Factors affecting personal financial management behaviors

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

Nguyen Thi Ngoc Mien

FACTORS AFFECTING
PERSONAL FINANCIAL MANAGEMENT
BEHAVIORS
ID: 22120056

MASTER OF BUSINESS (Honours)
SUPERVISOR: DR. TRAN PHUONG THAO

Ho Chi Minh City – Year 2014



DECLARATION
I hereby declare that this thesis, to the best of my knowledge and belief, is my own
work and effort and that is has not been submitted, either in part or whole, anywhere
for any award.
Information and ideas taken from other sources as cited as such. This work has not
been published.

Signature: Nguyen Thi Ngoc Mien


ACKNOWLEDGEMENT
At the first of my thesis, I would like to thank all those people who made this
thesis possible and an unforgettable experience for my studying.

Foremost, I would like to express my sincere gratitude to my supervisor, Dr.
Tran Phuong Thao. Her great knowledge and experience, patience and encouragement
helped me overcome any obstacles that I faced with when completing my thesis. Her
guidance helped me all the time of researching and writing of this thesis.
Besides my supervisor, I would also like to thank the ISB research committee
for their encouragement, insightful comments in my study.
Last but not the least, I would like to thank my parents who appreciated my
efforts and always provided cheerful encouragement during the period of this study.

Ho Chi Minh City, March 3, 2015


TABLE OF CONTENTS
ABSTRACT
CHAPTER 1. INTRODUCTION .................................................................................1
1.1. Background ...............................................................................................................1
1.2 Statement of the problem ...........................................................................................3
1.3. Research Objective and Research Questions ............................................................4
1.4. Scope of the research ................................................................................................5
1.5. Significant of the research ........................................................................................5
1.6. Structure of the thesis................................................................................................6
CHAPTER 2. LITERATURE REVIEW AND HYPOTHESES ..................................7
2.1. Theoretical Foundation .............................................................................................7
2.2. Personal Financial Management Behaviors ............................................................10
2.3. Financial Attitude and Personal Financial Management Behaviors .......................11
2.4. Financial Knowledge and Personal Financial Management Behaviors .................12
2.5. Financial Knowledge, Financial Attitudes and Personal Financial
Management Behavior ...........................................................................................14
2.6. External Locus of Control and Personal Financial Management Behavior ...........14
2.7. Financial Knowledge, Locus of Control and Personal Financial

Management Behavior ...........................................................................................16
2.8. Conceptual model ...................................................................................................16
2.9. Chapter summary...................................................................................................17
CHAPTER 3. RESEARCH METHOD.......................................................................18
3.1. Research procedure .................................................................................................18
3.2. Measurement scale ..................................................................................................19
3.3. Draft questionnaire..................................................................................................22
3.4. Sampling ................................................................................................................22
3.5. Data Analysis method .............................................................................................23
3.6. Pilot test result .........................................................................................................27
3.6.1. Cronbach alpha ...................................................................................................27
3.6.2. EFA for financial attitude scale ..........................................................................29


3.7. Chapter summary ....................................................................................................31
CHAPTER 4. RESEARCH RESULTS ......................................................................33
4.1. Data statistical analysis ...........................................................................................33
4.2. EFA result for financial attitude variable ...............................................................34
4.3. Cronbach’s alpha coefficient of reliability test .......................................................35
4.4. Exploratory Factor Analysis (EFA) results for all measures ..................................37
4.5. Confirmatory factor analysis (CFA) .......................................................................39
4.5.1. Financial Behavior ..............................................................................................39
4.5.2. Financial Attitude ...............................................................................................40
4.5.3. Saturated model ..................................................................................................41
4.6. The structural model ..............................................................................................44
4.7. The multiple group analysis to test the moderating effects ...................................47
4.8. Chapter summary.................................................................................................. 49
CHAPTER 5. CONCLUSIONS AND IMPLICATIONS...........................................50
5.1. Key findings of the thesis .......................................................................................50
5.2. Implications .............................................................................................................52

5.3. Limitations of study and future research .............................................................. 53
REFERENCE
APPENDIX


LIST OF FIGURE
Figure2.1. The financial management conceptual framework .................................. 9
Figure2.2. Conceptual model ..................................................................................... 17
Figure3.1. Research Process ...................................................................................... 18
Figure4.1. CFA for financial behavior ...................................................................... 40
Figure4.2. CFA for financial attitude ........................................................................ 41
Figure4.3. The saturated model ................................................................................. 43
Figure4.4. The structural model result....................................................................... 45
LIST OF TABLE
Table3.1. Measurement Scale .................................................................................... 20
Table3.2. Cronbach’s alpha result of pilot test .......................................................... 28
Table3.3. EFA results of the pilot test for the financial attitude variable .................. 30
Table3.4. EFA results of the pilot test for all variables ............................................. 31
Table4.1. Data statistics ............................................................................................. 33
Table4.2. EFA for financial attitude variable ............................................................ 35
Table4.3. Cronbach’s alpha coefficients.................................................................... 36
Table4.4. EFA for all variables .................................................................................. 38
Table4.5. Relationship between constructs................................................................ 42
Table4.6. Result of hypothesis testing ....................................................................... 46
Table4.7. Regression analysis of financial behavior as a function of
knowledge and locus of control ................................................................ 46
Table4.8. The different between variance and partial invariant model ..................... 48
Table4.9. Estimating for direct and moderating effects of knowledge...................... 48

ABSTRACT
The objective of the thesis is to determine the relationship between personal
financial attitude and financial management behavior, financial knowledge and
financial management behavior, locus of control and financial management behavior
of the youth in Vietnam. Specifically, the research model was developed from family
resource management model (Deacon and Firebaugh, 1988) and the theory of planned
behavior (Ajzen, 1991).
To examine research model, the thesis employs a survey approach by
distributing questionnaire for respondents from 19 to 30 in Ho Chi Minh City. Sample
size of this research is 307 respondents. Cronbach’s alpha, exploratory factor analysis
and confirmatory factor analysis were used to test measurement scale. The structural
equation modeling (SEM) is then used for measuring the relationships. The SPSS,
AMOS software packages are used.
The findings indicated that, all of three factors have direct effects on financial
management behavior, in which they explained 62.1% of the variance of financial
management behavior of respondents. Besides, this study also tests two addition
hypotheses about the indirect effect of knowledge on financial management behavior
through locus of control and the moderation of financial knowledge on the
relationship between financial attitude and financial management behavior. However,
both of them were not supported. This may be not accuracy because self assessment
financial knowledge scale. Future researches are encouraged to improve the financial
knowledge scale to get better and accurate results. Despite of some limitations, this
study also has some significations for parents, financial education institutions or
government agency. Discussion and implications of the findings are delineated at the
end of the study.


1

CHAPTER 1

INTRODUCTION
1.1. Background
Ability to manage finance of an individual has become an important problem
nowadays. Hilgert and Hogarth (2003) state that the financial systems of the 21st
Century have been growing with speed, sophistication and becoming more complex.
The increased complexity of the economy, financial markets, and availability of
different financial products make financial decisions of each individual more difficult.
People nowadays are immersing in different aspects of their financial state (Imbrahim
and Alqaydi, 2013). The poor financial management include excessively high debt
levels, low saving rates, being targets of investment fraud, being delinquent on credit
cards and bankruptcy contribute to the financial burden of each individual (Kim,
2000; Jorgensen and Savla, 2010). Failure in managing an individual’s finance can
lead serious long-term consequences not only for that person but also for enterprise,
society. For example, Garman et al. (1996) found that employees were stressed about
their poor financial behaviors that influenced negative on the job performance. When
someone does not plan their personal financial very well, they will face difficulties in
developing their lives such as delaying marriage or not getting married at all,
postponing having children or remaining childless, divorcing and remarrying at a
higher rate, changing jobs more often (Ismail et al., 2011). The question of how to
improve population-wide financial capability is of increasing concern to policymakers
(Dolan et al., 2012).
Financial management is simply “the ways and means of managing money”
(MacMenamin, 1999). In the literature, there are several factors influencing personal
financial behavior (Hira, Fanlsow, and Vogelsang, 1992; Hitzsimmons and Leach,
1994; Muske and Winter, 2001; Rha, Montalto and Hanna, 2006; Worthy, 2010).
Among these studies, two critical factors which may have significant impact on
behavior are knowledge and attitude (Eagly and Chaiken, 1993). In particular, much
research has been conducted on the relationship between financial knowledge and
financial management. Grable et al. (2009), for example, state it is important for those

