Financial Capability, Money Management, and Developmental Resources for Young Children in Low-Income Families

Background/Purpose: The growing vulnerability of low-income families requires a thoughtful and multidimensional response at individual and structural levels. Income poverty is only one dimension of disadvantage among low-income families. Other disadvantages such as lack of financial knowledge, lack of access to affordable financial products and services, and asset poverty also have negative influences on the wellbeing of low-income families. Studies suggest that the financial situation of low-income families has recently worsened, in part, due to lack of financial capability. However, much of the research in this area has been undertaken with insufficient attention to structural factors (e.g. financial inclusion) and the contribution of financial capability to the wellbeing of children. The purpose of this study is to examine the associations between financial capability, money management, and developmental resources for young children, controlling for demographic and socioeconomic characteristics.

Methods: The study uses survey data from low-income parents of Head Start children (n=681) in Pontiac, Michigan. The study analyzes longitudinal data (baseline, 2004; follow-up, 2008) from a larger research project called Michigan Saving for Education, Entrepreneurship, and Downpayment (MI SEED), which was part of a national demonstration of Child Development Accounts (CDAs). 

Measures: Financially capability is measured on the basis financial knowledge and financial inclusion (ownership of savings account and/or checking account). Money management measure is based on a number of positive household financial practices, consistent money management, and orientation to saving. Developmental resources for children measure includes items that have important implications for child development including learning resources for children at home, parent involvement in education, and enrichment activities. Demographic and socioeconomic characteristics used as controls are income, homeownership, employment, race, marital status, and educational attainment.  

Results: Findings suggest that financial capability helps to explain developmental resources for children (R²=.201, F(7, 674) = 24.232, p<.001) more effectively than money management (R²=.045, F(7, 674) = 4.518, p<.001), controlling for demographic and socioeconomic characteristics. Owning a savings account appears to be significantly associated with money management (r=.123, df=.118, p<.001), but not owning a checking account. Financially capable parents are more likely to invest in learning resources for children at home [r=.165, df=.015, p<.001], involve in their children’s education [r=.112, df=.019, p<.001], and invest in enrichment activities [r=.083, df=.025, p<.001] than parents who are not financially capable. 

Conclusion and Implications: Low-income parents and their children may benefit from program and policy efforts that are designed to strengthen the financial capability of low-income families. Owning a savings account appears to be a better measure of financial inclusion than owning a checking account. The contribution of financial capability to developmental resources for children particularly requires more study in the future as it appears to be more sensitive to financial capability than money management.