Every material on this site is authentic and was extracted from the complete available project.Click to GET IT NOW
MS-WORD DOC || CHAPTERS: 1-5 || PAGES: 88 || PRICE: ₦3000
IMPORTANCE OF FINANCIAL LITERACY ON MANAGEMENT OF PERSONAL FINANCES AMONG MILLENNIALS: CASE STUDY USIU-AFRICA
The purpose of the study was to assess the importance of financial literacy on the management of personal finances among Millennials. The study was guided by the following research objectives; to establish the level of literacy among the millennials, to explore the relationship between financial literacy and good money management practices and to explore the financial strategies employed by millennials to ensure future security after retirement.
A descriptive quantitative research design was adopted for this study and the data received from the questionnaire, used to interpret, with the aim of understanding the relationship of financial literacy on the management of personal finances among the Millennials. The select target population of this study consisted of USIU- Africa master’s students based in Nairobi. Determination of the sample size was made possible using the Slovin Formula, taking into consideration the confidence level and the confidence interval of the population. A sample size of 100 respondents was identified for this research study, with the response rate being 86%.
The data obtained was analyzed using the statistical tools, Statistical Package for Social Science (SPSS) and Microsoft Excel. The questionnaire consisted of both open ended and closed ended questions and the results were presented in the form of tables and figures. Pearson correlation analysis was used to investigate the relationship between the independent and dependent variables and multiple linear regression analysis was also used to analyze the findings.
Based on the first objective, which was to measure of the level of financial literacy among the millennials. The study has shown that most students in the master’s program havea basic understanding of financial literacy yet they engage with finance related decisions on a day to day as they manage their finances, this includes budgeting and saving,
The second objective was to explore the relationship between financial literacy and good money management practices. The data analyzed shows that there is a strong correlation between financial literacy and good money management practices. The findings show that the respondents do practice some form of good management practice like saving for emergencies and budgeting.
The final objective was to explore the financial strategies employed by millennials to ensure future security after retirement. The study has shown that masters students at USIU-Africa have investments, pension plans and insurance as part of their financial planning strategies, however they have a low satisfaction rating with the investments they currently hold.
The study concludes that financial literacy is very important to ensure millennials are able to navigate this fast-paced financial industry. With the current economic landscape investing, saving and retirement planning has shifted from being a government or employer concern to being an individual’s responsibility, it is due to this shift that financial literacy should be taken seriously.
The study therefore, recommends that education bodies should include practical financial education programs with real life simulations in the high school and university curriculum to ensure students are well equipped with financial knowledge when they enter the workplace. Employers should also offer financial planning courses as part of its training portfolio for employees to be able to take charge of their current financial situation and avoid financial distress due to lack of financial planning skills.
Further studies should be carried out on individuals in the informal sector to examine what major issues they face in their financial journey, what tools they require, and analyze the impact financial literacy can have on the management of their personal finances
1.1 Background of the problem
“The number one problem in today's generation and economy is the lack of financial literacy.” (Blair 2016;3)
Finance is a field of study that is omnipresent in our day to day life yet there is a distinct lack of knowledge and urge to find out more information on this area of study (Hardley 2012). Based on research done there is a strong correlation between the lack of financial knowledge and poor financial decisions, which impacts not only individuals but also the entire economy.
Millennials are set to hold the biggest share of the labor market and are also projected to be the highest spenders by 2025 (Schawbel, 2012). Their financial behavior and attitude towards money is therefore ever more important as their impact on the economy will be felt more than the preceding generations. The term Millennials refers to the generation of individuals born from early 1980’s and early 2000’s.
The Millennial Generation or commonly referred to as Generation Y, as they are the generation that follows Generation X or the baby boomers, have their recorded birth period between the early 1960’s and 1980’s. On the other hand, there are varied birth date ranges for millennials with one study classifying millennials as individuals born between 1980-1994, making the oldest 37 years and youngest 23 years today (Martin and Turley, 2004). Javelin Strategy and Research (2011) classify Millennials as individuals born between 1979-1999 which would mean they are around 38 years and 18 years old today. Finally, another classification is 1977-1992 (Bauerlein, 2008), individuals will be between the 40 years-19 years age bracket. It is based on Bauerlein’s classification that the population was selected.