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who make financial decision to use a reliable base of knowledge. In addition,
individuals with financial knowledge make better decisions than those without such
knowledge. For example, high school seniors with higher financial literacy scores
were less likely bounce a check and more likely to balance their checkbooks than
others (Mandell and Klein, 2009). Hilgert and Hogarth (2003) show that:
Consumers who know the full range of mortgage interest rates and terms in the
marketplace understand how their credit risk profile and personal situation fit
with those rates and terms, and consequently, be able to determine which
mortgage is best for them make it difficult for.
Successful personal financial management does not only depend on financial
knowledge, but also financial attitude (Joo and Grable, 2004; Kim et al., 2003).
Evidence suggests that attitudes precede the development of personal financial
management (Roberts and Jones, 2001; Border et al., 2008). In addition, from many
psychological literatures, it has long been assumed that increases in knowledge are
associated with greater influence of attitudes on behavior. Indeed, Kallgren and Wood
(1986) find that attitudes based on high level of knowledge were more predictive of
behavior than were attitudes based on low level of knowledge.
Several researchers have discussed impacts of locus of control on personal
financial management behavior recently. Perry and Morris (2005), for instance,
believe that a person’s locus of control has an important role to play in shaping
financial management behavior, with those exhibiting an internal locus of control
being more financially responsible. Joo et al. (2003) find that locus of control, among
other factors, has a significant relationship with college students’ attitude toward
credit with those with higher external locus of control have more positive attitudes
toward credit. People who do not take ownership for their behaviors exhibit poor
financial planning behaviors (Busseri, Lefcourt and Kerton, 1998; Gathergood, 2012).
In summary, managing personal financial as a subject has been concerned by

many researchers. Based on existing findings, this study attempts to explore the
relationship among financial attitudes, financial knowledge, and locus of control


3

toward personal financial management behavior. All concepts will be explained and
analyzed more detailed in the literature review section.
1.2 Statement of the problem
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. Today’s 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 (Cunningham, 2000; 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 (Pillai, as cited in 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; Roberts and Jones, 2001).The individual’s
materialism desire, the applying of credit card had exposed the youth into the debt’s
whirlwind if they are mismanaged. Poor money management can cause youth to be
easy prey to fraud and to fall into financial crises (Braunstein and Welch, 2002).
These poor behaviors also promote habits that may lead to costly financial mistakes
today and in the future (Royer et al., 2002).
Known as a developing country, 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. In addition, bad debt from

credit cards increased by 100% per year. From the end of 1000 billion outstanding
bills of credit card in 2011, to the end of 2012 outstanding bills of credit card up to
2000 billion (Tuoitre, 2013). In addition, according to the survey of Department of
Education and Training, Save the Children, and the Citi Foundation, one third of the
students questioned thought the amounts were less than they needed for their daily
expenditure (Vietnamnet, 2012). The survey also revealed that the most allowances


4

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.
Beginning from this situation, examining factors that are related to financial
management practices of the young in Vietnam are important areas for research. 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; Markovich and
Devaney, 1997), financial attitude (Dowling et al., 2009; Shime et al., 2009, Rajna et
al., 2011) 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; Andrey, 2005). Therefore, this study examines the roles of
financial knowledge, financial attitudes, and locus of control in explaining personal
financial management behavior among youth in Vietnam.
1.3. Research Objective and Research Questions
This main objective of the research is to investigate factors affecting personal
financial management behavior and determine the relationships between them. Three
factors are taken into consideration namely financial attitude, financial knowledge and

locus of control. Specifically, three proposed research questions are suggested as
follows:
-

Question 1: Whether do financial attitude, financial knowledge, and locus of
control have direct impact on personal financial management behavior?

-

Question 2: Whether does locus of control mediate the relationship between
financial knowledge and financial behavior?

-

Question 3: Whether does financial knowledge moderate the relationship
between financial attitude and financial behavior?


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1.4. Scope of the research
This study examines the key determinants of personal financial management
behavior. These are personal financial attitudes, financial knowledge, and locus of
control.
This study specifically focuses on the youth in Ho Chi Minh. According to
Vietnam’s Youth law, the youth are from 16 to 30 years old. Hayes (2006) stated that,
college life is the first time they are exposed to a significant degree of personal
responsibility for their day-to-day finances. In Vietnam, the college life begins at the
age of 19. This the reason in this study, the youth from 16 to below 19 years old are
not chosen because their financial decisions are still dependent much on their parents.

The respondents of this research are from 19 to 30 years old, studying or working in
Ho Chi Minh City.
1.5. Significant of the research
In terms of practice, the results of this study might be helpful for the youth. The
youth can assess their present financial management behaviors by themselves. After
that, based on the results, they can determine what they need to improve or change.
They might be more proactive in solving their financial hardship by taking courses
about financial management or expenditure more carefully.
Parents who have children are in college-age may use the findings of the study.
The college-age students start to face with the financial independent. The results give
the parents the way to forecast their children financial management tendencies based
on their locus of control, knowledge, and attitude. Thereby, they can grasp
opportunely financial problems of their children and monitor their college-age
children’s financial management behavior.
The results may interest government responsible for policy decisions
concerning education funding. The government agents may use the results to make
reforms in terms of how funding for education is allocated including programs to
educate about financial management for the youth.


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1.6. Structure of the thesis
This thesis is organized as follows:
Chapter 1 presents the statement of the problems, research questions and
objectives, scope of the research and thesis structure.
Chapter 2 introduces its literature reviews, including the definition of each
concept and their relationship in previous study. From that, its hypothesis and the
conceptual model are proposed.
Chapter 3 illustrates the way of setting up the measures and conducting the

study. It presents the research design, development of survey questionnaire, pilot
study, and main survey. This chapter also defines how to collect data and the statistic
methods to analyze the data collected to test the research hypotheses.
Chapter 4 analyses data as well as discusses the result finding in connection
with research model.
Chapter 5 summarizes the research results, provides the findings and
recommendations.


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CHAPTER 2
LITERATURE REVIEW, HYPOTHESES AND CONCEPTUAL MODEL
This chapter discusses about the theories of financial management behavior and
the influences of financial attitude, financial knowledge and locus of control factors
on the financial management behavior that have been conducted by previous
researchers. The review commences with an overview of theoretical foundation
including the family resource management model (Deacon and Firebaugh, 1988) and
theory of planned behavior (Ajzen, 1991). This is followed by review of the key
research that has addressed the roles of three determinants in financial management
behavior. Finally, based on the review of available literature, the proposed model to be
tested in the current study is presented and the hypotheses of the study are addressed.
2.1. Theoretical Foundation
The family resource management model
The research was developed based on the systems approach or better known as
the family resource management model by Deacon and Firebaugh (1988). The family
resource management model views four stages that explain how decisions are made.
These stages are connected sequences that start by inputs and continue by throughput,
output and the feedback linking back to the inputs. First, inputs are what the individual
brings to the situation. Inputs can include two categories: demands, and resources.

Demands are either goals or events that require actions. Resources are the mean that
provide the ability to meet the demands. The resources can be the skills, abilities and
knowledge of the individuals. Throughputs are the actions taken in response to
situations. Throughputs can include planning, implementing, decision-making,
controlling, communicating, sequencing, facilitating and using of resources. The third
stage is outputs. Outputs which include met demands, achieved goals, level of
satisfaction and altered resources are the end result or product of the decisions an
individual makes.
Hira et al. (1992), Parrotta and Johnson (1996) modified that model and apply
to financial management. They provide a conceptual framework to investigate effects


