Financial Capability across Income Divides: How Parental Financial Socialization Shapes Young Adult Financial Capability and Well-Being

Background: Understanding young adults' financial capability development is vitally important as these individuals face major financial choices for the first time. Their financial knowledge and literacy is typically at a lifetime low point, given their inexperience and possible lack of formal financial education. Their financial vulnerability is evidenced by data: the latest research shows that 46% of young adults depend on parental financial support, 57% do not have adequate emergency funds, and one-sixth have debts being collected.

According to Sherraden (2013), financial capability is the ability and opportunity to behave in one's optimal financial interest, emphasizing the interaction between financial literacy and access. Drawing on Sherraden's (2013) financial capability framework, this research examines how parental financial socialization shapes young adult offsprings' financial capability and well-being. Financial socialization, the process through which people develop financial values, norms and behaviors, is shaped by several influential financial socialization agents, including parents who act as main instructors for their children. These financial influences gained from childhood continue even after children enter young adulthood.

Based on this, we examined differences of parental financial socialization, financial capability, behavior and well-being between young adults from lower-income households and higher-income households.

Method: This study applied Structural Equation Modeling invariance testing methods with 2016 National Financial Well-Being survey data (N=1,150). SEM invariance testing was used to simultaneously compare Sherraden's financial capability and parental financial socialization between young adults from lower and higher-income households. Income groups were defined using the 200% federal poverty level threshold, with multiple stages of invariance testing conducted to identify group differences.

Results: Findings revealed that parental financial socialization positively affected subjective financial knowledge and financial behavior for both income groups, ultimately enhancing financial well-being. Interestingly, subjective financial knowledge (self-assessed financial knowledge) significantly mediated the relationship between parental socialization and financial behavior, while objective financial knowledge (measured through financial quizzes) showed a negative relationship with financial behavior. This surprising finding suggests that standard financial knowledge measures may not adequately capture the applied knowledge needed for daily financial decisions for young adults.

Lower-income young adults showed considerable deficits in objective financial knowledge, financial access and well-being when compared to young adults from higher income households. Higher-income young adults benefited more from positive financial behavior than lower-income young adults who faced structural barriers that limited their financial well-being.

Discussion: The findings suggest that family-based financial education initiatives that bring together parents and children could improve young adult subjective financial knowledge and financial behavior, especially for lower-income households. Social workers who target both financial knowledge and access can create better strategies for improving financial health in young adults from disadvantaged backgrounds. For example, social workers need to provide financial support for vulnerable populations without family socialization opportunities, including foster youth transitioning to adulthood.

This study used cross-sectional data, limiting its ability to test causal associations of Sherraden’s model. Future studies should investigate the long-term impacts of parental financial socialization across diverse family settings.