Due to the tendency of Millennials moving back with their parents, they have also been given the name the Peter Pan or Boomerang generation. The reasons for moving back to their parents’ home are varied however some of the theories proposed are that individuals are
moving back due to economic challenges, brought about by lack of a jobs, or retrenchments. This generation in comparison to Generation X are characterized with delaying some of the typical adulthood rites of passage like starting a career, settling down in marriage as well as starting a family. It is on this basis that the study was conducted to better understand the financial challenges of this group of our society who form almost 80% of the population.
Financial Literacy is considered very important for promoting financial inclusion, consumer protection and ultimately financial stability of an individual and subsequently of the whole financial system of a country. As a result of emerging technologies and the ease in which it is connecting various facets of the financial world focus on financial literacy has become very important. Understanding when to invest, which instruments are more suitable for an individual depending on their stage in life, how much savings one should have, the optimum debt levels to have and how to service this debt can all be mind boggling to a person.
Having financial literacy skills therefore becomes ever so important to avoid financial problems or distress in the future. Financial problems have often been cited as the basis for divorce, mental illness, and generally unhappy individuals. (Yeung and Hoffert 1998)
To avoid this unhappy cycle, it is paramount to nip the destructive nature of financial illiteracy in the bud and educate the younger generation who form a high percentage of the population, on good financial planning habits. It is estimated that millennials in Africa account for 70% of the population according to the 2011 Africa Development Bank report. The Millennial generation are characterized as an energetic and ambitious workforce, with very high expectations for both their professional and personal lives (Bishop, 2006). Despite having all the right qualities e.g. access to unlimited information, higher education levels they still face adversity that imposes immense financial pressure which limits their
economic opportunities. A delicate economy, rising levels of debt in the country, and an unstable job market are a few of the issues they encounter. Indeed, the personal finances of this generation is more relevant for the state of the economy than those of any preceding generations due to their numbers.
This is an important area of study as this generation is also at an important stage in life in which major life decisions need to be made of which could either lead to their future prosperity or downfall. The financial systems of the 21st Century have been growing with speed, complexity, and have a wider product offering than ever before therefore it is paramount for individuals to take control of their finances (Hilgert and Hogarth, 2002). The economic and social environment in which people take financial decisions has also changed drastically, and this change is set to continue with the dynamic and ever-changing technology (Mitchell, 2011). Financial products and services have multiplied along with technological and other means of marketing them (Greenspan, 2005). Today thanks to the internet one can easily trade in a stock exchange market in London while enjoying their morning cup of tea in Nairobi and vis versa. With the advent of internet banking and mobile banking the impossible has been made possible through technology.
Against this backdrop, this study discusses key factors associated with Millennials’ personal finances and identifies critical issues for the financial future of the Gen Y population.
It will also explore the relationship between financial literacy and good money management practices, e.g. explore the factors affecting the millennials savings habits, while appreciating the strategies employed by this generation to ensure future security after retirement.
Millennials as they are commonly referred to comprises of the group of persons who were born between the late 1970s and the mid-1990s. They are young, educated, well-travelled, have access to infinite amount of information through interactions with the online space, and peers, they are ethnically diverse and optimistic even in the face of a staggering economy
Dissimilar from its predecessors, the Baby Boomers and Generation X, Generation Y is the largest, most diverse generation in history. It is made up of the 70 to 80 million individuals born between the late 1970s and the mid-1990s. Its ethnic composition also makes it distinctive. In America, minorities who are more broadly represented among Generation Y’s most educated, high-achieving members, and 11% of all millennials have at least one immigrant parent (National Chamber Foundation 2012). In addition to being more ethnically diverse than previous generations, Millennials are indeed the most open and educated generation in history (Fry and Parker 2012). At least one third of bachelor’s degree holders are between 25-29 years old therefore millennials will become the largest labor force in the United States and abroad. It is predicted that, by 2025, three out of every four workers globally will be a Millennial (Schawbel 2012).
