We don’t just inherit our parents’ looks and last names—we can also inherit their money mindsets. These financial foundations aren’t passed down through genetics, but rather through a series of interactions over time called financial socialization. Financial socialization is the process by which parents’ own financial behaviors impact their children’s future financial behaviors,[1] and it can occur in several different ways. For example, parents can model financial behaviors through their example, talk with their kids about money, or provide experiences for kids to practice money management. As parents teach their children about finances, it can impact their children’s current and future relationship with money.
But are we destined to follow in our parents’ financial footsteps? A theory called “modeling-compensation” would suggest that this is only partially true. Modeling-compensation suggests that children may recognize poor parental modeling and intentionally change their own behaviors precisely because they have witnessed the effects of parents’ negative behaviors.[2] This means that when it comes to finances, children may choose to intentionally follow in their parents’ financial footsteps, while others may recognize the need for a course correction and forge a new path.
A study by Dr. Ashley LeBaron-Black and colleagues explored how financial socialization and modeling-compensation can both ring true for emerging adults.[3] In their study of over 4,000 emerging adults, they identified four distinct groups: (1) intergenerational financial flourishers, (2) socialization squanderers, (3) intergenerational financial flounderers, and (4) financial phoenixes. The groups were identified as the participating emerging adults reported both their parents’ financial modeling as well as their own current money management habits. The study also gathered data about different financial outcomes for each individual, including financial distress, financial independence, and financial satisfaction. The purpose of the study was to consider how these different groups compared in financial outcomes.
Intergenerational Financial Flourishers
This group included emerging adults who reported that their parents were good at managing money, and they also reported their own positive financial habits. Thanks to this powerful combination of both good modeling and intentional habits, intergenerational financial flourishers experienced the most positive outcomes of all of the groups. They reported the most financial independence, highest financial satisfaction, and least financial distress.3 These individuals had a great jump-start thanks to their parents’ positive financial socialization, but ultimately their own choices also played a role in their overall financial well-being.
Socialization Squanderers
Socialization Squanderers included those who reported that they received positive money modeling from their parents, but they themselves struggle with finances. These emerging adults, unlike the Intergenerational Financial Flourishers, were not able to experience the full benefits of positive financial socialization. Like their name implies, it seems that they may have “squandered” the financial head-start they could have received from their parents’ modeling. For financial outcomes, they reported lower financial independence, lower financial satisfaction, and higher financial distress.3
Intergenerational Financial Flounderers
Intergenerational Financial Flounderers reported that their parents did not model good financial behaviors, and they find themselves now following that same pattern. Financial Flounderers are comparable to Socialization Squanderers in financial distress and financial independence, but actually have even lower financial satisfaction—putting them at the bottom of the four groups when it comes to financial outcomes.3 With poor parental modeling, this group had a rocky start to their financial well-being, and they seem to have struggled in intentionally making a change.
Financial Phoenixes
Although this group reported poor parental financial examples, they actually reported great things about their own financial well-being. Following the modeling-compensation theory, this group of emerging adults managed to intentionally develop better financial habits than their parents. Although their starting point was less than ideal, these Financial Phoenixes managed to rise from the ashes and find themselves with positive financial outcomes. They do, however, not quite reach the same level of financial well-being as Intergenerational Financial Flourishers.3 Without a solid financial role-model, these emerging adults had some ground to make up for—but in the end, it seems that an individual’s personal choices can overcome negative parental modeling when it comes to financial well-being.2
Where do you find yourself? A flounderer, a phoenix, still to-be-determined? Whether your parents set you up for financial success or left your financial knowledge lacking, your choices still matter!
Takeaways
1. Be intentional with your finances!
Whether your parents were financial rockstars or more like financial disasters, your choices still matter when it comes to your own finances! In LeBaron-Black’s study, they found that emerging adults’ own choices play a huge role in their financial outcomes. Choose to engage in healthy financial behaviors like saving regularly and living within a budget. Developing good financial habits can help you experience more financial satisfaction, less financial distress, and more financial independence!3
2. Recognize that your parents’ financial behaviors did affect you—and you can affect the next generation!
While making intentional choices will certainly take you far, it is still important to reflect on your roots. If your parents were not good financial models, recognize that you may benefit from financial education, therapy, or other support.3 If you are still struggling to find the motivation to change, think of those that will follow after you—one day you might be the one teaching your children about money! Your financial decisions may impact not only your own future, but also the future of those who come after you.
Resources:
[1] LeBaron, A. B., & Kelley, H. H. (2021). Financial socialization: A decade in review. Journal of Family and Economic Issues, 42, 195–206.https://doi.org/10.1007/s10834-020-09736-2
[2] Floyd, K., & Morman, M. T. (2000). Affection received from fathers as a predictor of men’s affection with their own sons: Tests of the modeling and compensation hypotheses. Communication Monographs, 67(4), 347–361. https://doi.org/10.1080/03637750009376516
[3] LeBaron-Black, A. B., Saxey, M. T., McRae, K., Pistritto, M. M., Barros, J. D., Lindman, M. V., Yi, Michelle & Cavalcante, I. (2024). Rise from the ashes: The modeling–compensation hypothesis applied to parent financial socialization. Journal of Financial Counseling and Planning. https://doi.org/10.1891/JFCP-2023-0044