Factors Affecting Personal Financial Management …

[Pages:16]Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

Factors Affecting Personal Financial Management Behaviors: Evidence from Vietnam

Nguyen Thi Ngoc Mien, University of Economics Ho Chi Minh City, Vietnam.

E-mail: ngocmien@ueh.edu.vn

Tran Phuong Thao, University of Economics Ho Chi Minh City, Vietnam.

E-mail: tranthao@ueh.edu.vn

___________________________________________________________________________ Abstract

This study investigates factors affecting personal financial management behaviors by examining the relationships among four factors including personal financial attitude, financial knowledge, locus of control and financial management behaviors. The research model is examined by using a survey approach on the youth in Vietnam. In the paper, Cronbach's alpha, exploratory factor analysis and confirmatory factor analysis were used to test measurement scale while the structural equation modeling is used for measuring the relationships. The findings suggest that, all three key factors have direct effects on financial management behaviors, in which they explained 62.1% of the variance of financial management behaviors of respondents. Financial attitude and financial knowledge significantly positive relate to financial management behaviors. Besides, the person who has more external locus of control leads worse financial management behaviors. In addition, the results do not support for the indirect effect of financial knowledge on financial management behavior through locus of control and the moderated role of financial knowledge on the relationship between financial attitude and financial management behavior. These findings could be useful references for related organizations as well as financial institutes that are interested in developing personal financial management in a context of emerging economies like Vietnam. ___________________________________________________________________________ Keywords: financial management behavior, financial attitude, financial knowledge, locus of control

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

1. Introduction

In recent years, financial management practices of youth have received the increasing attention of a wide range of organizations, such as government agencies, community organizations, college and universities, etc. The youth are growing up in a culture of debt facilitated by expensive lifestyles and easy credit (Dugas, 2001). However, young adults often begin their college careers without ever having been solely responsible for their own personal finance (Borden et al., 2008). It was also pointed out that the young generation rarely practiced basic financial skills, such as budgeting, developing a regular savings plan or planning for long term requirements (Birari and Patil, 2014). They also may be unprepared to effectively manage the psychological costs associated with high debt; for example, increased levels of stress and decreased levels of psychological wellbeing (Norvilitis and Santa, 2002).

Known as an emerging economy, the Vietnam's yearly per capita income has been estimated to reach USD1.960, which is ranked at the 166 position in the world (Vietnamnet, 2013). The rate of saving on income in Vietnam is 13 to 14 percent, which is rather low compared to other East Asian countries. Moreover, according to the survey of Department of Education and Training, Save the Children, one third of Vietnamese students questioned thought the amounts were less than they needed for their daily expenditure (Vietnamnet, 2012). The survey also revealed that the most allowances were spent on clothing, cosmetics, cinema tickets and on eating in salubrious restaurants as a way of showing how well off they were. This situation proves that the young do not have abilities to plan for their spending in meeting their day-to-day financial obligations. These poor financial behaviors will have consequential, detrimental, and negative effect on their lives at home and work.

In the literature, there are many studies investigating the relationship between personal financial management behavior and personal characteristics such as financial knowledge (Ibrahim and Alqaydi, 2013; Robb and Sharpe, 2009), financial attitude (Dowling et al., 2009; Shime et al., 2009) and locus of control (Falahati and Paim, 2012; Britt et al., 2013). However, such studies in the Vietnamese context is limited, particularly studies towards young people (Le et al., 2009). Therefore, the objective of this study is to examine the relationship among financial knowledge, financial attitudes, and locus of control in explaining personal financial management behavior among the youth in Vietnam.

The paper covers 5 sections. Section 2 is a review of related literature. Section 3 shows methodology. Section 4 indicates results and discussion. The final section is conclusions and recommendations.

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

2. Literature Review

2.1 Personal Financial Management Behavior Financial management behavior is considered one of the key concepts on the financial

discipline. Many definitions are given with regarding to this concept, for example, Horne and Wachowicz (2002) propose financial management behavior as the determination, acquisition, allocation, and utilization of financial resources, usually with an overall goal in mind while Weston and Brigham (1981) describe financial management behavior as an area of financial decision-making, harmonizing individual motives and enterprise goals. Joo (2008) indicates that effective financial management behavior should improve financial well-being positively and failure to manage personal finances can lead to serious long term, negative social and societal consequences. Thus, financial management is mainly concerned with the effective funds management.

