Charlotte Cowles* says a new study has found that financial ‘self-efficacy’ correlates more strongly with subjects’ financial wellbeing than almost any other factor.
Photo: Jordan Rowland
The concept of “self-efficacy” is easy to love, partly because it just makes sense.
Coined in the 1960s by psychologist Albert Bandura, it’s defined as “one’s belief in one’s ability to succeed in specific situations or accomplish a task,” and generally correlates with higher performance in said task.
For example, I have high self-efficacy in grilling meats, because I know from experience that I can solve problems that might arise during the process.
Consequently, my steaks are usually pretty good.
Meanwhile, I have low self-efficacy in driving, which leads me to avoid it at all costs.
Low self-efficacy is often tied to “learned helplessness,” or giving up because you believe that no amount of effort will result in improvement.
What does this have to do with paying your bills?
Newly published research from a 10-year study of more than 2,000 students at the University of Arizona found that financial self-efficacy correlated more strongly with subjects’ financial wellbeing than almost any other factor.
The conclusion: being “good with money” isn’t just a matter of spending less than you earn — it’s a mindset.
The study began as a broad investigation of young people’s financial habits.
At first, it appeared that students’ parents played the biggest role in whether or not the kids spent recklessly: families who discussed finances together tended to produce young adults who made smarter, more considered choices with their money.
(Interestingly, kids from affluent families tended to have poorer attitudes and financial behaviours, but most grew out of it.)
However, as the students graduated and became young adults, a new variable came into play.
“It was no longer just about what the parents did,” says lead researcher Joyce Serido, an Associate Professor of Family Social Science at the University of Minnesota.
“Something was happening to trigger a voice inside these young adults that said, ‘I can do it on my own.’”
To determine what that “something” was, Serido and her research partner, Professor Soyeon Shim, continued to study the same subjects as they advanced through their twenties.
There is no standardised test for financial self-efficacy, so Serido and Shim rated subjects on a five-point scale based on their financial literacy, curiosity, anxiety, and outlook.
The data was clear: students who believed they had the capability to learn to manage money, and had a basic foundation of financial knowhow, had a much higher chance of achieving financial wellbeing after they graduated than those who didn’t.
They also tended to make more money.
Financial self-efficacy is different from financial wellbeing in that it’s more about approach.
Someone with high financial self-efficacy identifies as having the discipline to make good decisions with money.
And they have experience to back it up: they’ve made trade-offs to afford something they wanted and know that they can do so on a larger scale as their life progresses.
They are comfortable seeking help and know where to find it.
They know where their money goes.
They do dumb things occasionally without throwing in the towel and losing sight of realistic achievements.
It’s optimism mixed with knowledge and resilience.
Of course, all of this is easier to do if you have more money to begin with.
Which begs the question: were those with financial self-efficacy more likely to have a higher income, or does a higher income boost financial self-efficacy?
It’s a little bit of both, Serido explains: income does not equal wellbeing or self-efficacy, but there’s a certain level of income that you need to afford those things.
“If you’re making $35,000 a year, have school loans and rent and car payments to make, it’s not necessarily about managing your money better,” she says.
In fact, she says, some students demonstrated high financial self-efficacy during school, but lost steam after they were saddled with student loans and low-paying jobs in their twenties.
“Many adults who make under $40,000 a year are probably struggling for reasons unrelated to self-efficacy,” she says.
“They shouldn’t blame their mindset; it’s a problem of numbers.”
But, she adds, plenty of subjects making more money than they needed — $70,000 and above — still had low financial wellbeing.
“In that case, it was a self-efficacy issue,” she says.
“They mismanaged their money because they felt incapable of doing better.”
So, how do you build financial self-efficacy?
If you weren’t brought up in a household where financial responsibility was modelled, it’ll be a heavier lift on your part, but it’s doable with time, practise, and most importantly, education.
“It helps to have role models and inherent, inborn confidence, but if you don’t, you need to prove to yourself that you can do this,” says Patricia Seaman, a Senior Director at the National Endowment of Financial Education, which backed the study.
She recommends starting with small, concrete, accomplishable tasks, like putting a small amount into savings every month, so you can prove your own capabilities to yourself.
Taking a personal finance workshop — even just a free one online — can also boost confidence.
While you’re at it, find someone to hold you accountable.
“We’ve found that even if your parents were terrible role models and never talked to you about money, if they expect you to do well with money, you will have a greater chance of success,” says Seaman.
If you have a relative or friend who’s good with money, ask if they’ll provide mentorship.
If you have thornier problems — a stubborn credit card balance, for instance — professional help might be in order.
“You gain the sense of ‘I can do it’ by actually doing it,” says Serido.
“You don’t expect a kid, even if they’ve got a natural talent, to walk on a soccer field and become the star.”
“You encourage them to learn and hone their skills through repetition.”
“It’s the same way with finances.”
And finally, be patient: “Self-efficacy isn’t perfection,” she says.
“You will make mistakes.”
“What’s important is that you believe you can improve.”
* Charlotte Cowles is a New York writer and editor. She tweets at @CharlotteCowles and her website is charlottecowles.com.
This article first appeared at www.thecut.com.
