Financial Distress is Set Early in Life

Young adulthood is the staging ground for financial success later in life, and today the stakes are higher than they’ve ever been.  Young adults are managing the burden of paying back student loans or feeling an urgency to save – and many are trying to do both.

According to a study linking economics and psychology, what most strongly separates young adults who start out on the right foot from those already experiencing financial distress is whether they are conscientious or neurotic individuals.

University of Illinois researchers followed more than 13,000 teenagers and young adults between 1994 and 2008 in the National Longitudinal Study of Adolescent to Adult Health.  The survey asked questions about both their psychology and finances.  The six measures of financial distress in this study were determined by survey questions such as whether the respondents were keeping up with their rent and utility bills, whether they were worried about having enough food, and whether their net worth was positive or negative.

The personality measures were based on the Big Five traits widely used in psychology research: conscientiousness, agreeableness, neuroticism, openness to new experiences, and extroversion (known collectively as CANOE).  The survey respondents were grouped in this way based on the extent to which they agreed or disagreed with various statements. Examples included “I get chores done right away (conscientious),” and “I get upset easily (neurotic).”

The researchers found clear links between two of the Big Five traits and financial distress.  Being conscientious – following through, controlling one’s impulses, and being organized – strongly reduced the likelihood of having all six of the study’s financial distress outcomes.

Young adults exhibiting signs of neuroticism – being worried, angry, or depressed – were much more likely to experience the six forms of financial distress.

The researchers controlled for things like health and mathematical ability, and household income. Not having enough income is an obvious source of financial strain.  But their results held up after controlling for income, leading the researchers to conclude that personality plays some role in financial distress.

They put one caveat on their findings.  Despite clear evidence that personality and finances are linked, their analysis did not clarify the direction of these influences. Personality might, as they believe, drive finances, but it is also possible the reverse happens:  being in financial distress could enhance an individual’s neuroticism or conscientiousness.

More research will be needed, but this study provides useful insights into what drives financial behavior.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.