Factors affecting personal financial management behaviors

ABSTRACT The objective of the thesis is to determine the relationship between personal financial attitude and financial management behavior, financial knowledge and financial management

International School of Business

-

Nguyen Thi Ngoc Mien

FACTORS AFFECTING PERSONAL FINANCIAL MANAGEMENT

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

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

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

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

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

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?

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

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

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

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

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

OUTPUT THROUGHPUT

INPUT

MANAGERIAL SUBSYSTEM

PERSONAL SUBSYSTEM

Financial Management

Financial Attitudes

Financial

Knowledge

Satisfaction with financial status

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

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

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

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

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

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

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

Financial Knowledge

External Locus of Control

Personal Financial Management Behavior

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

CHAPTER 3

RESEARCH METHODOLOGY

This chapter presents about the method and research design used in the study to explore the relationships among financial attitudes, financial knowledge, and locus of control toward personal financial management behavior It starts with the research design procedure, questionnaire design It supplies information about the sampling method and the type of analysis carried out on each phase of the study

Final scale

Assessment of measurement

Testing of hypotheses

Literature review

Pilot test

Main survey

According to the above process, collecting data process of this study was

designed into two stages First was a pilot test, second was main survey The pilot test

of this study was conducted to assess the validity and reliability of the instrument before the questionnaire was distributed Main survey was also quantitative research

to collect data for examining research model Statistical analysis using the Statistical Package for Social Sciences (SPSS) was undertaken to process the raw data obtained from the questionnaires

3.2 Measurement scale

This part includes measurement scales of financial management behavior and its determinants adapted from previous study

Personal Financial Management Behavior

Scale items of personal financial behavior are adapted 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 The instruction for these 12 items was, “Please indicate how often you have engaged

in the following activities in the past six months.” The response set for these questions were scored on the 5-point Likert ranging from 1(never) to 5(always) The individual without a credit card are required to leave vacant for the statement 5, 6 and 7 Items that represented poor financial management behaviors (FB6, FB7) were reverse coded prior to the analysis The higher scores indicate more responsible personal financial management behavior

Financial Knowledge

Financial knowledge was measured following Perry and Morris (2005) Their financial knowledge construct is a 5-point Likert scale that measures an individual’s self-assessed ratings of knowledge about financial matters (1 – know nothing, 2 – poor, 3 – average, 4 – fair, 5 – good)

Financial Attitude

16 items of Rajna et al (2011) are used to measure attitude toward personal

financial management Each item is in a 5 point Likert scale (1 – strongly disagree, 5 –

strongly agree) indicating the respondents’ extent to which they agree with the statement High scores indicate positive attitude towards personal financial management Items that represented negative financial attitude (FA5, FA6, FA8, FA9, and FA13) were reverse coded prior to the analysis

External Locus of Control

External locus of control was measured using a 7-item of Rotter (1966) scale These measures were improved and used by Perry and Morris (2005) The instruction for these 12 items was, “Please indicate how often you have feel about the following situation in your life.” Response categories included (1) never, (2) seldom, (3) sometimes, (4) often and (5) always A high score shows that individual is more external in orientations, in other words, less internal in orientations Items that represented internal locus of control (LC4, LC5) were reverse coded prior to the analysis

Table3.1 Measurement Scale Personal Financial Management Behavior

Comparison shopped when purchasing a product or service

Paid all your bills on time

Kept a written or electronic record of your monthly expenses

Stayed within your budget or spending plan

Credit Management

Paid off credit card balance in full each month

Maxed out the limit on one or more credit cards

Made only minimum payments on a loan

Saving and Investment

Began or maintained an emergency savings fund

Saved money from every paycheck

Saved for a long-term goal such as a car, education, home, etc

Contributed money to a retirement account

Bought bonds, stocks, or mutual funds

I know about credit ratings done by companies and why it is done

I know about managing personal finance

I know how to invest my money in buying shares on the stock market

I clearly understand the balance on my bank statement

It is important for me to develop a regular pattern of saving and stick to it

I should have written financial goals that help me determine priorities in spending

A written budget is absolutely essential for successful financial management

Each individual should be responsible for his or her own financial wellbeing

Keeping records of financial matters is too time-consuming

Saving is not important

As long as I meet monthly payments, there is no need to worry about the length of time it will take me to pay off outstanding debts

It does not matter how much I save as long as I do save

I should really concentrate present when managing my finances

Financial planning for retirement is not necessary for assuring one's security during old age