Often referred to as the “instant-gratification generation,” Millennials have been characterized as having high expectations for both their professional and personal lives (Bishop 2006). The literature attributes this generation’s buoyant optimism, supreme confidence, and high achievement to changed social values regarding children and family life. The confidence instilled in this generation has, indeed, informed its attitudes about professional achievement. Additionally, millennials are the first truly digital generation, raised amid laptop computers, cell phones, tablets, and other rapidly advancing technologies that are changing the way consumers conduct business.
According to Javelin Strategy and Research, (2011) in just two years, by 2015, millennials income will exceed that of Baby Boomers. By 2020, their income is projected to exceed that of both Baby Boomers and Gen X. By 2025, millennials combined income is expected to account for 46% of the nation’s income. Their consumer spending is expected to grow to $1.4 trillion annually and represent 30 percent of total retail sales by 2020. So, while this tech savvy generation might not have assets or a lot of spending power today, they will be the largest consumer sector in the future. It is due to this fact that we need to protect them and their future families especially in this tough consumer targeted market.
Financial Literacy according to Basu (2005;2) refers to the ability to make informed judgements and to actively take control of the current and future use and management of money Financial literacy includes the ability to understand financial choices. For example,
the ability to compare offers before applying for a credit card, having a current and savings accounts, having a book keeping system, planning for the future using strategies like spending less than you earn to ensure you have some savings tucked away for unforeseen expenses or investing for long term goals like education, home, vacation etc. Financial literacy also calls for wise spending. This means preparing budgets, tracking expenditures, paying bills on time, and ensuring that credit card balances are paid in full each month. Financial literacy affects financial decision making. Ignorance about basic financial concepts can be linked to lack of retirement planning, lack of participation in the stock market, and poor borrowing behavior (Lusardi, 2008).
Financial literacy however needs to be practical not just theoretical, after analyzing a host of papers on the subject, Huston (2010) proposed that financial literacy must also include application of financial knowledge; the argument being that absent demonstrated ability to apply financial knowledge, an individual cannot be regarded as being financially literate.
Lusardi et al (2010) investigated financial literacy among the youth in the USA using data collected through the National Longitudinal Survey of Youth in 2007-08. In the research questions, they sought answers that related to preparedness of the youth to make sound financial decisions, determinants of financial literacy among the young and policy initiatives needed to improve financial literacy of the young. They found that the level of financial literacy among the young professionals was low, an inference that is consistent with findings across the world that despite concerted efforts to improve financial literacy, it continues to be inadequate among this segment of the market. They found that socio-demographic attributes significantly influenced the level of financial literacy, hence the family financial situation and sophistication. The question we would like to answer is whether financial literacy is related to good money management practices or not.
Topics around finances need not be taboo, it should be widely discussed to ensure the populace is adequately equipped with knowledge that can grow the economy. In Africa topics around money have always been perceived as a no-go zone, yet this is something that impacts everyone. Financial topics are only discussed in hush tones among “grown-ups” or financial representatives, and even then, not all information is divulged.
Personal Financial Management
Personal finance management refers to as all the financial decisions and activities that a person could make or undertake, this includes budgeting household incomes and expenditures, savings, investments, mortgages, insurance purchases, and all other decisions that require money. The most important factor of personal finance management is financial planning, which should involve analyzing the current financial position by measuring the net worth and setting of short-term and long-term goals. In Kenya, as well as other countries financial goals may include, future retirement fund, children education fund, etc. According to Kempson (2009), money management skills are influenced by three important factors; financial control, making ends meet and understanding the approaches to financial management.
Financial control relates to budgeting, keeping records and knowledge of daily living costs and the ability to meet the financial obligations as they fall due. Making ends meet refers to a person’s ability to predict times when finances may be low, and to remedy that situation. This also includes assessing the ability to maintain spending and keep up with commitments. Approaches to financial management relates to impulsiveness during spending, using credit instead of cash and general spending patterns that result in using more money than is available.
