Sowing seeds: The impact of financial socialization on the financial understanding of young children and preschoolers

Abstract

This paper is concerned with the relationship between financial socialization and financial understanding among young children. Measures of financial understanding, appropriate for 4–6 year olds, are developed. Regression analysis is used to relate these measures statistically to a set of financial socialization variables and control variables related to the child, their parents, and their household. Data collected in the nationally representative child and parent 2016 UK Children and Young People's Financial Capability Survey are used. A key empirical finding is that financial understanding is about 10% higher for children whose parents regularly discuss with their children how they spend their money. The analysis suggests that around 20% of parents do not discuss financial matters with their children. It is likely that variation in early-life financial socialization is important in explaining variation in later-life financial understanding. Further research is needed to establish if this relationship is causal.