It is essential to plan for the possible disability of my wage

Making sure my property is insured against reasonable risks is necessary for successful financial management

Planning is an unnecessary distraction when families are trying to get by today

Planning for spending money is essential to successfully managing my life Planning for the future is the best way of getting ahead

Thinking about where I will be financially in 5 or 10 years in the future is

essential for financial success

There is really no way I can solve some of my problems

I am being pushed around in my life

I can change the important things in my life by myself

I can do anything I set my mind on

What happens to me in the future depends on me

I’m helpless in dealing with the problems of life

I have little control over the things that happen to me

* Item needs to be reversed

3.3 Draft questionnaire

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 It was divided into two parts The first part of the survey included questions regarding demographic of the respondents The second part contained questionnaire items that measure four constructs in the proposed model

3.4 Sampling

According to Welman et al (2005), the pilot study essentially administers the questionnaire instrument to a limited number of subjects from the same population as that for which the eventual project is intended The main purpose of pilot study is to test the questionnaire on a small sample of respondents by trying to identify and excluding potential problems (Malhotra, 2004) For the pilot test, the initial data was collected from a sample of 64 respondents 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 in Vietnamese is completed This study includes 4 variables with 39 items, in which 11 items for the dependent variable and 28 items for the independent variables

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, which means:

n > 100 samples and n = 5.k (k is the number of items)

Hence, the minimum sample size needed for testing overall model was 195 (determined by equation multiply 40 items from measurement scale and 5)

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

3.5 Data Analysis method

The SPSS and AMOS computer program was used to analyze data 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 The Sobel test was used to access whether locus of control significantly carried the effect of financial knowledge to the financial management behavior

3.5.1 Cronbach’s Alpha

According to George and Malley (2003), “Cronbach’s alpha is used as only one criterion for judging instruments or scales.” Testing the reliability of the scale by Cronbach's alpha, a statistical test, examine the correlation between observed variables It allows us to eliminate the inappropriate variables in the model Observed

variables have Cronbach’s alpha less than 0.6, item-total correlation under 0.3 (Nunally and Berstein, 1994) would be removed

3.5.2 Explorary factor analysis

Exploratory factor analysis (EFA) is based on a testable model to identify latent constructs underlying a set of manifest variables (Norris and Lecavalier, 2010) The key feature of EFA is to allow the identification of latent variables, variables that are not measurable and indirectly relate the measurable to the explanatory variable (DiIorio, 2005) In EFA, KMO value (Kaiser- Meyer - Olkin) is used to examine the appropriateness of factor analysis KMO value must be valid in the range from 0.5 to

1, the analysis of factors potentially compatible with the data Bartlett's test of sphericity should also be statistically significant at 5 percent significance level to conduct factor analysis Besides that, the Kaiser-Guttman rule suggests the extraction

of any factors that have an eigenvalue above 1.0 (Lee and Hooley, 2005) Items with factor loadings less than 0.4 will be eliminated from the analysis (Chen and Hsu, 2001; Chen and Tsai, 2006)

3.5.3 Confirmatory factor analysis

Confirmatory factor analysis (CFA) of measurement scale was carried out by using AMOS 16 software package The author firstly validated the two second-order constructs: financial behavior, financial attitude After that, the author incorporated the first-order constructs (financial knowledge and locus of control) into the CFA models to form a saturated model Some common model fit indices were evaluated to assess the overall model fit In SEM, chi-square/degree of freedom is considered a better indicator of the model fit for larger samples The criterion for acceptance varies across researchers, ranging from less than 2 (Ullman, 2001) to less than 5 (Schumacker and Lomax, 2004) The RMSEA tells us how well the model, with unknown but optimally chosen parameter estimates would fit the populations’ covariance matrix An RMSEA which is below 0.08 shows a good fit (MacCallum et

al, 1996)

It is necessary to test that the measurement model has a satisfactory of validity and reliability before for a significant relationship in the structural model Composite

reliability offers a more retrospective approach of overall reliability and estimates consistency of the construct itself including the stability and equivalence of construct (Hair et al., 2010) Composite reliability (CR) was calculated using the following formula:

2 2

(sum of standardized loadings) (sum of standardized loadings) (sum of indicator measurement errors)