Budgeting and living within means involves keeping track of finances and reducing unnecessary spending while saving and planning means putting aside a fund for an emergency through savings or taking out an insurance policy. Some age-old attitudes to financial planning include saving and planning for retirement; and saving and planning for expected expenses. It is important to have good skills of personal finance management to make correct day-to-day financial decisions such as what to buy, what not to buy and when to buy. This would help to save lots of money in the long run, as the purchase of unnecessary products will be controlled or reduced all together. The ability to make these decisions more responsibly would improve the wellbeing of the households, but for all this to be beneficial there is a need for financial literacy, which would help understand various financial services and make financial decisions. Looking into all the approaches towards personal finance might seem complicated for an individual without financial education, as
such people usually do not understand ways of managing (planning, saving, investing and borrowing) money as may be necessary from time to time (Greenspan, 2005).
1.2 Statement of the problem
Millennials are characterized by their love of tangible things like gadgets, clothes, and advanced technology, this is quite understandable with the advent of the technological boom, items can easily be purchased and shipped seamlessly between countries with the payment hassle being solved by online platforms e.g. PayPal or by use of either a credit or debit card. A study by Visa found that Millennials claim they cannot survive without their laptops (89%) and smartphones (80%). With this value being placed on gadgets many have taken out insurance on their gadgets. They also find that clothes represent their social status among their peers and they spend majority of their income buying expensive brands. With the consumer driven nature of the world and societal pressures, the millennials biggest problem lies in planning for their future. Millennials live for the moment and think the future will take care of itself. This is evident in the fact that only 21% of Millennials save part of their disposable income while the rest spend it paying off debt. Millennials have poor financial planning skills, and feel that they are still young and healthy to be bothered with life insurance, health insurance, income protection cover or even home insurance.
Bernheim (1995; 1998) was among the first to emphasize that most households lack basic financial knowledge, leading them to use crude rules of thumb when engaging in saving behavior. While these studies include no direct financial literacy measure, the authors do find that poorer, and less educated households, characteristics associated with low financial literacy, are more likely to make financial mistakes.
In a research done by Hilgert, Hogarth, and Beverly (2002), they discovered a strong correlation between financial literacy and the skills an individual has that enables them carry out day-to-day financial management. Moreover, there is evidence that the more an individual is conversant with simple accounting practices and are financially aware, they are more likely to engage and become a player in the financial markets by investing in financial instruments like stocks, bonds, etc. (Kimball and Shumway 2006; Christelis, Jappelli, and Padula 2010; Van Rooij, Lusardi, and Alessie 2011; Yoong 2011; Almenberg
and Dreber 2011; Arrondel, Debbich, and Savignac 2012). It has also been shown that those who are more financially literate and aware are also more likely to undertake retirement planning, it is also seen that those who plan also accumulate more wealth (Lusardi and Mitchell 2007; 2011)
Financial planning is still relatively new to academia and to date little research has been conducted in the growing financial planning industry.
1.3 Purpose of the study
Statistics prove that as the economy grows over its lifetime, each generation improves their financial position to be higher than that of their parent’s generation. Breaking from this tradition, Millennials are the first generation in a century that is unlikely to end up better off than their predecessor’s due to how badly they’ve been affected since the 2008 recession, which led to job cuts, and loss of assets attributable to poor financial skills (Dugas 1).
1.4 Research Objectives
1.4.1 To establish the level of literacy among the millennials
1.4.2 To explore the relationship between financial literacy and good money management practices.
1.4.3 To explore the financial planning strategies employed by millennials to ensure future security after retirement
1.5 Significance of the study
This study will be important to the following stakeholders:
The findings from the study will be important to them to understand where they stand in relation to their peers as they form the generation poised to overtake their predecessor’s the Generation X or Baby boomers as the largest living generation. There is therefore immense pressure on this generation to perform better financially than the earlier generations given the abundance of information at their disposal. The feeling on the ground however is “At this age we are expected to be at a certain point in our lives and we are not there”. The truth is that with all the social pressures, good financial practices often
take a back seat, therefore understanding that they aren’t alone in this walk is very important.
The finding of this study will be beneficial to employers as they will gain more insight on the financial position of their millennial workforce and may put in place measures to assist employees become more financially aware. The benefit to employers is that financially aware employees are able to concentrate better in the workplace and avoid financial distress. According to Borden, Lee, Serido and Dawn (2008), higher levels of financial knowledge are associated with sound record keeping. Furthermore, the probability that individuals will choose the most appropriate option when provided with a hypothetical scenario concerning a financial decision is higher than for those individuals who lack personal financial knowledge. Moreover, high levels of financial knowledge may positively influence individuals to make better-informed financial decisions that will likely result in the attainment of long-term financial goals (Symanowitz, 2006).
1.5.3 Educators in the Financial Field
The study findings will provide insight to financial educators on the areas they will require to lay more emphasis on and subsequently inform the study material to be used while addressing this group of cohorts.
1.5.4 Policy Makers and Business Community
The study findings will provide insight to policy makers on the level of financial literacy among the millennials and this will form the basis to make financial literacy accessible to all consumers as this is an important area in our day to day lives. This generation is also rapidly taking over the consumer space therefore it would be important to understand them better and create products that addresses their needs.
1.5.5 Researchers and Academic Practitioners
The study results will contribute to the field of knowledge and will form a basis on which further research can be done by academicians and researchers in the field of financial literacy.
1.6 Scope of the study
The focus of the study will be on the millennials with special emphasis being on the Masters students at United States International University Africa (USIU- A), in Nairobi. The geological focus could be perceived as a limitation due to only one location being considered. The research process was undertaken over a period of five months from February 2017 to July 2017.
1.7 Definition of Terms
1.7.1 Financial literacy
This refers to a combination of awareness, knowledge, skill, attitude, and behavior required to make financial decisions and ultimately achieve individual financial well-being. (OECD, 2013).
According to Criddle (2006), being financially literate includes learning about the choice of many alternatives for establishing financial goals.
1.7.2 Millennials or Generation Y
There are several varying time periods used to define the millennial generation.
Literature defines the beginning of the millennials generation to be 1977 and the end being 1994. Another source put the millennial generation to be between 1981 to 2002 (Erickson 2008; Karefalk, Petterssen and Zhu 2007; Hagevik 1999; Robert Half International 2008).
According to Erickson (2008), Generation Y’s population is currently estimated at between 70 and 90 million individuals, depending on the specified boundaries
1.7.3 Financial Planning
This refers to process either done individually or through a financial planner that takes into account the client’s personality, financial status and the socio-economic and legal environments and leads to the adoption of strategies and use of financial tools that are expected to aid in achieving the client’s financial goals. (Warschauer, 2002)
1.7.4 Financial Distress
This can be defined as the mental or physical discomfort, which is brought about by the state of one’s financial well-being. Some triggers to this discomfort could be the ability or inability to pay bills, repay debts owed or even provide for the needs or wants in life. (Kim & Garman, 2003)
1.7.5 Financial Inclusion
This is achieved when financial services are within the reach of a vulnerable group of a society especially of the lower income segment. (Sharma, 2008)
1.8 Chapter Summary
This chapter provides an overview of the study specifically highlighting the background of the study, the importance of the study, the scope of the study, the research objectives and the bodies that could benefit from the study.
In summary, financial literacy is ever so important today especially among the millennials as the role played by governments and employers in managing investments on behalf of individuals has shrunk significantly in the recent past because of changes in the social support structures across the world. This has increased individual’s responsibility in managing their own finances and securing their financial freedom. In an environment where the range and the complexity of financial products continue to increase, it is imperative that individuals develop some understanding of the world of finance to be able to make choices that are most appropriate to their financial goals and needs.