The concept of “self-efficacy” is easy to love, partly because it just makes sense. Coined in the 1960s by psychologist Albert Bandura, it’s defined as “one’s belief in one’s ability to succeed in specific situations or accomplish a task,” and generally correlates with higher performance in said task. For example, I have high self-efficacy in grilling meats, because I know from experience that I can solve problems that might arise during the process (two words: meat thermometer). Consequently, my steaks are usually pretty good. Meanwhile, I have low self-efficacy in driving, which leads me to avoid it at all costs. Low self-efficacy is often tied to “learned helplessness,” or giving up because you believe that no amount of effort will result in improvement (see also: my parallel parking).
What does this have to do with paying your bills? Newly published research from a ten-year study of more than 2,000 students at the University of Arizona found that financial self-efficacy correlated more strongly with subjects’ financial well-being than almost any other factor, including gender, race, and socioeconomic background. The conclusion: being “good with money” isn’t just a matter of spending less than you earn — it’s a mind-set.
The study, which began in 2008, started as a broad investigation of young people’s financial habits. “At the time, the big concern for college students was credit-card debt,” says lead researcher Joyce Serido, an associate professor of family social science at the University of Minnesota. “People were saying, ‘Goodness, what’s wrong with these kids?’ So we decided to look at the bigger picture, and how their general financial behaviors developed over time. What contributes to them? What improves them? What undermines them?”
At first, it appeared that students’ parents played the biggest role in whether or not the kids spent recklessly: Families that discussed finances together tended to produce young adults who made smarter, more considered choices with their money. (Interestingly, kids from affluent families tended to have poorer attitudes and financial behaviors when they were freshman, but most grew out of it.) However, as the students graduated and became young adults, a new variable came into play. “It was no longer just about what the parents did,” says Serido. “Something was happening to trigger a voice inside these young adults that said, ‘I can do it on my own.’”
To determine what that “something” was, Serido and her research partner, professor Soyeon Shim of the University of Wisconsin-Madison, continued to study the same subjects as they advanced through their 20s. There is no standardized test for financial self-efficacy, so Serido and Shim rated subjects on a five-point scale based on their financial literacy, curiosity, anxiety, and outlook. The data was clear: Students who believed they had the capability to learn to manage money, and had a basic foundation of financial know-how, had a much higher chance of achieving financial well-being after they graduated than those who didn’t. They also tended to make more money.
Financial self-efficacy is different from financial well-being in that it’s more about approach. Someone with high financial self-efficacy identifies as having the discipline to make good decisions with money — they see it as part of who they are. And they have experience to back it up: They’ve made tradeoffs to afford something they wanted, and know that they can do so on a larger scale as their life progresses. They certainly don’t know everything about personal finance, but they don’t expect to; they are comfortable seeking help and know where to find it. They know where their money goes. They do dumb things occasionally without throwing in the towel and losing sight of realistic achievements; when they blow their budget at the bar one night, they don’t wake up the next morning and feel like their future is doomed. It’s optimism mixed with knowledge and resilience.
Of course, all of this is easier to do if you have more money to begin with. Which begs the question: Were those with financial self-efficacy more likely to have a higher income, or does a higher income boost financial self-efficacy? It’s a little bit of both, Serido explains: Income does not equal well-being or self-efficacy, but there’s a certain level of income that you need to afford those things,” she says. “If you’re making $35,000 a year, have school loans and rent and car payments to make, it’s not necessarily about managing your money better.” In fact, she says, some students demonstrated high financial self-efficacy during school, but lost steam after they were saddled with student loans and low-paying jobs in their 20s. “Many adults who make under $40,000 a year are probably struggling for reasons unrelated to self-efficacy,” she says. “They shouldn’t blame their mind-set; it’s a problem of numbers.” But, she adds, plenty of subjects making more money than they needed — $70,000 and above — still had low financial well-being. “In that case, it was a self-efficacy issue. They mismanaged their money because they felt incapable of doing better.”
Also, she notes, it’s important not to conflate self-efficacy and overconfidence. “Men have a higher tendency to be overconfident with money, which leads to risky behavior and potential financial instability,” Serido says. Men also tend to have higher financial self-efficacy than women, but not when you control for income: If you look at men and women making the same amount of money, this discrepancy disappears. “All this talk about women not being as financially aware as men — I didn’t find evidence for it at all in our study,” she says. “Our results showed that the self-efficacy difference was an income thing, not a gender thing.”
So, how do you build financial self-efficacy? If you weren’t brought up in a household where financial responsibility was modeled, it’ll be a heavier lift on your part, but it’s doable with time, practice, and most importantly, education. “It helps to have role models and inherent, inborn confidence, but if you don’t, you need to prove to yourself that you can do this,” says Patricia Seaman, a senior director at the National Endowment of Financial Education, which backed the study. She recommends starting with small, concrete, accomplishable tasks, like putting a small amount into savings every month, so you can prove your own capabilities to yourself. Taking a personal finance workshop — even just a free one online — can also boost confidence and give you a boost.
While you’re at it, find someone to hold you accountable. “We’ve found that even if your parents were terrible role models and never talked to you about money, if they expect you to do well with money, you will have a greater chance of success,” says Seaman. If you have a relative or friend who’s good with money, ask if they’ll provide mentorship. If you have thornier problems — a stubborn credit card balance, for instance — professional help might be in order (here are some pointers for getting a financial adviser who meets your needs).
“You gain the sense of ‘I can do it’ by actually doing it,” says Serido. “You don’t expect a kid, even if they’ve got a natural talent, to walk on a soccer field and become the star. You encourage them to learn and hone their skills through repetition. It’s the same way with finances.” And finally, be patient: “Self-efficacy isn’t perfection. You will make mistakes. What’s important is that you believe you can improve.”