Don’t worry, I had no clue what that was either. Self efficacy is your own belief in your ability to succeed at certain things or in certain situations. My daughter has a little tchotchke on her shelf that says “Believe in Yourself.” It’s that, but more specific.
Anyway, a new study shows self efficacy regarding your finances is a better indicator of financial health and wealth than just about anything else, including your socioeconomic background, your race and your gender. The researchers studied thousands of college students for a decade and found that those who are “good with money” are good more because of their confident mindset than anything else!
At first, as you might expect, students were most influenced by how their parents handled money and what they taught them about money. But as the researchers continued to follow the students into their 20s, they discovered that the ones who did best with money were those who believed that they could. They did need to know the basics for this confidence to help, so I’m a big believer in financial literacy classes.
Now here’s the REAL kicker: the students with the highest financial self efficacy also tended to make the most money! This is good stuff, so let’s dig a little deeper into what financial self efficacy might look like. It means that a person, especially a young person, IDENTIFIES as being good with money and able to be disciplined and make good financial decisions. They SEE themselves that way.
Now, in studies like this it’s always hard to tell causation. Did the financial self efficacy lead to the higher income? Or did the higher income lead to the financial self efficacy and confidence? The researchers argued that it cut both ways. The only time when financial self efficacy didn’t help much was when the young people were so saddled with debt, like student loans or credit cards and made so little that they couldn’t see their way out.
So can you CULTIVATE financial self efficacy? Yep. It’s just like riding a bike. If you learn the skills and then practice, you will be confident in your abilities in the area of biking. Ditto the financial field. Learn and practice and you will be confident and savvy with your money. The real takeaway for me is that we need to be mindful about the entire process of learning how to handle money confidently. It shouldn’t happy by accident or on the fly. Learn to make good decisions about money and practice this in your early career and you will MAKE more.
Take a look at Aplus’s study at self efficacy regarding your finances: