The Association Between Young Adults' Financial Capability and Their Financial Behaviors

Background and Purpose: Young adulthood is a period of the life course commonly characterized by financial fragility. Young adults earn the lowest incomes of their careers while making financial decisions about attending postsecondary education, living independently from families of origin, finding employment, repaying educational debt, purchasing a home, and saving for retirement. These decisions are complex and require a level of financial knowledge and access to financial products with which young adults may have limited experience, particularly given their early stage in the life course. Young adults may struggle with these decisions, potentially resorting to high-risk financial behaviors like lacking savings for emergencies or using alternative financial services (e.g., payday and tax refund lenders). The concept of financial capability, defined as the combination of financial knowledge and access to financial products that provide opportunities for experiential learning, has been proposed to assuage financial fragility and improve stability. Research is needed to determine whether young adults' financial capability is associated with their healthy financial behaviors at a time in the life course when these behaviors are essential. This paper asks whether young adults' financial capability (the combination of savings accounts and financial education) is associated with their significantly healthier financial behaviors compared to either savings accounts or financial education alone or neither.

Methods: This study used data from the 2012 National Financial Capability Study to examine the relationship between financial capability—defined as the combination of a savings account and financial education—and financial behaviors among young adults ages 18–34 (N= 6,865). Approximately 53% of young adults were white, a majority was employed (57%), and their average household income ranged between $15,000 and $35,000. Multiple imputation using the Markov Chain Monte Carlo (MCMC) method, propensity score dosages, and logistic and multiple regression were used to produce results.

Results: Compared to neither savings accounts nor financial education or either independently, young adults' financial capability was associated with being almost 300% more likely to afford an unexpected expense, 324% more likely to save for emergencies, 121% less likely to use alternative financial services, and 130% less likely to carry too much debt. Young adults' financial capability was also positively associated with their overall financial satisfaction.

Conclusions: Attention to financial capability and financial behaviors is especially relevant in an era when young adults are making increasingly complex financial decisions. The behaviors that flow from these decisions and their results may have long-term implications for young adults' abilities to achieve financial stability and to accumulate wealth. Considerations for developing young adults' financial capability are critical from a social work profession that helps vulnerable populations move from financial fragility to financial stability. The primary implication of these findings is that providing young adults with a combination of financial knowledge and experiential opportunities to put that knowledge into practice may be useful for encouraging healthy financial behaviors.