CR 



Note that, composite reliability more than 0.6, construct internal consistency is evidenced (Fornell and Larker, 1981) Convergent validity shows the extent to which indictors of a special construct converge or have a high proportion of variance in common (Hair, 2010) It is assessed based on factor loading The factor loading for all items have to be greater than the recommend level of 0.4 Discriminant validity determines the extents to which scale does not correlate with other conceptually distinct constructs Dicriminant can be tested by correlation between constructs, significant different from 1 was acceptable

3.5.4 The structural model

Structural equation model (SEM) is collection of statistical models that seeks to clarify and explain relationships among multiple latent variables Hair (2006) indicated that, in SEM, researchers can examine interrelated relationships among multiple dependent and independent constructs simultaneously The structural model can be tested to examine the hypotheses relationships between the latent constructs in the proposed model (Kline, 2005; Hair et al., 2006) In other words, it aims to specify which constructs directly or indirect impact on other constructs in the model (Byrne, 2001)

SEM was used in this research study to explore statistical relationships among the factors of independent variables (i.e., financial attitude, financial knowledge and locus of control) and the dependent variable (i.e., financial behavior) The absolute fit indices are used to assess the ability of the overall model fit and these indices include the likelihood ratio statistic chi-square (χ2), in association with root mean square error

of approximation (RMSEA) The incremental fit indexes are used including comparative fit index (CFI) and Tucker - Lewis index (Hair et al., 2006) To test the

direct effect of independent variables on dependent variable, the t-test critical was used The critical ratio values should be above 1.96 (Byrne, 2001) which mean the concerned independent variable has a significant direct impact on the dependent variable at the significant level 0.05

3.5.5 The Sobel test to test the indirect effect

According to Barron and Kenny (1986), mediation can be said to occur when it satisfies four conditions: independent variable significantly affects the mediator, independent variable significantly affects the dependents in the absence of mediator, mediator has a significant effect on dependent variable, and the effects of independent variable on dependent variable shrinks upon the addition of mediator to the model It takes much trouble on testing four conditions above in turn Sobel (1982) released the test for the indirect relationship, which after called Sobel test The equation for the Sobel test is as follows:

Through the SEM, the indirect effect of financial knowledge on financial management behavior through locus of control was also represented In order to be more certain about the conclusion of this indirect relationship, the Sobel test was used

to examine again whether locus of control was a mediator of the relationship between financial knowledge and personal financial management behavior

3.5.6 The multiple group analysis to test the moderating effect

In order to investigate moderating effects, a multi-group analysis in SEM can

be used to investigate if values of parameters vary across categorical variables (Kline, 2005) The objective of performing multiple analysis groups was to confirm that whether the paths between groups were significantly different or not The presence of significant difference among the groups (e.g low financial knowledge and high financial knowledge) suggests that moderator does have effect on the path strength and direction Two stages of analysis were conducted In variance approach, the estimation parameters in each model of those groups were not constrained In partial invariance method, no constraints were set for measurement models but constraints were imposed for relations among research concepts, they were set to be equal for both groups An overall chi-square difference test was conducted for the moderating effect If the Chi-square test results in a p-value of 0.05 or smaller, the results are deemed significant, the null hypothesis is rejected, and it is concluded that there is a significant difference between two groups

3.6 Pilot test result

Cronbach’s alpha and exploratory factor analysis (EFA) was used to test measurement scales

3.6.1 Cronbach’s alpha

Table 3.2 shows the results of Cronbach’s alpha of each scale

The variable financial management behavior includes three constructs: cash management, credit management, saving and investing The alpha values of the first two constructs (cash management and credit management) were higher than the alpha

if item deleted Item – total correlation of these constructs also satisfied greater than 0.3 The saving and investing construct also had the Cronbach’s alpha value higher than 0.6 However, the item-total correlation of the item FB12 (Bought bonds, stocks,

or mutual funds) was 0.219 that lower than 0.3 and the Cronbach’s alpha of if this item deleted were higher than the initial alpha values Vietnam's stock market is negligible, monotonous With limited size and low liquidity, the Vietnam’s stock

market is just unattractive, not strong enough to absorb the investment (Dantri, 2014) The securities investment channels remain a stranger to most Vietnamese people The population of this study is the young from 19 to 30, who are undergraduates or have just started their career a few years Most of them have not enough financial resources and experience to think about securities investing Originating from the Cronbach’s alpha result and the reality of the Vietnam stock market, the item FB12 was removed out of scales

Table3.2 Cronbach’s alpha result of pilot test

Observed

Variable

Scale Mean if Item Deleted

Scale Variance

if Item Deleted

Corrected Total Correlation

Item-Alpha if Item Deleted Financial management behavior (cash management): alpha = 0.667

