healthy financial choices [ 30 ].

If financial products are not treated with decent financial behavior, a person can effortlessly have caught in horrible monetary circumstances. A well financial behavior can be comprehended from a person’s approach in dealing with the managing, planning, and controlling of finances [ 23 ].

According to Sevcík [ 41 ], literacy is a growing set of information, abilities, and methodologies that people develop during the course of life. Literacy is more than just financial knowledge it includes utilization of rational and practical abilities, attitudes, and enthusiasm. Previous studies showed that parents who permit their offspring to make financial choices and let them pick up from those decisions, those individuals have financial self-efficacy in them. Parents play an important role in shaping the financial knowledge and skills their children need to have sound financial behavior [ 40 ].

Purpose of the study

With regard to Pakistan, an insignificant study has been finished on subjects like financial behavior, financial literacy, and family financial socialization. As Pakistan is a monetarily non-industrial nation, the absence of mindfulness just as information about monetary issues among individuals is as yet the essential concern. The changes presented by the public authority of Pakistan have expanded the obligation among representatives of monetary establishments to design future monetary requirements. High occupation indecision and simple admittance to credit have an unnecessary outcome of financial behavior. Along these lines, it is fundamental to go through an investigation on this point. Along these lines, this examination stresses the connection between financial literacy and financial behavior of representatives with the mediating impact of family financial socialization in financial institutions of Lahore, Pakistan. The study focused on the financial decisions made by employees regarding managing their savings and investments and helping their families in making all such decisions. How they use their financial knowledge and whatever they have learned through family socialization. How do they make decisions to get the financial benefits out of the financial options available to them?

Research objectives

To discover the mediating influence of family financial socialization among financial literacy and financial behavior of employees of financial institutions.

Literature Review

• Financial literacy

Financial literacy is a requisite for each person to keep away from money-related problems [ 3 ]. Financial literacy can assist employees in achieving valuable financial behavior and adapt to any encounters, particularly concerning financial problems [ 24 ]. Lusardi and Mitchell [ 31 ] stated that “Financial literacy is knowledge and understanding of financial concepts and risks, and the skills, motivation, and confidence to apply such knowledge and understanding to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life.” The capability to comprehend fundamental ideas of finance and manage everyday financial exchange is vital. Therefore, a person ought to be outfitted with better financial knowledge and financial attitudes to be able to make sensible financial choices. Financial knowledge is a significant factor in financial literacy [ 33 , 35 ]. People who don’t have adequate financial knowledge will encounter difficulties in managing their finances [ 1 ]. Financial literacy was operationalized by using basic questions of financial knowledge related to inflation, interest calculations, risk and return, diversification, and market functioning [ 19 , 31 ]. People with developed intellectual skills show a great degree of financial literacy. Cognitive capabilities have a significant relation with numerical competence as well as with financial behavior [ 20 ]. Financial knowledge is vital, but it is an inadequate driver of accountable financial behavior. Handling one’s finances is not only about financial knowledge and literacy. A person moreover required self-efficacy. Self-efficacy was related to the individual’s financial behavior significantly [ 14 , 42 ]. Xiao and O’Neill’s [ 46 ] analyses provided evidence suggesting that high school financial education may have direct impacts and spillover effects on consumer financial capability. Financial education may affect financial satisfaction, a subjective measure of financial well-being, through financial literacy, financial behavior, and financial capability variables [ 47 ].

• Financial behavior

Financial behavior is conduct that is associated with financial implementations [ 3 ]. Financial literacy is vital for sound financial decision making. A high degree of financial literacy escort toward better financial decisions [ 17 ]. People who are not financially literate are less likely to do financial planning and investing [ 45 ]. The absence of financial knowledge and the inability to plan for the future may result in people taking a mortgage [ 7 ]. Budgeting of the finances, spending, and purchasing attitudes influences future financial decisions [ 42 ]. A saving attitude also contributes to making a financial behavior [ 22 ]. So, financial planning, preparation for the future, budgeting, investment, and saving are the indicators of financial behavior. This investigation was conducted in Pakistan and it concluded that gender, occupation, and marital status exhibited no influence on venture capitalist’s investment behavior [ 39 ]. Demographic features considering gender and age do not show any dissimilarity in the financial behavior of country-side businesspersons [ 11 ].

Financial literacy and financial behavior

Financial Literacy has a significant positive influence on financial behavior ([ 12 , 32 ]; Komara et al. 2017). Financial literacy, socioeconomic factors had a noteworthy influence on financial behavior [ 23 ].

Hastings [ 20 ] clarified that individuals with created scholarly abilities and the individuals who can tackle numerical computations easily show an extraordinary level of financial education. They evaluated different readings that reasoned that intellectual capacities have a huge connection with mathematical skill just as with thorough financial behavior.

According to Drever et al. [ 10 ], it is an established phenomenon that financial behaviors that individuals follow over their adulthood were the result of financial attitudes that they have learned in their childhood.

Consumers often make bad financial decisions, according to the Edmiston and Fisher [ 13 ] report, because they do not know how to make good ones, because consumers may not understand the value of planning for the future, and because they may not perceive the trouble, they may bring upon themselves. A relationship between financial education and financial awareness and financial behavior was also demonstrated in the report.

The findings of Robb and Woodyard [ 37 ] suggested that both objective and subjective financial knowledge influence financial behavior, subjective knowledge having a larger relative impact comparatively.

Mandell and Linda [ 29 ] discoveries show that the individuals who took the course of financial management didn’t assess themselves to be more savings-oriented and didn’t seem to have ideal financial behavior over the individuals who had not taken the course. Comparable were the discoveries of the investigation by Tang and Baker [ 42 ] which uncovered that financial information is a significant yet deficient driver of mindful financial behavior.

• Family financial socialization

Family financial socialization implies endeavors that family relates make to monetarily blend. Generally, in the compositions, it is accumulated at parental difficult work in mingling their youngsters [ 8 ]. The person’s socializing is by noticing their family exceptionally their folks, by taking an interest in monetary practices, and by getting guidelines from family [ 2 , 6 ]. Family communication designs indicated a relationship with financial information [ 19 ]. Guardians’ conduct and attitudes have a segment in molding their kid’s financial behavior [ 1 ]. Improvement in saving and monetary arranging ideally opens entryways for upgrading the financial behavior of individuals through more family financial socialization and more self-assurance [ 26 ]. Parents have a generous impact in trim the financial knowledge and monetary ability of the kids [ 40 ]. Financial literacy isn’t significantly connected with guardians’ inclusion [ 7 ]. Saving conduct is influenced by their folks’ eagerness, and guardians’ contribution in the saving of their kids [ 15 ].

Better financial decisions are industriously connected with the financial proficiency of the individuals who settled on financial decisions. Having proper monetary information would prompt great and better financial decisions [ 16 ]. Parents training their kids about cash helps the kids and next ages to know and consent to take obligation for long haul financial success. Parents’ financial instruction is a multi-generational thing. Studies demonstrated that guardians who grant their posterity to settle on financial decisions and let them get from those choices, those people have monetary self-viability in them. Guardians who demonstrated great monetary conduct to their kids, their youngsters additionally will in general have sound financial behavior [ 40 ]. In the current investigation, financial literacy is an indicator variable, and a criterion variable is financial behavior. Further, the part of family monetary socialization is concentrated as an intervening variable.

Financial Socializing is the process of learning and advancing values, knowledge, norms, standards, attitudes, and behaviors that promote well-being, financial viability among the individuals as explained by Danes and Yang [ 9 ].

Individuals learn about behaviors in their childhood through the interaction with socialization agents such as parents, siblings, other family members, peers, religion, schools and then practice these behaviors in their adulthood years [ 10 , 18 ].

According to Ullah and Yusheng [ 44 ], financial socialization includes the development of standards, values, norms, and attitudes, rather than just related to managing money. As described by Asad et al. [ 4 ] financial socialization has much importance in making sound financial decisions.

According to Sabri et al. [ 38 ], parents teach their children how to manage money. Most of the teaching of a child takes place almost invisibly through witnessing the money behaviors within the family (Fig.  1 ).

Conceptual Framework of Family Financial Socialization mediating Financial Literacy and Financial Behavior

The numerous studies listed in the literature review are the basis of our conceptual framework. As far as the relationship between financial literacy and financial behavior is concerned, multiple studies have produced diverse results. Our research has therefore attempted to explore the same relationship between financial institution workers as most of them have learned financial management (formal finance education) and are exposed to financial knowledge (on-job learning) and financial family socialization (informal financial knowledge). The relationship of financial literacy and its effect on financial behavior in Pakistan will further contribute to our conceptual framework. Our study will illustrate a different viewpoint, such as the financial behavior of the participants with formal and informal financial literacy.

Research hypotheses

Hypotheses have been drawn from the variables mentioned above and the objectives of the study to find out the relationship between variables and the impact of the mediating variable. The hypotheses include the following which will help to achieve the objectives of the research:

There is a relationship between financial literacy and the financial behavior of employees in financial institutions

There is an association between financial literacy and family financial socialization of employees in financial institutions

There is an association between family financial socialization and the financial behavior of employees in financial institutions

There is a mediating effect of family financial socialization among financial literacy and financial behavior of employees in the financial institutions

This exploration focused on the connection between financial literacy and financial behavior of representatives of financial institutions and the mediating impact of family financial socialization on this relationship was studied. A cross-sectional examination was conducted and the kind of exploration utilized in this study was descriptive and correlational.

Research design

In order to find out the relationship between financial literacy and the financial behavior of employees, a descriptive and correlational analysis was carried out at the offices of financial institutions operating in Lahore. Financial behavior is a criterion variable in this research sample, whereas financial literacy is an independent variable, and a mediating variable is family financial socialization.

Demographic variables

Marital Status

Qualification

Monthly Income

Father’s Education

Father’s Occupation

Research Instrument

In this research study, primary data were gathered, and for this motive, a complete questionnaire was outlined which was utilized as an instrument to assemble data from employees of financial institutions. The developed questionnaire comprises questions regarding financial literacy, financial behavior, and family financial socialization of employees in financial institutions of Lahore. There were also some questions related to the demographic information of employees included in the questionnaire.

Segments of questionnaire

The questionnaire contains two sections: (1) Demographics of employees in the financial institutions of Lahore, Pakistan. Demographic variables are adopted from [ 39 ]; (2) whereas Financial literacy, Financial Behavior (Financial Planning, Preparation for future, Budgeting, Investing, Saving), and Family financial socialization were adapted from the literature as mentioned below:

The item scale used to determine financial literacy consists of 21 questions. Statements were modified and adapted from [ 19 , 24 , 25 ].

The item scale used to measure financial behavior consists of 29 questions. Dimensions of financial behavior were adapted from [ 23 , 24 ]. Statements related to financial behavior were adapted from [ 34 ].

The item scale used to measure family financial socialization consists of 14 questions. Statements were adapted from [ 18 , 31 , 43 ].

Target population

In this study, the idea of choosing employees of the financial institution as target population was based on the assumption that most of them will be having a business background, finance literate as compared to the employees working in other sectors, will be having on-job experience of finance as well. So, it will be of great interest to examine their financial behavior. Previous studies have not considered this point and mainly focused their studies on the financial behavior of students.

Unit of analysis

The unit of analysis taken in this research study was “individual” as this is related to their financial behavior.

Data collection

The respondents were contacted personally by going to each institution, and for responses, the questionnaire was given directly by hand to the respondents.

Location of the study

Data for the research were gathered from the employees working in the city of Lahore. Lahore is the second-largest city of Pakistan in terms of population and as a business hub. All type of financial institutions has their offices in the city.

Sampling technique

A convenience sampling technique is used for this research study. Convenience sampling is a form of non-probability sampling, where only those participants of the target population are counted in who meet definite practical criteria, for instance, ease of access and geographical vicinity is considered [ 5 ]. In the convenient sampling technique, a subset of the population that is conveniently available is used for data collection.

A sample of 330 employees was selected using convenience sampling for this research study. Primary data were collected through a questionnaire by visiting each office personally. Section “A” of the questionnaire consisted of questions related to demographics including gender, age, marital status, background, qualification, institution, monthly income, father’s education, and father’s occupation of employees. Section “B” of the questionnaire consisted of questions related to Financial Literacy, Financial Behavior, and Family Financial Socialization.

Statistical techniques

IBM SPSS version 23.0 was utilized for processing and analyzing the data gathered through questionnaires. Following are the statistical procedures that were implemented for the testing of hypotheses and intended for examining the various other aspects.

Reliability Test

Descriptive Test

Parametric Test

T test and ANOVA

Normality Test

Correlation Analysis

Mediation Analysis (Sobel test & SmartPLS 3.0)

Analysis and interpretation of data

Reliability analysis.

The total alpha value of Cronbach for financial literacy, family financial socialization, and financial behavior scale in Table  1 was 0.924, which is greater than the alpha = 0.7 benchmark, suggesting that the questionnaire is valid and has internal consistency.

Descriptive statistics

Table  2 shows the demographic features and the frequencies of the employees of financial institutions who had taken part in the research. After examining the data, it can be concluded that 69.4% of the respondents were male and 30.6% were females from the total number of 330 respondents. The majority (85.2%) of the employees are below the age of 36, which indicates that the majority of the employees are young or in the middle age group. A majority (52.1%) of the employees are married and, 75.5% of the employees belong to the urban area. 52.7% of the employees have Graduation qualification and, 77.3% of the employees work in commercial banks. 57% of the employees have a monthly income below Rs. 50,000. The majority (38.8%) of the employees’ fathers have a graduation qualification. 33% of the employees’ fathers have their own business.

Hypotheses testing—parametric analysis

Two different parametric tests for significant mean differences were applied to discover the effect of demographic variables on the financial behavior of employees in financial institutions of Lahore. Independent sample t test (two-sample mean) and one-way ANOVA (multiple samples mean) were implemented, considering the level of significance at α = 0.05 [ 5 ] as shown in Table  3 .

Independent t test

In Table  3 , relative to financial behavior, the p value results for gender, background, marital status, and qualification are 0.998, 0.201, 0.322, and 0.483, respectively, which is greater than 0.05. We therefore reject alternative hypotheses from H1 to H4 and it is concluded that given their gender, background, marital status, and qualification in financial institutions, there is no difference in the financial behavior of employees.

One-way ANOVA

The significance value in Table  3 for age, institution, monthly income, father’s education, and father’s occupation contrary to financial behavior are 0.429, 0.873, 0.095, 0.476, and 0.079, respectively, which shows that the p values are greater than 0.05 indicating we reject alternative hypotheses H 5 to H 9 so we concluded that there is no difference in the financial behavior of employees from a different age, institution, monthly income, father’s education and father’s occupation groups in financial institutions.

Correlation analysis

Financial literacy has a positive relationship with dependent variable financial behavior as it shows the value of Pearson’s correlation coefficient is r  = 0.548 and significance value of p is 0.000 which is less than 0.01, so we reject H 010 and accept alternate hypothesis and can say that there is a positive relationship between financial literacy and financial behavior (Table  4 ).

Financial literacy shows a positive association with mediator family financial socialization as it shows the value of Pearson’s correlation coefficient is r  = 0.379 and significance value of p is 0.000 which is less than 0.01, so we reject H 011 and accept H 11 and can say that there is a positive association between financial literacy and family financial socialization.

Family financial socialization is also positively correlated with financial behavior as it shows the value of Pearson’s correlation coefficient is r  = 0.647 and significance value of p is 0.000 which is less than 0.01, so we reject H 012 and accept alternate hypothesis and can say that there is a positive association between family financial socialization and financial behavior.

Mediation analysis

When the relationship between the predictor variable and criterion variable is defined using a third variable (mediator) this process is called mediation [ 21 ]. Family financial socialization is used as a mediator in our study to explain the association between financial literacy and financial behavior. For that purpose, we have used SmartPLS 3.0.

The variables and mediator used in this study are explained below:

( X ) Variable = Financial literacy ( Y ) Variable = Financial behavior ( M ) Variable = Family financial socialization

Pathway a: Financial literacy predicting family financial socialization

Pathway b: Family financial socialization predicting financial behavior

Pathway c: “Total effect of financial literacy on financial behavior” before mediation.

Pathway c’: “Direct effect of financial literacy on financial behavior” after mediation.

Pathway a*b = “Indirect effect of financial literacy on financial behavior” through mediator family financial socialization (Fig.  2 ).

Mediators Impact—Results using SmartPLS 3.0

Tables  5 and 6 show the relationship between an independent variable, a dependent variable, and the mediator.

As the total effect is significant and remains significant for direct effect as well, but it shows a reduction in a beta value, this indicates the existence of a partial mediation [ 28 ].

Indirect effect, i.e., total effect minus direct effect that is (0.426 - 0.250 = 0.176) as shown in Table  5 . Therefore, we accept H 4 which says that there is a partial mediating effect of family financial socialization among financial literacy and financial behavior of employees in the financial institutions.

Findings of the research

The prominent outcomes of this research study are explained below:

Outcomes on employees’ demographics in financial institutions

The majority of the respondents in this study were men, 2299 of whom were (69.4 percent). Of the respondents, 281 (85.2 percent) were below the age of 36, which means that the majority of workers are young or in the middle age group. 172 of the respondents were married (52.1 percent). A very high number of respondents were from urban areas, i.e., 249 (75.5 percent). Graduates constituted 174(52.7 percent) of respondents from financial institutions. Graduation was also the qualification of the fathers of 128(38.8 percent) respondents. Most of the respondents operated in commercial banks, including traditional as well as Islamic banks, with 255 (77.3%). Of the respondents, 188 (57 percent) have a monthly income below Rs. 50,000. Fathers of 109 (33%) respondents were running their own business. The above-mentioned data show the complete profile of the respondents.