8

of financial knowledge and financial attitude on financial management behavior and
satisfaction with financial status. The family resource management defines the
resources of the input as material resources (such as income, net worth), or as human
resources (such as general education or financial knowledge). The input of the system
of Parrotta and Johnson is defined as financial knowledge, which is one of the
traditional human resources of the basic model. Rajna (2011) identifies that the
system’s throughputs is where the actual transformation of resources into financial
management practices take place. The throughput of the origin model includes two
subsystems: personal and managerial. Financial attitude is defined as a personal
subsystem variable that present the psychological tendency expressed by evaluating
financial management behavior with some degree of agreement or disagreement. The
managerial subsystem is conventionally defined as transformation processes such as
money management practices (Mugenda et al., 1990) or other management practices
(Hira et al., 1992). Base on those definitions, Parrotta and Johnson use financial
management behaviors as the managerial subsystem of their model. Output is defined
subjectively as satisfaction with financial status. From those, the financial

management conceptual framework to investigate effects of financial knowledge and
financial attitudes on financial management behaviors and satisfaction with financial
status is shown in the Figure1. This study does not concern the output part of the
model.
According to the theory of reasoned action developed by Ajzen and Fishbein
(1980), behavior is predicted using attitudes toward a specific behavior and subjective
norms to form a behavioral intention that determines the actual behavior. This theory
strengthens the theoretical point about the relationship between financial attitude and
personal financial management behavior of the financial management model above.


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INPUT

THROUGHPUT
PERSONAL
SUBSYSTEM

Financial
Knowledge

Financial
Attitudes

OUTPUT

MANAGERIAL
SUBSYSTEM
Financial

Management

Satisfaction
with
financial
status

Figure2.1. The financial management conceptual framework
Theory of planned behavior
Began from the theory of reasoned action, Ajzen (1991) modifies it by adding a
new behavior antecedent to the model besides two factors attitude toward behavior
and subjective norms, and named the theory of planned behavior. The factor of
personal behavior control was added to the theory of reasoned action model in order to
address the issue of personal control that the original model was lacking. Ajzen (2002)
concludes perceived control over performance of a behavior can account for a
considerable variance in intentions and actions. Perceived behavioral control indicates
that a person's motivation is influenced by how difficult the behaviors are perceived to
be, as well as the perception of how successfully the individual can, or cannot,
perform the activity (Ajzen, 2002). Later, Ajzen (2008) acknowledged the possibility
that perceived behavioral control may be perceived by some as being similar to locus
of control. Similarly, Kraft et al. (2005) use locus of control as the indicator variable
of personal perceived control and show negligible differences when the locus of
control items are excluded from perceived behavioral control. This study does not
look up about the subjective norms factors.
In summary, combining the financial management and theory of planned
behavior, this part give a general view on the relationships between personal financial
behavior and financial attitude, financial knowledge, locus of control. The next parts


10

will delve each particular relationship and give evidence for each exploration
from existing researches.
2.2. Personal Financial Management Behavior
Financial management is defined as the determination, acquisition, allocation,
and utilization of financial resources, usually with an overall goal in mind
(MacMenamin, 1999; Van Horne and Wachowicz, 2002). It is similar to the definition
of Solomon (1963) who suggests “it is concerned with the efficient use of an
important economic resource namely, capital funds such as check control to credit
card management, budget preparation, purchasing insurance and investment.”
Weston and Brigham (1981) describe financial management as an area of financial
decision-making, harmonizing individual motives and enterprise goals. Joo (2008)
indicated that effective financial management 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.
Research on the causes of financial management commonly defines personal
financial management as a set of behavioral indicators (Davis and Carr, 1992; Davis
and Weber, 1990; Godwin, 1994). Deacon and Firebaugh (1988) and Jodi (1996)
define personal financial management 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. Financial management
behavior refers to one's practice of using a systematic financial management system,
for example, a consistently saving through well thought and written planned with
specific aims (Titus et al., 1989). Responsible financial behavior is described by
having effective behavior such as preparing financial record, documentation on the
cash flow, planning expenses, paying utilities bills, controlling the usage of credit card
as well as saving consistently (Gorham et al., 1998).
The scales of financial management behavior also vary between studies, but,
Xiao (2011) show that, few of them are validated. Those scales just measured only

