Predictors of Financial Capacity in Young Adults

Objective: To examine several predictors of financial capacity as assessed via the Independent Living Scales Money Management (ILS-MM) subtest in a regression correlational design. Method: One hundred and five college students were administered measures of financial literacy and financial experience, as well as multiple neuropsychological measures assessing language, processing speed, executive functioning, and arithmetic. Using hierarchical regression analyses, we sought to predict performance on the two subscales of the ILS-MM-Problem Solving and Performance/Information. The former assesses financial knowledge (e.g., defining financial terms such as health insurance) whereas the latter assesses financial abilities (e.g., computing a financial balance). Results: After controlling for demographic variables, financial literacy and experience predicted the Problem Solving subscale, but not the Performance subscale. Neuropsychological measures did not account for additional variance. In contrast, after controlling for demographic variables and financial literacy and financial experience, neuropsychological measures predicted the Performance but not the Problem Solving subscale. The key predictor was the Arithmetic subtest of the Wide Range Achievement Test4, which is not surprising given the mathematical demands of the task. Measures of executive functioning were not related to this measure. Conclusions: Financial capacity is a broad construct, encompassing many financial abilities and concepts. To predict these, a variety of measures is necessary: financial literacy and experience predict knowledge-based items, whereas neuropsychological measures, especially arithmetic, predict performance-based items. Clinical and research implications of these findings are discussed as well as directions for future investigation.