Children who are given pocket money are much less likely to save than those who have part-time work such as a paper round, and they may well turn out to be less financially prudent as adults. These are among the findings of research by Sarah Brown and Karl Taylor, presented at the Royal Economic Society’s 2013 annual conference.
The study analyses data from around 10,000 annual individual interviews carried out each year as part of the British Household Panel Survey. For the years 1997, 2001 and 2005, children aged 11 to 15 were asked ‘what do you usually do with your money?’The possible responses were: ‘save to buy things’, ‘save and not spend’ and ‘spend immediately’. These responses provide the researchers with over 6,000 answers on the saving behaviour of children.
Among the findings:
From the sample, over 4,000 children can be tracked through to 2008, by which time they were in early adulthood (aged 16-26). Almost a third of the sample saved both as a child and in early adulthood. The findings suggest that having saved as a child increases the probability of saving in adulthood by around 18 percentage points.
The authors comment:
‘Given the widespread concern that individuals are not saving enough, it is apparent that attitudes towards finances may be shaped at an early age.
‘Our findings indicate that shaping the financial behaviour of children may have long-lasting effects in terms of financial behaviour and decision-making as an adult.’
This study explores the influences on children’s saving behaviour, focusing on whetherthere is an intergenerational link between the saving behaviour of parents and their children. It then explores the influence of saving behaviour as a child on saving behaviour in early adulthood. One might conjecture that an intergenerational link may exist between the attitudes towards finances between parents and their children as parents seek to equip their children with particular values and life skills.
Given the widespread concern that individuals are not saving enough, the empirical analysis serves to shed light on saving behaviour at the early stages of the lifecycle, which has attracted very little interest in economic research. It is apparent that attitudes towards finances may be shaped at an early age, which endorses this focus on childhood and early adulthood.
The researchers analyse data from the British Household Panel Survey (BHPS), a survey comprising approximately 10,000 annual individual interviews. Since 1994, children aged 11 to 15 completed a short interview for the BHPS Youth Questionnaire.
Specifically, in 1997, 2001 and 2005, the children were asked ‘what do you usually do with your money?’ The possible responses were: save to buy things; save and not spend; and spend immediately. The responses provide information on the saving behaviour of children, comprising 6,201 observations.
The responses indicate that a significant proportion of children spend their money immediately (22%) and hence do not save. The researchers match the saving behaviour of parents with that of their offspring: 36% of the matched sample indicate that both parents and offspring save while 13% indicate that neither parents nor their offspring save.
These findings suggest that parental allowances/pocket money (earnings from part-time work) lower (increase) the probability that a child saves. For example, the magnitude of the effect of a 1% increase in the child’s allowance is associated with a decrease in the probability that the child saves by 22 percentage points.
Parental saving behaviour does not influence that of their offspring, whereas parental financial optimism lowers the probability that a child saves. Specifically, optimistic or stable financial outlooks, compared with pessimistic financial expectations, are negatively associated with the probability of the child saves, with a magnitude of approximately 3 percentage points. This corresponds to around a 4% increase in the unconditional probability that the child saves.
From the sample of 6,201 children drawn from the BHPS Youth survey, 4,299 individuals can be tracked into the full BHPS survey post-1997, potentially through to 2008, where the individuals can be observed in early adulthood (aged 16-26). In thesample of individuals in this study, 29% saved both as a child and in early adulthood.
These findings suggest that having saved as a child has a large positive influence on the probability of saving on a monthly basis and on the amount saved on a monthly basis as a young adult. For example, whether the individual saved during childhood has a large positive effect on the probability of saving in adulthood at around 18 percentage points. This confirms that shaping the financial behaviour of children may have long-lasting effects in terms of financial behaviour and decision-making as an adult.