Building Financial Capability: The Role of Formal Financial Education and Family Socialization

As individual lives are increasingly financialized, having sufficient financial knowledge to make sound financial decisions is of great importance. However, studies have consistently shown that American adults are lacking basic financial knowledge and skills. Formal financial education (education in schools or workplaces) and family financial socialization are two main channels through which many individuals learn to engage financial management activities. While the two channels have distinct advantages and limits, little is known about how formal financial education and family financial socialization help people gain financial capability. To address the knowledge gap, this study examines the disparate impacts of financial education and socialization on financial knowledge.

We used 2015 National Financial Capability Study (NFCS) state-by-state dataset. The NFCS is a large national survey of U.S. adults and households, and its state-by-state survey was conducted in 2015 among a nationally-representative sample of 27,564 American adults. The dependent variable is financial knowledge and was measured by a financial knowledge scale composed of six factual questions about basic interest, compound interest, inflation, mortgage, investment, saving and bond. Questions are in a multiple-choice format, and each has one correct answer. The two independent variables are financial education (whether received financial education through schools or employers) and family financial socialization (whether received financial education provided by parents or guardians). We employed ordered logistic regression to examine the impact of financial education and financial socialization on financial education.

Less than half (45.90%) of the respondents had financial socialization and 21.76% received financial education in schools or workplaces. Only 12.49% reported having both. Results from ordered logistic regressions showed that both financial education and family socialization were positively associated with increased financial knowledge levels. Respondents reported having financial socialization only were 57% more likely to give correct answers more than those didn’t have financial socialization. Respondents who had only financial education were 14% more likely to give correct answers than those did not receive financial education. The group that received both financial education and family socialization was additionally 57% more likely to have more correct answers than their counterparts.

This study is one of the few existing studies that compares impacts of financial education and socialization on financial knowledge. Our findings suggest that family financial socialization and formal financial education both had positive influences on people’s financial knowledge, yet their impact magnitudes were not the same. The finding that family financial socialization had a larger impact than formal financial education on financial knowledge underscores familial factors and their influence on affecting people’s financial knowledge and skills. Yet, current financial education programs rarely take family context into consideration. Our study provides valuable insights into the mechanism of learning financial literacy and building financial capability.