Failure in managing an individual's finance can lead serious long-term consequences not only for that person but also for enterprise, society (Ismail et al., 2011). Hence, personal financial management behavior has received an increasing concern of researchers in recent years. In the study by Deacon and Firebaugh (1988), personal financial management is defined as the set of behaviors performed regarding the planning, implementing, and evaluating involved in the areas of cash, credit, investments, insurance and retirement and estate planning. Xiao and Dew (2011) take into account the personal financial management with regard to cash flow, credit, saving and investing management. There are many studies in Vietnam before which examining only one dimension of financial management behavior such as credit card (Nguyen and Lai, 2013; Vuong and Nguyen, 2013) or saving (Gries and Ha, 2014). However, measuring many different domains of financial management behavior is important because each domain has a serious role (Xiao and Dew, 2011). This study expands on the studies before in finding out factors affecting on financial management behavior in general.

The conceptual model of this study is supported by two foundational theories including the family resources management model and the theory of planned behavior. The family resource management model, as given by Deacon and Firebauge (1988), shows that decision process includes connected sequences started by inputs and continued by throughput, output and the feedback linking back to the inputs. Parrotta and Johnson (1996) modified that model by defining financial knowledge as the input, financial attitude and financial management behavior as two subsystems of the throughput. This is called financial management conceptual framework to investigate effects of financial knowledge and financial attitude on financial management behavior. In addition, the theory of planned behavior of Ajzen (2002) concludes perceived control over performance of a behavior, which may be perceived by

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

some as being similar to locus of control, can account for a considerable variance in actions. In summary, combining the financial resource management model and the theory of planned behavior gives a general view on the relationship between financial behavior and financial attitude, financial knowledge, locus of control. 2.2 Hypothesis Development on Personal Financial Management Behaviors

In the literature, several factors are used to examine their relationships with regard to the personal financial management behaviors; however, three critical factors are discussed in many recent studies including financial attitude, personal financial attitude, financial knowledge, locus of control (Dowling et al., 2009; Ibrahim and Alqaydi, 2013; Shime et al., 2009; Britt et al., 2013). As such, this paper suggests several hypotheses on these relationships given as follows: Financial Attitude and Personal Financial Management Behaviors

Financial attitude can be considered as the psychological tendency expressed when evaluating recommended financial management practices with some degree of agreement or disagreement (Parrotta and Johnson, 1998). A number of researches have concluded that financial attitudes play an important role in determining a person's financial behavior (Davis and Schumm, 1987; Shih and Ke, 2014). Financial attitudes shape the way people spend, save, hoard, and waste money (Furnham, 1984). Thus, one hypothesis is suggested as follow:

Hypothesis 1 (H1): There is a positive relationship between financial attitudes and personal financial management behavior. Financial Knowledge and Personal Financial Management Behaviors

The term financial knowledge is defined as sufficient knowledge about facts on personal finance and is the key to personal financial management behaviors (Garman and Forgue, 2006). The importance of financial literacy is obvious as it is typically used as an input to a model that determines the need for financial education and explained variations in behavior and financial outcomes such as savings, investment, and credit behavior (Idris et al., 2013). The relationship of these two variables is conclusive, with all studies find that having financial knowledge does influence individuals to behave in a more financially responsible ways (Robb and Woodyard, 2011; Zakaria et al., 2012). The consumers who are financially knowledgeable are more likely to behave in financially responsible way (Hogarth and Hilgert, 2002). Therefore, this study suggests a following hypothesis:

Hypothesis 2 (H2): There is a positive relationship between financial knowledge and personal financial management behavior.

Financial Knowledge, Financial Attitudes and Personal Financial Management Behavior Through research in psychology literature, it has been suggested that the magnitude of the attitude?behavior relation may be moderated not by attitude accessibility but by other

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

correlated factors such as certainty, amount of knowledge, or the attitude's temporal stability (Eagly and Chaiken, 1993). Parrotta and Johnson (1998) find a positive relationship between financial attitudes and financial behaviors. Similarly, Joo and Grable (2004) find that, people with stronger perceptions and positive financial attitudes tend to more successful in financial management. Therefore, the relationship between financial knowledge, financial attitudes and personal financial management behavior is suggested in this study as follows:

Hypothesis 3 (H3): Financial knowledge moderates the relationship between financial attitudes and financial management.