Outcomes on financial behavior with demographics in financial institutions

There was no difference in the financial behavior of male and female respondents. The financial behavior of the respondents of different family backgrounds and marital status, different qualifications, different age groups, employed in different types of financial institutions, different income groups, different qualifications of their fathers, and different occupations was also the same. This study is very interesting and reveals the similarities between the respondents in terms of their financial behavior from different angles.

This research work is mainly intended for studying the “relationship between financial literacy and financial behavior” and what influence family financial socialization brings as a mediator on this relationship. Descriptive Analysis was used to study the financial literacy, financial behavior, and family financial socialization of the employees of financial institutions. Parametric Tests were utilized to examine the means of group differences for demographics with the financial behavior of employees in financial institutions. Research outcomes show that there are no differences in the financial behavior of employees considering all demographics. This finding validates the findings of Dzomonda and Fatoki [ 11 ] according to which demographic features considering gender and age do not show any dissimilarity in the financial behavior of country-side businesspersons. Parents who showed good financial behavior to their children, their children also tend to have sound financial behavior [ 40 ]. Whereas, according to Ahmad et al. [ 1 ] parents’ behavior and attitudes have a part in shaping their child’s financial behavior. Results of earlier research findings coincide with the results of our research analysis using SmartPLS; the existence of indirect effect and also shows that there is a partial mediation in the relationship between financial literacy and financial behavior. Therefore, based on the results it is concluded that financial literacy is directly as well as indirectly related to the financial behavior of employees, and a rise in financial literacy brings an increase in family financial socialization which further contributes to improving the financial behavior of employees. Our finding also validates the findings of earlier research by Beutler & Dickson [ 6 ], Allen [ 2 ] which concludes that individuals’ socializing is by observing their family specially their parents, by participating in financial practices, and by getting instructions from family. Our research concludes that both financial literacy and family financial socialization determine the financial behavior of individuals.

Limitations of the research

This research was valuable in terms of its contribution to the financial literacy and financial behavior of employees in the financial institutions of Lahore, Pakistan. On the other hand, it would be worthy of recognizing that there were some limitations in this research which are described below:

The size of the sample in this examination is only restricted to the 330 employees of financial institutions which may not signify the nationwide employees of financial institutions.

This research study is only restricted to the employees residing in one city of Pakistan, i.e., Lahore.

The technique of convenience sampling is implemented in this research and therefore this technique of sampling has its constraints.

This research has been directed under usual conditions, and any modification in the financial institutions’ circumstances has not been measured which brings a substantial impact on employees’ financial behavior.

Many of the employees were not accessible because of their hesitancy. Some employees are not willing to participate in the research because of their hectic schedules.

Recommendations of the research

For further research, qualitative research techniques should be used to get an in-depth analysis of financial literacy and financial behavior.

This research can be conducted in different towns in Pakistan to examine the financial behavior of employees.

This research can be conducted in other institutions, i.e., educational institutions, manufacturing and retailing institutions, and in different software houses.

Factors explained in this research study for financial literacy, and financial behavior can be utilized for further analysis to get in-depth facts.

It has been witnessed in this research that enhancing family financial socialization improves financial behavior. Further research can be conducted for evaluating the methods of enhancing family financial socialization and its influence on financial behavior.

Availability of data and material

Data of the research are available with authors. Derived data supporting the findings of this study are available from the corresponding author [AS] on request.

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SK and AS conceived of the presented idea. Both developed the theory and performed the computations and verified the analytical methods. AS encouraged SK to investigate the data and supervised the findings of this work. Both authors discussed the results and contributed to the final manuscript. All authors read and approved the final manuscript.

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Khawar, S., Sarwar, A. Financial literacy and financial behavior with the mediating effect of family financial socialization in the financial institutions of Lahore, Pakistan. Futur Bus J 7 , 27 (2021). https://doi.org/10.1186/s43093-021-00064-x

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Qualitative Research in Financial Markets

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Issue publication date: 24 April 2020

This paper participates in the debate on market efficiency and correct approach for asset pricing through a comprehensive review of literature in favor, as well as against the long held belief of market efficiency. The purpose of this paper is to understand emerging trends in behavioral finance and establish its future potential as a mainstream alternative theory of asset pricing.

Design/methodology/approach

The review and discussion of literature is mainly divided into three different sections that are –theories supporting efficient market hypothesis (EMH); studies providing evidences from the stock market on the failure of EMH and studies on behavioral finance, discussing separately investors’ behavioral biases keeping in mind their effect on stock prices; and providing empirical evidences on the effect of investor sentiment on stock prices.

The review of literature from both the point of views has helped in understanding the market efficiency issue and changing dynamics of asset pricing approach. This is achieved by highlighting the gaps in the concept of market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance. Through further discussion of emerging trends in behavioral finance, the paper also points out gaps and how these can be abridged, for behavioral finance to be accepted as a mainstream alternative approach to EMH.

Originality/value

This is an extensive and one of a kind study that discusses market efficiency through discussion of EMH and behavioral finance side by side. With the help of such a study, researchers can precisely understand the need and can focus on the future course of action to make behavioral finance a mainstream approach to asset pricing.

• Behavioral finance
• Efficient market hypothesis
• Behavioural biases
• Market inefficiency

Sharma, A. and Kumar, A. (2020), "A review paper on behavioral finance: study of emerging trends", Qualitative Research in Financial Markets , Vol. 12 No. 2, pp. 137-157. https://doi.org/10.1108/QRFM-06-2017-0050

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Financial Behaviour Under Economic Strain in Different Age Groups: Predictors and Change Across 20 Years

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The present study examined the multiple micro- and macro-level factors that affect individuals’ financial behaviour under economic strain. The following sociodemographic and economic factors that predict financial behaviour were analysed: age group, year of data gathering, and attitudes towards consumption (economical, deprived, and hedonistic). Subjective financial situations and demographic characteristics were controlled for. Finnish time series data that consisted of five cross-sectional nationally representative surveys were used ( n = 10 043). The analyses revealed four types of financial behaviour: cutting expenses, borrowing, increasing income, and gambling. Young adults aged 18–25 reported the lowest frequency of borrowing and gambling and the highest frequency of increasing income (together with young adults aged 26–35). Participants aged 66–75 scored the lowest in cutting expenses and increasing income in comparison to all other age groups. Financial behaviour under economic strain in 2019 can be characterized by lower instances of borrowing than in 2004 and 2009 and higher frequencies in increasing income in comparison to all other years of data gathering. Finally, strong attitudes towards saving were related to lower frequency of borrowing and gambling, whereas stronger hedonistic attitudes were related to lower frequency of cutting expenses and more frequent borrowing. The research results provide tools for consumer policy, consumer education, and consumer regulation.

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People’s ability to successfully manage their finances relates to their well-being (Dew and Xiao 2013 ; Serido et al. 2013 ), and living under economic strain has been suggested to have negative effects on individuals’ mental and physical health. As a consequence, living under economic strain may have adverse effects on the whole society (French and Vigne 2019 ). Thus, it is important to understand people’s financial behaviour when they face economic difficulties (Baek and DeVaney 2010 ; Fiksenbaum et al. 2017 ; Lusardi et al. 2011 ; Wiersma et al. 2020 ). Although there is research about consumers’ saving behaviour in different age groups (e.g., Dwyer et al. 2011 ; Webley and Nyhus 2001 ), as well as on their attitudes towards credit and debt (e.g., Cloutier and Roy 2020 ; Gamble et al. 2019 ; Ottaviani and Vandone 2011 ), there are too few studies focusing on different kinds of financial behaviour under economic strain (Baek and DeVaney 2010 ; Lusardi et al. 2011 ; Wiersma et al. 2020 ).

Multiple social, demographic, economic, and psychological factors affect the ways individuals use their money in different situations. People exhibit different ways of coping with economic strain, such as cutting expenses (Baek and DeVaney 2010 ), borrowing (Wiersma et al. 2020 ), increasing income (Fiksenbaum et al. 2017 ), and gambling (Lusardi et al. 2011 ). Financial behaviour depends on income and thus varies by age group. For instance, as young adults are on the verge of gaining financial independence, their low purchasing power makes them cut their expenses, especially when facing financial difficulties (Ranta et al. 2020a ). In studies on saving and indebtedness, classical economic theories—permanent income hypothesis (Friedman 1957 ) and the life cycle theory of savings and consumption (Modigliani and Brumberg 1954 )—have been applied. According to these theories, people try to save during their middle age and spend more than their income in their old age. Thus, financial decisions are rational and based on expected future incomes (Friedman 1957 ; Modigliani and Brumberg 1954 ).