one or two domains of financial management behavior, and they are not


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comprehensive. Originating from that situation, Xiao and Dew (2011) construct new
scale for financial management behavior and they prove that it is a good scale. Cash
flow, credit, saving and investing management is viewed to be a critical financial
management practice. Cash flow is the inflow or outflow of money that modifies your
cash available on hand over a period. Cash flow management is the process of
monitoring, analyzing, and adjusting your personal cash flow. Credit management
involves behaviors towards credit card, i.e., having credit card, pay credit card
balances in full each month, etc. Saving is defined as what is left out of personal
income. Saving management behavior relates to look for opportunities to save money,
setting aside for future needs and saving out of each payment they received (Nyamute
and Maina, 2010). Investing management can be understood as the purchase of
a financial product with an expectation of profit in the future.
2.3. Financial Attitude and Personal Financial Management Behaviors
Eagly and Chaiken (1993) argue that attitude is a psychological tendency
which is shown in the evaluation on certain entities with some degree of favor or
disfavor. Therefore, 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).
The thorough review of the literature on the attitude – behavior relationship is
important. Chein (1948) argues that the differences in any dimension between an
individual’s results are in different attitudes. Fishbein (1966) supports Chein’s
viewpoint by developing a model that disunited intentions from attitudes. The result
shows behavior is a function of many variables, including situational factors,
individual differences, and contends attitude, specifically disunited from beliefs and
intentions. The theory of reasoned action proposed by Ajzen and Fishbein (1980)

argues that behavior is influenced by intention, and intention is influenced by the
attitude toward the behavior. Trafimow and Finlay (1996) find that, individually
defined differences play a significant role in determining intentions. Results from their
study indicated 79 percents of the respondents indicated intentions as a result of
attitudes rather than subjective norms. Shook and Bratianu (2010) state that, a person


12

forms his attitudes based on his beliefs in the possible outcomes. The more favorable
the possibility is, the stronger the intention to do the behavior will be, and vice versa,
the less favorable the outcome possibility is, the weaker the intention to do the
behavior will be.
The brief summary on the relatively early research on the attitude – behavior
relationship give an appreciation of the financial attitude on financial behavior
intentions and the subsequent financial actual behavior. 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). Godwin
(1994) examines financial attitudes as an independent variable, and she finds that a
position attitude toward planning was the greatest predictor of cash flow management.
Gurney (1981) has researched the reasons why people earn, spend, save and invest in
the ways they do. She concludes that understanding one’s money style will help gain
insight into how and why one react emotionally towards money and how it affects
financial success or lack of success. In the research about credit card using behavior,
Hayhoe et al. (2000) finds that, higher affective credit attitudes increased the
likelihood that students would carry a balance on several credit cards. Falahati and
Paim (2011) in a research for predicting financial management among college
students conclude that, spendthrift attitude will significant negative effect on financial
management among students. In this study, the following hypothesis is suggested:

H1. There is a positive relationship between financial attitudes and personal
financial management behavior.
2.4. Financial Knowledge and Personal Financial Management Behaviors
The term financial knowledge, also called financial literacy, is defined as
sufficient knowledge about facts on personal finance and is the key to personal
financial management behaviors (Garman and Forgue, 2006). Jacob et al. (2000)
considered personal financial knowledge as knowing conditions, practices, rules and
norms required for performing financial duties. Huston (2010) considers financial
literacy including awareness, knowledge, financial instruments and their application in


13

business and personal life. A study by Prawitz and Garman (2009) suggest employees
are given education focusing on financial literacy, which includes setting financial
goals, developing an expenditure plan, using credit wisely, saving for emergencies,
and learning not to spend exceeding their income. In summary, financial literacy
includes the ability to understand financial choices, for example, the ability to
compare offers before applying for a credit card, plan for the future and learn
strategies to manage debt.
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). Knowledge of how financial
markets operate should result in individuals making effective borrowing decisions
(Liebermann and Flintgoor, 1996). Chen and Volpe (1998) establish a link between

financial knowledge and financial decisions. The research show that, more
knowledgeable students achieved higher scores on hypothetical spending, investment,
and insurance decisions when compared with less knowledgeable students. According
to Vitt et al. (2000), the greatest advantage of financial literacy education is reducing
employees’ financial problems and encouraging them to be responsible for their own
financing and both will help increasing the efficiency of the organization. Atkinson
and Kempson (2004) find that young people (aged 18 to 24) in Britain are increasingly
over-borrowing, leading to financial difficulties because of financial illiteracy.
Therefore, this study suggests a following hypothesis:
H2. There is a positive relationship between financial knowledge and personal
financial management behavior.