External Locus of Control and Personal Financial Management Behavior The term locus of control construct is best conceptualized as a person's perception of their place in the world (Rotter, 1966). According to Hellrigel et al. (2010), locus of control refers to the extent to which individuals believe that they can control events which affect them. Locus of control had two dimensions: internal control and external control. Those with an internal locus of control are apt to be goal driven and often than not. External control referred to events such as luck, chance, and fate as being under the control of powerful others (Hoffman et al., 2000). Dessart and Kuylen (1986) found that people who were more external in their orientation were more likely to experience financial difficulties. Tokunaga (1993) reports that the more external the orientation, the more likely were people to use consumer credit unsuccessfully. Perry and Morris (2005) conclude that how people feel about money depends on how they feel about their lives. Locus of control has also been to discriminate between those who save and those who do not, in which savers being internal in orientation than non-savers (Lunt and Livingstone, 1992). From the previous research, the following locus of control hypothesis is proposed in this study: Hypothesis 4 (H4): There is a negative relationship between external locus of control and personal financial management behavior. Financial Knowledge, Locus of Control and Financial Management Behavior Hayes (2006) states that, financial education may be of little value if personal responsibility is not included. Perry and Morris (2005) argue that individuals may not take full advantage of their knowledge or financial resources unless they feel that they control their own destiny. In the research explaining financial behavior for Koreans living in the United States, Grable et al. (2009) find that locus of control mediate the effect of financial knowledge on responsible financial management behavior. The study by Zakaria et al. (2012) finds evidence support for a mediating role of a locus of control on the relationship between financial knowledge and personal financial management behavior. As such, this study proposes a following hypothesis:

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

Hypothesis 5 (H5): The relationship between financial knowledge and personal financial management behavior is mediated by locus of control. 2.3 Conceptual Model

Based on the above studies, a conceptual model is proposed. Details about the conceptual model and its hypotheses as follows:

Financial Attitudes Financial Knowledge

H1(+) H3

H2(+)

Personal Financial Management Behavior

H5

H4 (-)

External Locus of Control

3. Methodology

Figure 1: A Conceptual Model

3.1 Research Design In the paper, two phases of study were undertaken in this research: a pilot study and a

main survey. The pilot's purpose was to modify and refine the measures. The main survey was used to test the measurement and structural models. In addition, four constructs were examined including personal financial management behavior (FB), financial attitude (FA), financial knowledge (FK), and locus of control (LC). Only FB was second-order constructs, while FA, FK, and LC were first-order constructs.

The measurements of constructs are based on prior studies. Specifically, personal financial management behavior was adopted from Xiao and Dew (2011). It includes 12 items, measured participants' financial management behaviors in three domains: cash management, savings and investment, and credit management. Sixteen items of Rajna et al. (2011) are used to measure attitude toward finance. Financial knowledge was measured following Perry and Morris (2005), which measured based on individual's self-assessment of knowledge about financial matters. Finally, locus of control was measured by 7 items, adopted from Rotter (1966). Five-point Likert-type scale was used for all items in this study. Details can be seen in the Appendix.

A paper-based questionnaire was developed to collect data to validate the constructs. This questionnaire was firstly developed in English, and was translated into Vietnamese later because English is not well understood by all respondents in Vietnam. It was divided into two parts. The first part of the survey included questions regarding demographic of the

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

respondents. The second part contained questionnaire items that measure four constructs in the proposed model. 3.2 Sampling

For the pilot test, the initial data was a sample of 64 respondents collected from the population of the youth from 19 to 30 years old. All are living in HCM City. After conducting the pilot test, the survey via questionnaire with 39 items is completed.