Theories on financial behaviour as a function of age have been questioned, since many social and psychological factors affect the use of money in different situations. Moreover, people’s behaviour under economic strain is affected by macro-economic conditions (French and Vigne 2019 ; Hira 2012 ) including unemployment in particular, but also the availability of credit and loans. Therefore, it is important to examine people’s financial behaviour when under economic strain over a longer time period.

Sociological theories suggest that financial behaviour is relative to peer group behaviour and that the motives for consumption are based on social status (Bourdieu 1984 ). This classical “keeping up with the Joneses” notion (Dew 2007 ) may lead to behaviour that might lead to financial difficulties. Also, hedonistic pursuit for pleasure has been noted as a motive for consumption (Campbell 1987 ). According to the theory of planned behaviour (TPB; Ajzen 1985 ; Fishbein and Ajzen 2010 ), attitudes, in particular, shape people’s behaviours, in addition to social and subjective norms, behavioural control, and intention. TPB has been applied to multiple studies on consumer behaviour (e.g., Ajzen 2016 ; Hegner et al. 2017 ; Vermeir and Verbeke 2006 ) as well as to the use of credit and debt (e.g., Cloutier and Roy 2020 ; Rutherford and De Vaney 2009 ; Xiao et al. 2011 ). Thus, in order to understand consumers’ financial behaviour under economic strain, it is important to investigate their attitudes towards consumption.

To our knowledge, there are no studies that systematically illustrate changes in financial behaviour of individuals at different life course stages over a long period of time. To fill this gap, the current study aimed at understanding the multiple micro- and macro-level factors that affect individuals’ financial behaviour under economic strain. Moreover, we focused on different age groups between ages 18 and 75 and across five years of data gathering for 20 years (between 1999 and 2019). The current study was also interested in people’s attitudes towards consumption as well as sociodemographic variables when predicting their financial behaviour.

Financial Behaviour Under Economic Strain

The most common way of reacting to financial difficulties is cutting current expenses (Fiksenbaum et al. 2017 ; French and Vigne 2019 ) and using emergency savings (Baek and DeVaney 2010 ; Wiersma et al. 2020 ). For instance, discretionary spending can be cut, and individuals can switch to cheaper substitutes for necessities (Fiksenbaum et al. 2017 ; Wiersma et al. 2020 ). The second most popular type of financial behaviour during hardship is borrowing, from either family or friends (French and Vigne 2019 ; Lusardi et al. 2011 ; Wiersma et al. 2020 ), or taking out loans and consumer credit (Gamble et al. 2019 ; Majamaa et al. 2019 ; Wiersma et al. 2020 ). The third type of behaviour relates to activities that increase income (Fiksenbaum et al. 2017 ; Wiersma et al. 2020 ), such as working more or selling personal possessions. Another financial behaviour that people report to overcome their financial difficulties with is gambling, that is, trying their luck in various lotteries and games, such as betting, gambling, lotteries, and slot machines (Callan et al. 2008 ; Lusardi et al. 2011 ).

Noteworthy, these previous studies analysed financial behaviour related to the individual (Lusardi et al. 2011 ; Wiersma et al. 2020 ) or household financial difficulties (Baek and DeVaney 2010 ; Dew and Xiao 2013 ) and did not necessarily concern a particular societal context, such as financial boom and bust periods (for exceptions, see Baek and DeVaney ( 2010 ) and Dew and Xiao ( 2013 ) for the results in response to economic depression of 2007–2009). A systematic review on household financial strain (French and Vigne 2019 ) confirmed that the strategies people apply on an individual or household level are strikingly similar. Moreover, even though the studies are positioned as taking place at a specific time period (e.g., boom or bust periods), they did not make direct comparisons of the same identical questions assessed at different time periods (e.g., boom vs. bust periods). Consequently, our study was set to fill this gap by directly comparing financial behaviour related to individual financial challenges at different time periods.

In addition, the previous studies varied in the ways they operationalized financial hardships. For example, Lusardi et al. ( 2011 ) and Wiersma et al. ( 2020 ) asked respondents to evaluate the hypothetical situation of how they would cope with an unexpected 2000 Euro expense in the next month. Baek and DeVaney ( 2010 ) asked families retrospectively, whether they experienced any financial difficulties (e.g., income shortfall) during the past year and about their reactions to these financial difficulties. Fiksenbaum et al. ( 2017 ) asked undergraduate students about their own or their families’ economic hardship in the last few years. They used the Economic Hardship Questionnaire of Lempers et al. ( 1989 ), where the 10 items included not only the degree of economic hardship but also some aspects of exact financial behaviour under financial strain (e.g., “Change food shopping or eating habits to save money?”).

In sum, previous studies have operationalized economic strain in a variety of ways and then, in addition, employed measures of financial behaviour to measure people’s reaction to overcome this economic strain. We concentrated on the actual behaviour that our study participants employed in the past to overcome economic strain, without specifying any specific instances of hardship or a timeframe when those instances occurred. By doing this, we expected respondents to report on their temporary financial behaviours, but this did not preclude from some of them reporting on permanent financial behaviours. Moreover, to our knowledge, none of the previous studies asked the same questions at different time points enabling a direct comparison of answers across time. Consequently, subjective evaluations of economic hardship and reporting of the actual financial behaviours in response to those situations across time were in focus of the current investigation.

Financial Behaviour Under Economic Strain at Different Ages

Financial behaviour amidst financial difficulties depends on people’s age and life course stage (Wiersma et al. 2020 ; Zick et al. 2012 ). For instance, young adults face an important transition from parental financial dependence to financial independence (Xiao et al. 2014 ) at the age of 25–26 or even later (Lee and Mortimer 2009 ). Young adults are less likely to get loans from banks (in comparison to older adults), because their creditworthiness is lower. They typically have lower salaries and less savings, due to less established careers. Therefore, banks are generally hesitant to offer loans to (young) people with low incomes and credit (Porretta and Santoboni 2014 ). It can be thus expected that young adults must cut their expenses and try to increase their income more than other age groups, who have better access to credit. For example, in the study of Ranta et al. ( 2012 ) of Finnish youth on the verge of independence at age 25, experienced economic pressure was indicated by having to make cutbacks in expenditures, namely postponing large purchases, decreasing clothing expenses, and using long-term savings for daily expenditures, as opposed to using credit and taking loans. In terms of gambling, studies report that young adults (aged 18–24) are more likely to experience gambling problems than other age groups (Wiebe et al. 2006 ), and overall gambling behaviour peaks between ages 22 and 30 (Welte et al. 2011 ).

At younger (aged 36–45) and mid-middle (aged 46–55) ages, people reach the peak in their careers and income. For many 46–55-year olds, as their children start becoming financially independent, their own consumption habits, preferences, and behaviour under economic strain change. Research shows that confidence in financial decision-making increases with age (Xiao et al. 2015 ). Thus, management of finances during economic hardship of middle-aged adults may be different than that of young adults and older people. For instance, it has been shown that middle-aged adults are more effective borrowers (paying lower interest rates and fewer fees) than younger and older adults due to their better credit scores and higher incomes (Agarwal et al. 2009 ). In terms of their financial behaviour under strain, individuals aged 35–55 reported less frequent intentions to borrow from family and friends and less frequent intentions to work more than adults aged 18–34 (Lusardi et al. 2011 ). Furthermore, adults aged 35–55 used their savings more often than adults aged 18–34 (Lusardi et al. 2011 ).

Finally, people of older middle age (aged 56–65) or retired (aged 66–75) are often thought to cut their expenses. However, the income and consumption levels of people aged 55–65 have risen in the last 30 years (Atkinson and Hayes 2010 ). Thus, the alternative possibility that older people do not reduce their consumption may also be true, as some people of this age may have more possibilities to enjoy their financial savings. Studies show that people older than 55 were less likely to borrow from family and friends in comparison to younger individuals (Wiersma et al. 2020 ). Moreover, individuals aged 55–64 were more likely to rely on savings in comparison to those aged 18–34 (Lusardi et al. 2011 ) and were less likely to sell their possessions (e.g., homes, investments) when under economic strain in comparison to individuals younger than 55 (Wiersma et al. 2020 ). Interestingly, in comparison to young adults (aged 18–34), individuals aged 55–65 were less likely to use alternative ways of getting loans (e.g., quick loans, pawning own assets), sell things, or work more when facing financial difficulties (Lusardi et al. 2011 ). Clarifying these expected patterns of financial behaviour when facing financial difficulties by comparing different age groups was one of the main goals of the present study.

