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Boosting financial well-being with self-control and future time perspective

by Fred van Raaij & Leonore Riitsalu
Posted on June 05, 2020

The impact of psychological factors on financial behaviour is an increasingly popular topic for researchers around the world. Their focus, however, is shifting from financial capability to financial well-being. Until now, there is only one in-depth study on the antecedents of financial well-being, based on data from several countries and including various psychological factors. Across countries, financial locus of control and confidence have significant effects on financial well-being (Kempson, 2018).

Locus of control means taking personal responsibility for financial outcomes (internal control) rather than blaming others or the circumstances (external control). Confidence in the Kempson study is similar to subjective financial knowledge, a significant predictor of financial well-being (Riitsalu & Murakas, 2019). If you are confident to have sufficient financial knowledge, you are more likely to take active care of your financial well-being.

The first study to include both self-control and future time perspective

In a recent TFI story, we discussed what financial well-being stands for. Is it an objective or subjective measure? How do different countries score on financial well-being? We measured two components of financial well-being: 'current money management stress' and 'expected future financial security' (Netemeyer et al., 2018) and used the ING International Survey on Savings to assess financial wellbeing across 16 countries.

The next step in our research project is to analyse the impact of self-control and future time perspective on financial well-being. Self-control (SC) has been found to explain a broad range of financial behaviours, such as saving for the future and avoiding getting into debt (Nyhus, 2017; Strömbäck et al., 2017; van Raaij, 2016). Those with higher SC are more likely to manage their finances prudently both for the short and long term. SC has also been found to have a significant effect on both components of financial well-being, current money management stress and expected future financial security (Ponchio et al., 2019).

Future time perspective (FTP) is a general concern for and corresponding consideration of one’s future (Kooij et al., 2018, p. 3). It is assumed that individuals scoring high on FTP are better at planning for their retirement. There is evidence that time orientation has a significant effect on financial well-being (Kempson, 2018). Yet ours is the first study to include both SC and FTP simultaneously in the analysis of financial well-being levels around the world.

More self-control, less money stress

For measuring self-control and future time perspective, participants were asked to rate how much they agree or disagree with eight statements, ranging from "I have a hard time breaking bad habits" to "I like planning and preparing for the future".

Analysing the responses from 15,773 individuals, we find both SC and FTP to have a large effect on financial well-being. People with high self-control have a lower level of current money management stress (CMMS). Future oriented people have a higher expected future financial security (EFFS). The effect of these psychological factors on both components of financial well-being is larger than of the socio-economic variables. Only having more than one year´s income set aside in savings has a bigger effect on CMMS than self-control (see Figure 1). For EFFS, more than 7 months´ income in savings and the highest household income level have a larger effect than future time perspective (see Figure 2). All other socio-economic factors have a substantially smaller effect.

Figure 1. Standardized regression model of current money management stress

Figure 2. Standardized regression model of expected future financial security

Training your SC and FTP

Our results show that psychological factors do indeed have a large effect on financial well-being. It has been argued that neither self-control nor future time perspective remains unchanged throughout lifetime and across contexts (Goldstein, 2011; Kooij et al., 2018). You can train your self-control by creating useful habits, possibly using commitment devices that help you stick to financial goals.

If you focus on your future lifestyle, you may find that your future needs and wants compete with present worries and desires. This is a challenge in the context of a consumer culture promoting immediate gratification. Thankfully there are more and more innovative apps you can download that serve as personal trainers of both self-control and future time perspective: these apps make your vague future goals more concrete and tangible, helping you to imagine what you might need to keep your desired living standard in the future. If you recognise the role that psychological factors play in your financial decisions, and use the tools designed to help you out, you may increase your financial well-being in both the present and the future.

The final step of our research project is to analyse how providers of financial education and services could better segment their target audiences for increasing financial well-being around the world.

References

  • Goldstein, D. G. (2011). The battle between your present and future self [TED talk]. https://www.ted.com/talks/daniel_goldstein_the_battle_between_your_present_and_future_self
  • Kempson, E. (2018, November 26). Financial Capability and Well-Being. An international comparison. National Research Symposium on Financial Literacy, Toronto.
  • Kooij, D. T. A. M., Kanfer, R., Betts, M., & Rudolph, C. W. (2018). Future time perspective: A systematic review and meta-analysis. Journal of Applied Psychology, 103(8), 867–893. https://doi.org/10.1037/apl0000306
  • Netemeyer, R. G., Warmath, D., Fernandes, D., Lynch, J. G., Fischer, E., & Toubia, O. (2018). How Am I Doing? Perceived Financial Well-Being, Its Potential Antecedents, and Its Relation to Overall Well-Being. Journal of Consumer Research, 45(1), 68–89. https://doi.org/10.1093/jcr/ucx109
  • Nyhus, E. K. (2017). Saving Behaviour: Economic and Psychological Approaches. In Economic Psychology (pp. 206–221). John Wiley & Sons, Ltd. https://doi.org/10.1002/9781118926352.ch13
  • Ponchio, M. C., Cordeiro, R. A., & Gonçalves, V. N. (2019). Personal factors as antecedents of perceived financial well-being: Evidence from Brazil. International Journal of Bank Marketing, 37(4), 1004–1024. https://doi.org/10.1108/IJBM-03-2018-0077
  • Riitsalu, L., & Murakas, R. (2019). Subjective financial knowledge, prudent behaviour and income: The predictors of financial well-being in Estonia. International Journal of Bank Marketing, 37(4), 934–950. https://doi.org/10.1108/IJBM-03-2018-0071
  • Strömbäck, C., Lind, T., Skagerlund, K., Västfjäll, D., & Tinghög, G. (2017). Does self-control predict financial behavior and financial well-being? Journal of Behavioral and Experimental Finance, 14, 30–38. https://doi.org/10.1016/j.jbef.2017.04.002
  • van Raaij, W. F. (2016). Understanding Consumer Financial Behavior. Money Management in an Age of Financial Illiteracy. Palgrave Macmillan US. http://www.palgrave.com/gb/book/9781137544247