According to Hair et al. (2010), the sample should be 100 or greater and the minimum sample should have a desired ratio of five observations per item. Hence, the minimum sample size needed for testing overall model was 195. Data were collected using convenience sample method with a structured questionnaire. The study population comprised of the youth who studying or working in Ho Chi Minh City and from 19 to 30 years old. For the study, 400 questionnaires were distributed directly to respondents. After the collection, 307 questionnaires are suitable. The accepted responses must not have more than 30 percents missing value and all answers were not at the same value. 3.3 Research Method

The first step in analyzing the data collected is test of reliability by Cronbach's anpha. Exploratory factor analysis (EFA) and confirmatory factor analysis (CFA) were used to test validity of measurement scales. The structural equation model (SEM) had been used as the main method for analyzing the research model to test the hypotheses.

To test the moderating effects of knowledge on the relationship between financial attitude and financial management behavior, the multi-group analysis in SEM was conducted. The indirect effect of financial knowledge toward to financial management behavior through locus of control was also tested by using Sobel's test (Sobel, 1982). In addition, for the moderating effect of the financial knowledge, the multiple group analysis is used. Both the SPSS and AMOS package are used to analyze the data.

4. Data Analysis and Results

4.1 Respondents' Characteristics Total 307 questionnaires were gathered from the respondents from 19 to 30 years old.

Initial analysis of data indicated that gender was represented with 57.3% of respondents were female and 39.4% were male. Age ranged between 19 to 30 years old, with 26.1% of the respondents between 19 and 22 years old, 34.2% of respondents between 23 and 26 years old, and 39.7% from 27 to 30 years old. The academic attainment of the respondents was relative high, only 21.8% of respondents' education level under bachelor. 86.1% of the respondents have the income less than 10 million VND per month. This easily to understand in which the respondents of this study are the young who are undergraduates or just start their career. In

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Proceedings of the Second Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (AP15Vietnam Conference) ISBN: 978-1-63415-833-6 Danang-Vietnam, 10-12 July, 2015 Paper ID: VL532

summary, respondents are widely diverse by different gender, age, education level, and career. 4.2 Results on the Relationship between Factors

4.2.1 Exploratory Factor Analysis (EFA) Results

After run Cronbach's alpha to test validity of variables in the pilot test, although financial attitude variable also had the acceptable Cronbach's alpha, the item ? total correlation values of almost items were very low. It could be explained that financial attitudes might be a higher ? order constructs. So, in the main survey, EFA was first run to refine the financial attitude variable. It was modified with four constructs: attitude toward daily financial behavior (FA_FB), attitude toward saving plan (FA_SP), attitude toward financial management (FA_FM) and attitude toward future financial ability (FA_FF).

Cronbach's alpha was used to examine reliability of all scales in the main survey. The results indicated that, almost scales (except credit management and attitude toward saving plan) satisfied the requirement of reliability. Three items had low corrected item-total correlation and the Cronbach's alpha if these items deleted increased significantly. So, these items were deleted from the measurement scale. All Cronbach's alpha is higher than 0.6.

After testing Cronbach's alpha coefficient, all measures (including financial attitude) were continued to be analyzed by EFA. The KMO value (0.813) is greater than 0.5 which mean the data set is likely to factor well. In addition, Bartlett's test showed the significant value is very small, which indicating that the correlation matrix is significant different from an identity matrix. As result, both acceptances for diagnostic tests confirm that the data are suitable for factor analysis. There were 9 factors which had the eigenvalues more than 1. The extraction sum of squared loading showed that with 9 factors were extracted; it could explain 64.612% of the information contained in the original variables.

4.2.2 Confirmatory Factor Analysis (CFA) Results

The distribution of variables showed that, all of them had skewness value within (-0.860 to 0.462). The kurtosis value was within (-1.061 to 0.693). The data might exhibit slight deviations from normal; however, the absolute values were less than 3.0 for skewness and 10.0 for kurtosis. Measurement model can be estimated using maximum likelihood method evaluate the measurement variables of each construct (Kline, 1998).

Financial behavior was comprised of three components: cash management, credit management and saving. The CFA result indicated that the measurement model of financial behavior received an acceptable fit of data: 2(32) 51.623 (p-value = 0.015 < 0.05),

CMIN/df = 1.613, CFI = .965 and RMSE = .045. In addition, all factor loading is of this model had value higher than .4 and significant. Hence, the scale had convergent validity. The composite reliability of cash management, credit management and saving management in turn

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