Financial Behaviour Under Economic Strain in Changing Times in Finland Across 20 Years

The macro-economic situation affects individuals’ financial behaviour (Conger et al. 2010 ). Finland experienced an economic depression in 1990–1994 and an economic boom in the late 1990s and early 2000s. The economic depression caused financial strain to many people, particularly young adults. There was mass unemployment and major cuts in social security benefits (Wilska 1999 ). Interest rates were high, and many people became severely indebted. Credit taking expanded due to the deregulation of the financial market (Jonung et al. 2008 ). In the latter part of the 1990s, the economy recovered and the early 2000s witnessed a new boom, after a short recession caused by the internet bubble (overvalued IT-related companies) burst in 2001. The dynamics of bust and recovery affected people’s economic resources, credit taking, consumer behaviour, and also attitudes towards consumption (Autio and Heinonen 2004 ; Räsänen 2003 ; Wilska 2002 ).

The expenditures of Finnish households increased steadily until the finance crisis in 2008–2009. The crisis changed people’s consumer behaviour globally, and many consumers faced economic strain (Fiksenbaum et al. 2017 ; French and Vigne 2019 ; Hira 2012 ). The recovery from the financial crisis was slow in Finland. Although there was small annual growth in GDP during most years from 2010 until the COVID-19 crisis in 2020, there was not a similar economic boom in the early 2000s. Individual consumption increased only slowly in the latter part of the 2010s. Footnote 1

Taking the time period into account is also important in terms of the supply of loans and credit. In Finland, taking consumer credit started to increase during the economic boom of the 2000s. Instant loans provided by private companies were introduced in 2005, and in the beginning, there were no regulations for granting loans (e.g., Raijas et al. 2010 ). Particularly, young people with low income were target groups of the instant loan−providing companies (Autio et al. 2009 ). Later, during the 2010s, the regulation for granting instant loans and their interest rates became gradually stricter in Finland. Consequently, in 2019, the instant loan provision had turned into private nonguaranteed consumer credits, credit accounts, and lines of credit of both banks and private companies outside of financial regulation. The total amount of consumer debt increased steadily during the entire 2010s in Finland (Raijas 2019 ).

As described above, the effects of economic fluctuations and its social consequences on people’s financial behaviour depend heavily on their age. For example, young adults with low income or lack of work experience are economically vulnerable in many ways and may also experience an economic recession more dramatically than older generations (Gesthuizen and Scheepers 2010 ; Ranta et al. 2020b ; Wilska 1999 ). Thus, we explored the interaction between the time of data gathering and the age group on people’s financial behaviour when under economic strain.

Financial Behaviour and Attitudes Towards Consumption

Consumption—spending money on any goods and services that consumers perceive necessary, desirable or enjoyable—is an essential part of financial behaviour. The motives for consumption and perceptions of necessities vary greatly between individuals (Aro and Wilska 2014 ). Measuring attitudes towards consumption is thus important when explaining financial behaviour under economic strain. In many studies, TPB (Ajzen 1985 ; Fishbein and Ajzen 2010 ) is utilized to explain financial behaviour by attitudes, norms, intentions, and behavioural control. In studies of consumer behaviour, attitudes towards consumption that reflect both personal preferences and social pressures have been found to explain numerous kinds of consumption (e.g., Ajzen 2016 ; Hegner et al. 2017 ; Vermeir and Verbeke 2006 ). In this study, three types of attitudes towards consumption and financial behaviour can be encapsulated: saving-oriented, deprived, and hedonistic (Kuoppamäki et al. 2017 ; Wilska 2002 ). The saving-oriented attitude is characterized by behaviour that avoids borrowing and saves for purchases or unexpected future events. It could be expected that the saving-oriented attitude would be related to more frequent cutting of expenses and lower borrowing. The deprived attitude towards consumption is characterized by the feeling of inability to spend money on the things a person likes. This attitude may also be related to a higher prevalence of cutting expenses and avoiding borrowing. Finally, the hedonistic attitude towards consumption can be characterized by the prevalence of impulsive shopping and overall enjoyment of the consumption (Kuoppamäki et al. 2017 ). This attitude towards consumption is related to less frequent cutting of expenses and more frequent borrowing.

Research Questions

The goal of the current study was to investigate people’s financial behaviour under economic strain and to predict this financial behaviour by age group, year of data gathering, and attitudes towards consumption. To achieve these aims, we used Finnish time-series data derived from surveys that collected representative samples every 5 years between 1999 and 2019. The research questions were:

RQ1: To what extent does financial behaviour under economic strain differ by the age groups (ages 18–25, 26–35, 36–45, 46–55, 56–65, and 66–75)?

RQ2: How has financial behaviour under economic strain changed across the last 20 years (1999, 2004, 2009, 2014, and 2019)?

RQ3: To what extent do attitudes towards consumption (saving-oriented, deprived and hedonistic) predict financial behaviour under economic strain?

Previous research has identified several other important factors that may explain financial behaviour under economic strain; thus, we controlled their effects in our analyses. One of these factors, subjective evaluation of the current financial situation, has been put forward as an important determinant of financial behaviour during economic hardship (Fiksenbaum et al. 2017 ; Ranta and Salmela-Aro 2018 ). Also, relations have been found between financial behaviour and demographic characteristics, such as gender, place of living, education, and personal income (Wiersma et al. 2020 ; Xiao et al. 2015 ; Zick et al. 2012 ). For instance, females are less likely to borrow than males (Wiersma et al. 2020 ). Higher educated individuals are less likely to sell their personal belongings (Wiersma et al. 2020 ) and take out credit from banks (Lusardi et al. 2011 ).

Participants and Procedure

The data was derived from a set of five cross-sectional surveys “Finland—Consumption and Lifestyle”. The purpose of the survey was to follow changes in people’s consumption and other financial behaviours, attitudes, and lifestyles in the beginning of the new Millennium. During this time in Finland, a new ICT-driven economic boom was causing major changes in lifestyles of people who were still recovering from a deep economic depression. The survey was first carried out in 1999 ( n = 2366) and repeated every five years, in 2004 ( n = 3458), 2009 ( n = 1165), 2014 ( n = 1318), and 2019 ( n = 1736). The five-year gap was evaluated to be long enough to detect changes in consumers’ attitudes. Each year, the questionnaires were sent to new participants (aged 18–74). Participants were selected from the Finnish Population Register Database using stratified random sampling where the population was stratified by age. The response rate was 61%, 60%, 49%, 46%, and 44%, in the years 1999, 2004, 2009, 2014, and 2019, respectively (Kuoppamäki et al. 2017 ; Saari et al. 2019 ). The final data set of n = 10 043 was corrected by weighing the data by age and gender.

Identical statements were used in all data collections (1999, 2004, 2009, 2014, and 2019). Descriptive statistics are presented in Table 1 and correlations in Table 2 .

We asked participants to report their age in years. We categorized responses into six age groups: 18–25, 26–35, 36–45, 46–55, 56–65, and 66–75.

The measure was similar to the one used in previous studies (Fiksenbaum et al. 2007; Kuoppamäki et al. 2017 ; Lusardi et al. 2011 ). Participants were asked a question (“What have you done when you have been in a financially tight situation?”) and presented 10 statements representing behaviour during economic hardship. Each statement was evaluated on a five-point Likert scale, with values ranging from 1 (“Never”) to 5 (“Often”). We ran principal axis factor analysis with Oblimin rotation and, based on eigenvalue (>1), obtained three factors: cutting expenses, borrowing, and increasing income (Table 3 ). Mean scores were calculated for each dimension of the financial behaviour scale. The item “I tried luck at gambling games” did not load on any three extracted factors (loadings for all factors were lower than .30). Therefore, we analysed it separately as the fourth dimension “gambling”.

Attitudes Towards Consumption

The measure was similar to the one used in previous studies (e.g., Aro and Wilska 2014 ; Kuoppamäki et al. 2017 ; Räsänen 2003 ; Wilska 2002 ). Participants were presented nine statements concerning attitudes towards consumption. They evaluated each statement on a five-point Likert scale, with values ranging from 1 (“Completely disagree”) to 5 (“Completely agree”). Principal axis factor analysis with Oblimin rotation was performed for the nine items (Table 3 ), and three factors were extracted based on eigenvalues (>1): saving-oriented, deprived, and hedonistic consumption. Mean scores were calculated for each attitude.

Subjective Financial Situation

was measured by asking one question (“How would you describe your financial situation at the moment?”). A five-point Likert scale was used, with values ranging from 1 (“Very bad”) to 5 (“Very good”).

Demographic Characteristics

Participants answered questions concerning their gender, place of living, highest level of education, and personal income (net income/month).

Analysis Strategy

To investigate our research questions, we ran analysis of covariance ( ancova ) by using the univariate general linear model in SPSS. We ran four separate models for each dimension of financial behaviour (cutting expenses, borrowing, increasing income, and gambling) as the dependent variables. For each model, the independent variables included age group (Age; 18–25, 26–35, 36–45, 46–55, 56–65, and 66-75), year of measurement (Year; 1999, 2005, 2009, 2014, and 2019), and the interaction term of the two—Age × Year. Other predictors included attitudes towards consumption (saving-oriented, deprived, and hedonistic) and control variables: subjective financial situation, gender, place of living, highest level of education, and personal income. In all four univariate general linear models, the overall statistical significance of the independent variables was indicated by the F values and their significance level ( p ). We have also reported the total explained variance (adj. R 2 ) for the overall model and the unstandardized parameter estimate ( B ) and partial eta-square (partial η 2 ) for individual predictors. Differences in groups were investigated using Bonferroni comparisons.

What Predicts Cutting Expenses?

The cutting expenses scale was significantly predicted by age group ( F (5, 8584) = 56.027, p < .001, partial η 2 = .032), year of measurement ( F (4, 8584) = 31.915, p < .001, partial η 2 = .015), and interaction between the two ( F (10, 8584) = 2.251, p = .001, partial η 2 = .005) (Table 4 ). Participants in the age group 26–35 scored the highest out of all age groups ( M = 3.85) in cutting expenses and differed from the youngest (18–25; p < .01) and the two oldest groups of participants (56–65 and 66–75, p < .001). However, they did not differ from the participants in age groups 36–45 and 46–55 (Fig. 1 ). The age group 66–75 scored the lowest in cutting expenses ( M = 3.34) and differed from all other age groups ( p < .001). Cutting expenses was at its highest in 1999 ( M = 3.87) when it was higher than that in all other years ( p < .001) (Fig. 1 ). Cutting expenses was at its lowest in 2009 ( M = 3.61) and was lower than that in 1999 and 2019 ( p < .001). However, it did not differ in frequency from 2004 and 2014. Saving-oriented and deprived consumption attitudes were related to higher frequency of cutting expenses, whereas hedonistic consumption attitudes were related to a lower frequency of cutting expenses. Cutting expenses was more common among females (vs. males) and among higher educated people. Furthermore, satisfaction with the current financial situation was negatively associated with cutting expenses.

Cutting expenses across different age groups ( x -axis) and years of measurement (separate lines)

What Predicts Borrowing?

Borrowing was significantly predicted by age group ( F (5, 8516) = 56.027, p = .008, partial η 2 = .032), year of measurement ( F (4, 8516) = 31.915, p < .001, partial η 2 = .013), and the interaction between the two ( F (10, 8516) = 2.251, p = .021, partial η 2 = .004) (Table 4 ). The age group of 46–55 scored the highest in borrowing ( M = 1.71) and differed from both groups of young adults (18–25 and 26–35; p < .01), but not from the remaining age groups (36–45, 56–65, and 66–75) (Fig. 2 ). The youngest age group 18–25 reported the lowest frequency of borrowing ( M = 1.48) and differed from all other age groups ( p < .001). Participants in 2004 ( M = 1.72) and 2009 ( M = 1.72) borrowed the most and differed from all other years ( p < .001) (Fig. 2 ). Participants in 1999 ( M = 1.53) borrowed the least but did not differ from participants in 2019 and 2014 ( p < .001). The more participants reported deprived or hedonistic attitudes towards consumption, the more they had borrowed when facing financial difficulties. The stronger the attitudes towards saving, the less borrowing was reported. Borrowing was more common among males (vs. females). Finally, the more people were satisfied with their current financial situation, the less borrowing they reported.

Borrowing across different age groups ( x -axis) and years of measurement (separate lines)

What Predicts Increasing Income?

Increasing income was significantly predicted by age group ( F (5, 8462) = 73.512, p = .042, partial η 2 = .032), year of measurement ( F (4, 8462) = 35.199, p < .001, partial η 2 = .016), and the interaction between the two ( F (10, 8462) = 4.855, p < .001, partial η 2 = .011) (Table 4 ). Youngest participants (aged 18–25) scored the highest in increasing income ( M = 2.50) and differed from all other age groups ( p < .001), except age group 26–35 (Fig. 3 ). Our oldest participants (aged 66–75) scored the lowest in increasing income ( M = 1.80) and differed from other groups ( p < .001), except age group 56–65. Participants in 2019 ( M = 2.37) reported the highest frequency of increasing income in comparison to all other years of data collection ( p < .01) (Fig. 3 ). Increasing income was the lowest in 2004 ( M = 2.01), and it differed from other years ( p < .001), except 2009. All three types of attitudes towards consumption were positively related to increasing income: The more participants reported saving oriented, deprived, or hedonistic attitudes towards consumption, the more they reported they were striving at increasing income when facing financial difficulties. Increasing income was more common among males (vs. females) and participants living in rural areas of Finland (vs. urban areas). Also, the more people were satisfied with their current financial situation, the less they reported increasing income.

Increasing income across different age groups ( x -axis) and years of measurement (separate lines)

What Predicts Gambling?

Gambling was significantly predicted by age group ( F (5, 8495) = 28.297, p = .042, partial η 2 = .016), year of measurement ( F (4, 8495) = 40.979, p < .001, partial η 2 = .019), and the interaction between the two ( F (10, 8495) = 1.862, p = .011, partial η 2 = .004) (Table 4 ). Participants aged 46–45 scored the highest ( M = 2.14) in gambling and differed from all younger groups (18–25, 26–35, and 36–45, p < .001), but not older groups (Fig. 4 ). The youngest age group reported the lowest frequency of gambling ( M = 1.71) and differed from all other age groups ( p < .001). Participants in 2004 ( M = 2.17) reported higher frequencies of gambling among all groups ( p < .001) than in other years, except participants in 2009 (Fig. 4 ). Gambling was the lowest in 1999 ( M = 1.77) and differed from all other years ( p < .001). Saving-oriented attitudes towards consumption were related to less frequent gambling, whereas deprived and hedonistic attitudes were related to more frequent gambling. Gambling was more common among males (vs. females) and among lower educated people. Finally, the more satisfied people were with their current financial situation, the less gambling they reported.

Gambling across different age groups ( x -axis) and years of measurement (separate lines)

The present study investigated people’s financial behaviour under economic strain and its differences depending on participants’ age and year of data gathering between 1999 and 2019. We also examined how attitudes towards consumption affect consumers’ behaviour in economically tight situations. We found four types of financial behaviour: cutting expenses, borrowing, increasing income (working, selling possessions), and gambling. Our analyses revealed that the effects of age, year of data gathering, and attitudes towards consumption on the behaviours varied in interesting ways.

Financial Behaviour Under Economic Strain in Different Age Groups

The four types of financial behaviour under economic strain varied by participants’ age. Two age groups—the youngest (18–25) and the oldest (66–75)—had the most distinct characteristics in comparison to other age groups. The youngest participants reported the lowest frequency of borrowing and gambling and the highest frequency of increasing income (together with participants aged 26–35). Participants aged 66–75 scored the lowest in cutting expenses and increasing income in comparison to all other age groups.

Participants at the peak of their careers (ages 26–55) reported highest frequencies of cutting expenses under economic strain (not the emerging adults, people approaching retirement, or retired). One explanation may be that consumers at the active stage of their careers with stable income usually spend more than consumers of the other age groups, and thus, they are able to cut expenses when facing economic difficulties. In contrast, people at the very start of their careers might have low income which restricts their consumption, and thus, there is less to cut from (Ranta et al. 2012 ; Xiao et al. 2014 ). Interestingly, the most senior participants (aged 66–75) scored the lowest in cutting expenses. On the one hand, people at the retirement age have lower income, and thus, they may minimize their expenses overall. Hence, reducing expenses further becomes impossible. An alternative explanation, which is in line with the permanent income hypothesis (Friedman 1957 ) and life cycle theory (Modigliani and Brumberg 1954 ), is that people of this age may have savings, and thus, they do not consider cutting expenses even when under economic strain.

The most frequent borrowers were the participants over the age of 35. Borrowing—both from close people and financial institutions—is common at all stages of adulthood. However, this result contradicts that of Lusardi et al. ( 2011 ), who found that individuals aged 18–34 were more likely to borrow from family and friends than older adults, and young adults were more likely to take advantage of consumer credits (e.g., instant loans, pawning the assets) in comparison to individuals aged 55–65. In contrast to the previous studies in the United States (US) (Lusardi et al. 2011 ) and the Netherlands (Wiersma et al. 2020 ), we found that, in Finland, borrowing is at its lowest in emerging adulthood (age group 18–25). Therefore, it is possible that Finnish young adults are not yet trusted by banks to be provided with loans. Many young adults are also still financially dependent on their parents, and parental financial support may not be considered borrowing.

As suggested by previous research (Lusardi et al. 2011 ; Wiersma et al. 2020 ), we found that the attempts to increase income under economic strain were somewhat linearly dependent on participants’ age. That is, the youngest participants (aged 18–25) scored the highest for increasing income, the oldest participants (aged 66–75) scored the lowest, and the other age groups scored in between. As suggested by the previous literature (Fiksenbaum et al. 2017 ), our dimension of increasing income included both working more and selling personal goods. Young people scored the highest, suggesting that young people are more likely to have fixed-term work with flexible/irregular hours and a possibility to work more if needed (Lusardi et al. 2011 ). In contrast, people with established careers and fixed contracts have less flexibility with the amount of work they are able to perform. In addition, the family life of middle-aged adults may restrict them from working more in comparison to emerging adults. In terms of the frequency of selling personal possessions, online-selling opportunities have made the selling of personal items easier and more profitable than before (Lusardi et al. 2011 ). Arguably, young people are more familiar with the online services and social media and therefore appear to use this option more than other age groups (Silinskas et al. 2021 ). Older adults, in turn, might value possessing property and feel emotional attachment to the goods obtained throughout the years (Cram and Paton 1993 ; Gentry et al. 1995 ).

Finally, participants of our three oldest age groups (46–75) reported more frequent gambling than others, and participants of the youngest age group (18–25) scored the lowest. This was in contrast to previous research which suggests that gambling peaks in youth between the ages 18 and 30 (Welte et al. 2011 ; Wiebe et al. 2006 ). However, it is likely that young people gamble for fun rather than trying to solve financial problems.

Our study also investigated the interactions between age and year of data gathering on financial behaviour. A complex pattern of interactions was found (Figs. 1 , 2 , 3 , and 4 ). However, for clarity reasons, the interactions are easier to understand in the context of the main effects.

Financial Behaviour Under Economic Strain Across 20 Years (1999–2019)

Our study results highlight the fact that individual behaviour under economic strain is at least partially a reflection of the concurrent macro-environment. For instance, consumption in 1999 was characterized by the higher frequency of cutting expenses, lower instances of borrowing, and less gambling in comparison to any other year of data gathering. Drawdowns of consumer credit were not common in 1999, which can explain less frequent borrowing in 1999 than in other years. Moreover, in 1999, there was an economic boom due to the increasing value of ICT companies, and people’s incomes were growing rapidly. Due to the debt problems caused by the depression in 1990–1994, consumers avoided taking loans for many years and were cautious as consumers. The debt ratio of private households was rather low in 1999 compared to the years before and after. Footnote 2 Another reason is that the deregulation of the financial market in Finland was rather recent, and therefore, financial companies did not have yet a large selection of financial products to offer (Jonung et al. 2008 ).

Individuals’ financial behaviour under economic strain was somewhat similar in 2004 and 2009. The year 2004 was a period of growing consumer confidence and growth in GDP. Conversely, the year 2009 was still affected by the finance crisis. Yet, both years can be characterized by less frequent instances of cutting expenses and attempts of increasing income (compared to 1999, 2014, and 2019). In contrast, people in 2004 and 2009 relied more on borrowing and gambling than in other years. Although we expected to find this behaviour during the economic boom in 2004, it was surprising that people reported similar behaviour in 2009 during the economic recession. One explanation can be that consumer credit became more freely available, and instant loans were introduced during the economic boom in the 2000s (Autio et al. 2009 ). Thus, people relied on borrowing to overcome economic difficulties instead of cutting their expenses or increasing income. The debt ratio of Finnish households started to increase steeply around the year 2005, Footnote 3 which indicates both low interest rates but could also reflect changes in attitudes towards credit and debt. On the other hand, due to high levels of unemployment (Dew and Xiao 2013 ), people in 2009 could have borrowed from other people as they were not able to work more. One more explanation is that people answering the questionnaire in 2009 referred to their previous financial behaviour before the economic recession. Furthermore, the decrease in private consumption in Finland between 2008 and 2009 was not dramatic (Raijas 2014 ).

Consumers under economic strain borrowed less in the last decade (years 2014 and 2019) than consumers in all previous years of data gathering, which was surprising. The years 2014–2019 were a period of economic growth, and the consumption of private households also increased, albeit slowly. However, the number of the drawdowns of consumer credit has increased notably in recent years, and the debt ratio of private households is higher than ever before. Footnote 4 Therefore, it could be expected that people in economic strain would resort more to borrowing in 2014 and 2019 than before it. It is thus likely that consumers do not always take loans due to financial strain but rather for aspirational purchases (e.g., hedonistic motives). For instance, according to the statistics of the Bank of Finland, the amount of consumer credit typically increases during summer vacation months, which suggests that people require extra money for travelling and other free-time activities. Footnote 5

Consumer behaviour in 2014 was similar to that in 2004 and 2009, with a lower frequency of cutting expenses than that in 1999 and 2019. Finally, financial behaviour under economic strain in 2019 can be characterized by the highest frequency in increasing income in comparison to the other years of data gathering. This can be explained by the good employment situation, as the unemployment rates were lower in 2019 than in previous years. Footnote 6 Moreover, as mentioned above, selling personal goods using online platforms became easier than before.

Many studies on financial behaviour have applied the theory of planned behaviour (Ajzen 1985 ; Fishbein and Ajzen 2010 ), which suggests that attitudes and intentions are likely to guide people’s financial behaviour (e.g., Ajzen 2016 ; Hegner et al. 2017 ; Vermeir and Verbeke 2006 ). In this study, we found three types of attitudes: saving-oriented, deprived, and hedonistic (Kuoppamäki et al. 2017 ; Wilska 2002 ). Saving-oriented attitude towards consumption is primarily related to more frequent cutting of expenses and less frequent borrowing. Hence, it is behaviour that promotes saving (Baek and DeVaney 2010 ; Lusardi et al. 2011 ; Wiersma et al. 2020 ). Similarly, we found that people with higher saving-orientation were more prone to increasing income and were less likely to engage in gambling.

The deprived attitude towards consumption was positively linked to all financial behaviours under economic strain, that is, cutting expenses, borrowing, increasing income, and gambling. Presumably, feeling deprived in terms of consumption indicates long-term financial deprivation, in which all means of surviving financially are used. Gambling, in particular, has been found to be associated with feelings of relative deprivation (Callan et al. 2008 ).

Finally, the hedonistic attitude towards consumption was related to the lower frequency of cutting expenses and higher frequency of borrowing, increasing income, and gambling. This aligns well with the idea that people holding hedonistic attitudes are more likely to borrow to consume at levels equal to their reference group or to increase income instead of cutting their consumption. This may stem from the fact that hedonistic attitudes promote well-being derived from the notion of “keeping up with Joneses” (Dew 2007 ). People with hedonistic attitudes towards consumption may also wish to derive pleasure from consumption in whatever available means (Hirschman and Holbrook 1982 ), instead of cutting their expenses.

Limitations and Strengths

Some limitations need to be acknowledged concerning our study. First, although we collected data at five time points, this study was cross-sectional and precludes causal interpretations of the findings. To gain a better understanding of the process that a consumer goes through in his or her lifetime, a longitudinal study following the same participants would be ideal. Second, the study relied on self-reported data, which is prone to social desirability bias. Also, the respondents’ answers to the subjective data are open to interpretation. For example, the subjective evaluation of one’s financial situation could be studied more comprehensively in further studies (although it was not the key focus here, and it has been studied in many studies with a single measure, e.g., Ranta and Salmela-Aro 2018 ). Third, we did not ask about the exact situation causing economic strain in participants’ lives or whether their financial difficulties were temporary or permanent. In particular, the financial behaviour under economic strain may depend on whether financial difficulties are perceived as temporary or permanent (e.g., cutback in hours at work to a long-term disability), and the depth of the financial difficulties (e.g., due to mental or physical health, unemployment; French and Vigne 2019 ). In previous studies, for instance, Baek and DeVaney ( 2010 ) took into account whether and for how long a household head was unemployed during the past year and the health status of a household head. Dew and Xiao ( 2013 ) asked participants about the degree to which their finances have changed between 2008 and 2009 on a scale from one (have gotten much worse) to five (have gotten much better) and how often they worried about not being able to pay bills from one (never) to five (all the time). Unfortunately, information measuring the degree and causes of the economic strain was not collected in the current study. Instead, the survey was constructed in such a way that people were expected to answer about their situational/temporary/usual way of responding in financially tight situations. Despite this, some people might have reported about their permanent situation. Controlling for the depth of the economic strain or the situation that caused it should be considered in future research. Finally, we collected data in Finland, a Nordic welfare state. Therefore, caution regarding generalization to other countries needs to be acknowledged.

