Context

Research has shown that low levels of financial understanding are associated with poorer financial wellbeing outcomes across a number of domains. Young children are vulnerable consumers who are often targeted by advertising. Without intervention, they risk becoming vulnerable adult consumers.

Financial socialisation from as young as preschool age has a potential role to play in moderating this risk, particularly if it can be shown that young children’s financial understanding improves in that context. This paper examines the relationship between financial socialisation by parents and levels of financial understanding among young children in the UK aged 4 to 6.

The study

This study involved secondary analysis of data from a sample of 817 children aged 4 to 6 years old, and their parents, drawn from the 2016 UK Children and Young People's Financial Capability Survey. The survey was commissioned by the Money and Pensions Service and used quota sampling, with over-sampling in Northern Ireland, Scotland and Wales, to provide a nationally representative sample of children and young people aged 4 to 17 years old.

The study aimed to:

• examine the relationship between parental financial socialisation and the financial understanding among young children using concurrent measures; and
• use regression analysis to allow for the relationship to be examined while controlling for many other factors which might also influence young children’s financial understanding.

Financial understanding was measured based on recognition of coins and notes, using online vignettes and six multiple-choice questions to children. Financial socialisation was measured using questions asked of parents:

• If they ‘often or ‘sometimes’ talked to their children about where their money comes from, how the child spends their money and the child’s choices in spending money.
• Whether or not parent discussed their finances openly with their children.

Key findings

Controlling for other factors, children who received financial socialisation from their parents were significantly more likely to have high financial understanding than their counterparts who did not receive financial socialisation from their parents on nearly all measures.

• Where parents said they talked to their children about:
  • where their money comes from, 41.6% of children got all six questions correct compared with 29.3% if parents did not (p<.01)
  • how the child spends their money, 40.5% of children got all six questions correct compared with 27.8% if parents did not (p<.01)
  • their child’s choices in spending money, 41.6% of children got all six questions correct compared with 28.9% if parents did not (p<.01).
• For each of the above measures, the number of questions children got right was also significantly higher for children whose parents did this (minimum p<.05).
• The number of questions children got right was significantly higher for children whose parents talked openly on all three measures (minimum p<.05).
• However, 41.3% of children whose parents said they talked openly to their children about their household finances got all six questions correct compared with 36.8% whose parents did not (not significant, p>.10).

Points to consider

Methodological strengths or limitations

• The survey from which the sample was drawn was a robust survey with typically well-validated and standardised measures.
• Reliability of the three composite outcome measures used in the analysis was tested in Cronbach’s alpha and was deemed low but acceptable in each case.
• The analysis incorporated a large number of individual and household control variables in multivariate regression analyses. This provided a rigorous approach to identifying the independent influence of financial socialisation on financial understanding.
• It is important to consider the practical significance of the findings which, despite being statistically significant, were small for some measures.
• The findings suggest some redundancy between the measures of financial socialisation.

Applicability

• The findings should be of interest to policymakers, financial educators and all organisations with a remit to support financial wellbeing, and the wellbeing of children in particular.
• The practical significance and redundancy noted above might help inform practitioners and their evaluators about the content of intervention and measurement in relation to parental financial socialisation of children.

Relevance

• The findings are highly relevant given the Money and Pensions Service’s ambition to improve financial wellbeing in the UK for all generations.

Generalisability/transferability

• The findings are specific to young children but may nonetheless have transferability to other contexts, such as countries with comparable socio-cultural influences on financial socialisation and with similar economies.