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New research from the University of Arizona shows that high school and college students who are exposed to cumulative financial education show an increase in financial knowledge, which in turn drives increasingly responsible financial behavior as they become young adults.
In fact, researchers at the UA Norton School of Family and Consumer Sciences documented a "snowball effect" that these early efforts exponentially increase the likelihood that students will pursue more financial education as time goes on, including informal learning through books, magazines and seminars.
Young adults also begin to display their own distinct financial identities that reflect varying degrees of parental influence and autonomy. The Norton School researchers have bundled them into three categories: pathfinders, followers and drifters.
Also, parents, more than any other factor, exert the most influence over their children when it comes to developing positive financial attitudes and behaviors – 1.5 times more than continuing financial education and more than twice as much as what young people hear from their friends.
These findings come from the third wave of a landmark study, Arizona Pathways for Life Success in University Students, or APLUS. In this latest round, researchers surveyed more than 1,500 students and drop-outs four years after they entered the UA in the fall of 2007.
"We are able to show causal linkages between repeated financial education and higher levels of good financial behaviors such as tracking expenses, paying credit cards in full and saving money each month," said Soyeon Shim, director of the Norton School and the lead researcher on APLUS.
"Students also are smarter about finances in general compared to previous waves of the study. Objective knowledge measured by performance on a financial quiz rose five percent," she said.
APLUS researchers studied how individual financial styles developed in the cohort, including the degree to which young adults relied on parents or themselves to guide their financial decisions and how financial style affects financial capability. They discovered three clusters of emerging financial styles among the students:
Pathfinders (31 percent): The most promising group of young adults are those most engaged in defining their financial style and see themselves as having actively chosen their approach to managing their finances. Of the three groups, pathfinders exhibit more positive financial attitudes, feel much better about their efficacy and control and report the most positive financial behaviors.
Followers (39 percent): The largest group of young adults tends to follow their parents' guidance and imitate their parents' financial management style. Although they are exploring finances on their own, they also are the most unconcerned about the process of doing so.
"This is not necessarily a negative financial style when parents are good at financial management," said Joyce Serido, an assistant research professor and co-principal investigator of the study.
Drifters (30 percent): These young adults are those least accepting of their parents' financial management style, but they have not yet established any approach of their own. They are not necessarily unconcerned about personal finance, but their financial behaviors tend to be worse than their peers. However, their financial knowledge and awareness overall are solidly average.
Researchers believe that some young adults will retain their financial identity, while others will continue to evolve and change places as they encounter new opportunities and unexpected financial demands on the path to financial self-sufficiency.
For Hannah Gomez, a recent UA graduate, the decision to stay close to home in Arizona, rather than attend a private school, came with an important safety net. By taking advantage of in-state tuition and a scholarship, Gomez graduated debt-free in an unsteady economy.
"Not only was the cost much lower than my first-choice private university, but it gave me the chance to learn to manage my finances at lower stakes, and now I can afford and understand my loans for graduate school," she said.
Although parents continue to be the most important factor in building financial capacity in children, the nature of their influence changes over time. Parental modeling declines slightly while children are in college – perhaps because students spend less time at home, or parents are stepping back to let their young adult children take more responsibility for their own finances.
The value of parental communication – the most significant influence – remained stable over the study's time frame, Serido said.
"As young adults mature, so do their conversations with their parents about money. Parents need to evolve their approach to fit their students' growing independence: treat the discussions as a dialogue between equals, adult to adult, and scale back on lecturing their children and flooding them with checklists and advice," she said.
Meanwhile, the reported influence of parental expectations for responsible financial behaviors, such as tracking expenses and sticking to a budget, increased 4 percent since their freshman year.
Arizona Pathways for Life Success in University Students is a longitudinal study that has examined financial attitudes and behaviors, and the forces that drive them, in youth ages 18 and up.
The study is the first of its kind and is particularly valuable because it tracks the same group of young adults and is designed to identify the factors contributing to positive financial behaviors.
"We are able to see what these young adults have in common when they change, or don't change, their financial behaviors," said Serido. "And then we can determine the differentiators that contribute to or detract from good financial practices."
The APLUS study is a cooperative effort of the John and Doris Norton School of Family and Consumer Sciences, the College of Agriculture and Life Sciences and the Take Charge America Institute for Consumer Financial Education and Research at the UA.
"The Citi Foundation is committed to funding relevant research, like the work of APLUS, to inform the financial capability field on factors that influence positive financial behaviors and attitudes in young adults," said Pamela Flaherty, president and CEO of the Citi Foundation.
"These findings offer critical lessons that can be incorporated into the design of effective strategies that encourage young people to make sound financial decisions that will contribute to their financial stability over time."
"The APLUS research gives us the data we need to design more effective financial education programs which in turn strengthens the financial decision-making skills of the next generation of young adults," said Michael Staten, professor and director of TCAI.
An APLUS Webinar, "Changing Financial Behaviors of First Year College Students: Three years and one financial crisis later," is scheduled for Wednesday, Sept. 14, at 11:30 a.m. EDT. Co-principal investigator Serido will present research results and take questions from attendees. Advance registration is required. Sign up online.