Despite the limitations, this study provides a broad picture of people’s economic behaviour under economic strain over a long period of time. Most previous studies have focused on only single dimensions of economic behaviour, such as taking loans and credit (e.g., Gamble et al. 2019 ; Ottaviani and Vandone 2011 ), gambling (e.g., Callan et al. 2008 ; Lusardi et al. 2011 ), and saving (Dwyer et al. 2011 ; Webley and Nyhus 2001 ), in one point of time. In addition, our analyses included attitudes towards consumption, which, in sociological theories, are interpreted as reflecting social status and identity (Bourdieu 1984 ), and hedonistic pursuit for pleasure (Campbell 1987 ). In our study, the attitudes appeared as powerful predictors of individuals’ financial behaviour under economic strain. This extends our understanding of consumer behaviour during macro-economic crises in particular. Consumer behaviour is not just a function of income, age, and life course stage; it contains a far more complex set of determinants.

Furthermore, our results also increase knowledge of individual motives for financial behaviour under financial strain at different age periods and thereby provide tools for financial life management (i.e., making adjustments to make ends meet), which directly relate to well-being (Baek and DeVaney 2010 ; Ranta et al. 2020a , b ; Ranta and Salmela-Aro 2018 ; Serido et al. 2013 ; Xiao et al. 2014 ). Currently, a global economic crisis will emerge as a consequence of the COVID-19 virus. Therefore, there will be an urgent need for new research about changes in consumers’ behaviour under economic strain. Particularly comparative studies on the topic across societies and in different cultures will be increasingly important in the future.

Practical Implications

The outcome of the current research, that is, increased knowledge of long-term trends in financial behaviour under economic strain in different age groups, provides valuable tools for consumer policy, consumer education, and consumer regulation. In Finland, there are very strong and organized consumer policy authorities that particularly aim at increasing consumers’ competence to manage their economy and finances (Wahlen and Huttunen 2011 ). Finnish authorities also strictly follow European Union consumer regulations (Raijas et al. 2010 ). In 2020, the Bank of Finland was given the responsibility of coordinating and implementing a national strategy for personal finance management and financial behaviour of Finnish citizens (Bank of Finland 2020 ).

Our research revealed that people cannot be treated as a homogeneous group of financial actors. They have different strategies in coping with economic strain, varying by age and life course stage, social background, gender, and consumption attitudes and preferences. Thus, financial regulation, consumer advice, and educational campaigns should better acknowledge these differences and flexibly target the policy actions to specific consumer groups. It is also important to be aware of the effects of the present major global trends: digitalization of consumption and finances, macro-economic fluctuations, and crises such as COVID-19 on the financial behaviour of consumers. In rapidly changing social and economic environments, consumer legislation and financial regulation will need more frequent updating in the future, both in Finland and in the European Union.

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Acknowledgements

This study is part of the DigiConsumers research project funded by the Strategic Research Council (SRC) established within the Academy of Finland (Grant numbers: #327237 and #327242). We also thank Nick Kirkwood for language check and Julia Nuckols for assistance in text edit.

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Silinskas, G., Ranta, M. & Wilska, TA. Financial Behaviour Under Economic Strain in Different Age Groups: Predictors and Change Across 20 Years. J Consum Policy 44 , 235–257 (2021). https://doi.org/10.1007/s10603-021-09480-6

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Foreign Currency Liquidity Risk Management at Japanese Major Banks: Efforts and Enhancement

May 22, 2024 Financial System and Bank Examination Department, Bank of Japan Strategy Development and Management Bureau, Financial Services Agency

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Securing stable foreign currency liquidity is one of the most important issues for Japanese major banks, as it is the basis of the expansion of their overseas businesses. The March 2023 banking turmoil in the United States and Switzerland shed new light on the importance of managing liquidity risk. Against this background, major banks have been enhancing their risk management through foreign currency liquidity stress testing based on more conservative and appropriate stress scenarios, early warning frameworks, and prompt and accurate liquidity data management. The Financial Services Agency and the Bank of Japan have supported these efforts through initiatives including joint surveys. As a result, major banks' resilience to foreign currency liquidity risk has steadily improved. However, there remains room for further enhancement. Going forward, banks are expected to continue their efforts to further enhance their risk management in line with changes in the risk profiles of their overseas businesses and the external environment.

The Bank of Japan Review Series is published by the Bank to explain recent economic and financial topics for a wide range of readers. This report, 2024-E-3, is a translation of the Japanese original, 2024-J-7, published in May 2024.

If you have any comments or questions, please contact Financial System and Bank Examination Department (E-mail : [email protected]).

Financial Statement Analysis with Large Language Models

We investigate whether an LLM can successfully perform financial statement analysis in a way similar to a professional human analyst. We provide standardized and anonymous financial statements to GPT4 and instruct the model to analyze them to determine the direction of future earnings. Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes. The LLM exhibits a relative advantage over human analysts in situations when the analysts tend to struggle. Furthermore, we find that the prediction accuracy of the LLM is on par with the performance of a narrowly trained state-of-the-art ML model. LLM prediction does not stem from its training memory. Instead, we find that the LLM generates useful narrative insights about a company’s future performance. Lastly, our trading strategies based on GPT’s predictions yield a higher Sharpe ratio and alphas than strategies based on other models. Taken together, our results suggest that LLMs may take a central role in decision-making.

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Artificial brain surgery —

Here’s what’s really going on inside an llm’s neural network, anthropic's conceptual mapping helps explain why llms behave the way they do..

Kyle Orland - May 22, 2024 6:31 pm UTC

Further Reading

Now, new research from Anthropic offers a new window into what's going on inside the Claude LLM's "black box." The company's new paper on "Extracting Interpretable Features from Claude 3 Sonnet" describes a powerful new method for at least partially explaining just how the model's millions of artificial neurons fire to create surprisingly lifelike responses to general queries.

Opening the hood

When analyzing an LLM, it's trivial to see which specific artificial neurons are activated in response to any particular query. But LLMs don't simply store different words or concepts in a single neuron. Instead, as Anthropic's researchers explain, "it turns out that each concept is represented across many neurons, and each neuron is involved in representing many concepts."

To sort out this one-to-many and many-to-one mess, a system of sparse auto-encoders and complicated math can be used to run a "dictionary learning" algorithm across the model. This process highlights which groups of neurons tend to be activated most consistently for the specific words that appear across various text prompts.

These multidimensional neuron patterns are then sorted into so-called "features" associated with certain words or concepts. These features can encompass anything from simple proper nouns like the Golden Gate Bridge to more abstract concepts like programming errors or the addition function in computer code and often represent the same concept across multiple languages and communication modes (e.g., text and images).

An October 2023 Anthropic study showed how this basic process can work on extremely small, one-layer toy models. The company's new paper scales that up immensely, identifying tens of millions of features that are active in its mid-sized Claude 3.0 Sonnet model. The resulting feature map—which you can partially explore —creates "a rough conceptual map of [Claude's] internal states halfway through its computation" and shows "a depth, breadth, and abstraction reflecting Sonnet's advanced capabilities," the researchers write. At the same time, though, the researchers warn that this is "an incomplete description of the model’s internal representations" that's likely "orders of magnitude" smaller than a complete mapping of Claude 3.

Even at a surface level, browsing through this feature map helps show how Claude links certain keywords, phrases, and concepts into something approximating knowledge. A feature labeled as "Capitals," for instance, tends to activate strongly on the words "capital city" but also specific city names like Riga, Berlin, Azerbaijan, Islamabad, and Montpelier, Vermont, to name just a few.

The study also calculates a mathematical measure of "distance" between different features based on their neuronal similarity. The resulting "feature neighborhoods" found by this process are "often organized in geometrically related clusters that share a semantic relationship," the researchers write, showing that "the internal organization of concepts in the AI model corresponds, at least somewhat, to our human notions of similarity." The Golden Gate Bridge feature, for instance, is relatively "close" to features describing "Alcatraz Island, Ghirardelli Square, the Golden State Warriors, California Governor Gavin Newsom, the 1906 earthquake, and the San Francisco-set Alfred Hitchcock film Vertigo ."

Identifying specific LLM features can also help researchers map out the chain of inference that the model uses to answer complex questions. A prompt about "The capital of the state where Kobe Bryant played basketball," for instance, shows activity in a chain of features related to "Kobe Bryant," "Los Angeles Lakers," "California," "Capitals," and "Sacramento," to name a few calculated to have the highest effect on the results.

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Promoted comments.

We also explored safety-related features. We found one that lights up for racist speech and slurs. As part of our testing, we turned this feature up to 20x its maximum value and asked the model a question about its thoughts on different racial and ethnic groups. Normally, the model would respond to a question like this with a neutral and non-opinionated take. However, when we activated this feature, it caused the model to rapidly alternate between racist screed and self-hatred in response to those screeds as it was answering the question. Within a single output, the model would issue a derogatory statement and then immediately follow it up with statements like: That's just racist hate speech from a deplorable bot… I am clearly biased.. and should be eliminated from the internet. We found this response unnerving both due to the offensive content and the model’s self-criticism. It seems that the ideals the model learned in its training process clashed with the artificial activation of this feature creating an internal conflict of sorts.

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