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2.5. Financial Knowledge, Financial Attitudes and Personal Financial
Management Behavior
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 correlated factors such as certainty, amount of knowledge, or the attitude’s
temporal stability (Eagly and Chaiken, 1993). They show that, the amount of stored
knowledge that is available and accessible to people moderates attitude- behavior
correspondent. That is, knowledge affects the direction and strength of the relationship
between attitudes and behavior (Baron and Kenny, 1986). Similarly, according to
Fabrigar (2006), intentions were better predictors of behavior when they were based
on high amounts of knowledge than when they were based on little knowledge.
Based on the model adapt from the family resource management model,
Parrotta and Johnson hypothesis that, when financial knowledge is high, positive the
relationship between financial attitudes and financial behaviors will be stronger than
when financial knowledge is low. 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:
H3. Financial knowledge moderates the relationship between financial
attitudes and financial management.
2.6. 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 is the degree to which individuals
believe they are in control of their own future (Britt et al., 2013). According to Ntayi
(2005), locus of control is a psychological construct and focuses on the perception of
control. Locus of control had two dimensions: internal control and external control.


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Internal control referred to individuals' perception that events depended on their own
behavior. 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. Those with an external viewpoint are more likely
to feel that powerful others construct barriers that limit their achievement. Individuals
with an internal locus of control generally expect that their actions will produce
predictable outcomes and thus are more action motivated than external (Hoffman et
al., 2000). Many studies report that individual with an external locus of control
orientation tended to be conforming, complaint and easily perishable with a reduced
ability, in contrary, internal locus of control individuals tended to be better adjusted,
more popular, less anxious and more achievement oriented (Coster and Jaffe, 1991;
Ozmete, 2007).

Expectancy measures such as locus of control have been found to be the most
useful when tailor to predict behavior in specific areas (Lefcourt, 1982; Hume et al.,
2006). Extant literature showed that individual’s self-perception influences both
financial and non-financial preferences and behavior (Hira and Mugenda, 2000;
Onkivisit and Shaw, 1987). 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). Boyce and Wood (2011) find that the marginal utility of income depends on
personality traits. Specifically, Chatterjee et al. (2011) found that, higher self-efficacy
is related to greater wealth creation and a higher propensity to hold financial assets. In
their study, Perry and Morris (2005) hypothesized that there is a negative relationship
between external locus of control and responsible financial management behavior.
Their research result supports this hypothesis.


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From the previous research, the following locus of control hypothesis is
proposed in this study:
H4. There is a negative relationship between external locus of control and
personal financial management behavior.
2.7. 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. Zakaria et al. (2012)
confirm again that locus of control mediates the effect of financial knowledge in the
sense that given similar level of financial knowledge, those with external locus of
control tend to demonstrate lesser control over their finances. As such, this study
proposes a hypothesis as follow:
H5. The relationship between financial knowledge and personal financial
management behavior is mediated by locus of control.
2.8. Conceptual model
Based on the above studies, a conceptual model is proposed. Details about the
conceptual model and its hypotheses as follows:
Financial
Attitudes
H1(+)
Financial
Knowledge
H5
External
Locus of Control

H3
H2(+)

Personal Financial
Management Behavior

H4 (-)

Figure2.2. A conceptual model

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This research has 5 research hypothesis, those are:
H1. There is a positive relationship between financial attitudes and personal
financial management behavior.
H2. There is a positive relationship between financial knowledge and personal
financial management behavior.
H3. Financial knowledge moderates the relationship between financial
attitudes and financial management.
H4. There is a negative relationship between external locus of control and
personal financial management behavior.
H5. The relationship between financial knowledge and personal financial
management behavior is mediated by locus of control.
2.9. Chapter Summary
In summary, this chapter presents the research model of this article, based on
two models: family resource management model of Deacon and Firebaugh (1988) and
the theory of planned behavior of Ajzen (1991). Three items have been identified as
common determinants of predicting the personal financial management behavior:
financial attitudes, financial knowledge and locus of control. The chapter also presents
the concept of the factors mentioned in the model, and the hypothesis of this study.