4.726 5.454 5.307 6.245

0.551 0.522 0.350 0.411

0.524 0.556 0.682 0.628 Financial management behavior (credit management): alpha = 0,666

FB5

FB6

FB7

5.9615 6.0577 6.3654

4.704 3.663 3.962

0.425 0.576 0.444

0.637 0.430 0.621 Financial management behavior (saving and investing): alpha = 0,687

11.749 10.023 9.926 9.442 11.437

0.366 0.583 0.581 0.532

0.219

0.668 0.579 0.579 0.595

11.585 8.206 11.563 9.405 10.753

0.503 0.726 0.423 0.568 0.532

0.747 0.658 0.767 0.724 0.735 Financial Attitude: alpha = 0.651

36.373 36.518 36.415 35.850 34.643 31.190 37.480 34.403 35.909 37.206

0.193

0.310 0.327 0.395 0.358 0.464

0.090

0.378

0.229 0.196

0.646 0.631 0.629 0.622 0.621 0.598

0.663

0.618 0.640 0.644

37.826 36.812 33.415 37.274 39.138 37.459

0.137 0.297

0.427

0.237 0.007 0.158

0.651

0.633 0.609 0.639

0.668

0.649 Locus of Control: alpha = 0.807

19.4063

16.155 15.133 17.996 17.218 16.380 16.855 15.674

0.570 0.672 0.397 0.471 0.557 0.507 0.607

0.777 0.756 0.805 0.794 0.779 0.788 0.769 Two variables financial knowledge and locus of control satisfy the conditions

of Cronbach’s alpha and item-total correlation There was no need to modify these variables

The financial attitude variable also had the acceptable Cronbach’s alpha However, the item – total correlation values of almost items were very low It could

be explained that financial attitudes might be a higher – order constructs The exploratory factor analysis was used to test whether the financial attitude variable was

a first-order construct or a higher-order construct

3.6.2 EFA for financial attitude scale

According to Cronbach’s alpha, almost of measurement scales were acceptable, except financial attitudes So, in the pilot test, EFA first was used only for financial attitude construct because among measurement scale in this study, only financial attitude variable had limitation in item-total correlation values All items of financial attitude were run through the principal component analysis, using the varimax rotation method After three times of running, the results showed that all remained factor loading higher than 0.4 and a significant loading on an acceptable factor The details

of this process were manifested as follow:

- First time running, there were six factors with the eigenvalues that were higher than 1 (see Appendix3) The items FA4, FA5 loaded on two factors, so they were deleted from the analysis

- Second time running, there were five factors with the eigenvalues higher than

1 (see Appendix3) There was no violation of low factor loadings or cross-loading Only FA7 loaded a factor, this variable was eliminated for next running The Cronbach’s alpha was recalculated for each new constructs The item FA11 and FA14 loaded the same factor, but the Cronbach’s alpha for this construct was very low (only 0,218) So, they were deleted from the analysis

- Third time running, there were three factors There was also no violation of low factor loadings or cross-loading The Cronbach’s alpha values also satisfied Financial attitude became a multiple- dimension variable with three constructs (see in Table3.3)

Table3.3 EFA results of the pilot test for the financial attitude variable

Factor loading Cronbach’s

alpha

FA8 0.754

0.712 FA6 0.743

FA9 0.692 FA13 0.679

Finally, there were seven factors which had the eigeinvalues more than 1 Financial attitude after this EFA becomes two – dimension variable

However, sample size of pilot test is too small, so, using EFA to test require a strictly conditions Moreover, there is no previous study in Vietnam do the research on financial attitudes before, so, I did not have sure-fine experimental evidence that I could remove these items These items were not deleted and would be tested again in the main study EFA for this test was only used as reference for the main survey

Table3.4 EFA results of the pilot test for all variables

3.7 Chapter summary

This chapter presented research method that used to test research model, measurement scale construct and results of pilot test A paper-based questionnaire was developed to collect data through distributing directly and email to respondents Pilot test indicated that financial management behavior, financial knowledge and locus of control items were acceptable They were be used for the main survey There is a problem with the construct of financial attitudes, and after using the EFA, financial attitude was considered as a multiple dimension variable This analysis was used as reference for the main survey

Main survey had sample size with 307 respondents and used CFA, SEM as main method Multi-group and Sobel test were also used to test the moderating effect and indirect relationship The next chapter presented data analysis results of main survey