Mental budgeting: how young people manage their money, credit and debt

Students’ spending and levels of debt have already been researched both within the marketing arena (e.g. Prince [1]; Palmer, Pinto and Parente [2]) and other disciplines – in particular, economic psychology (see, for example, Scott, Lewis and Lea [3]; Webley et al. [4]). This current research extends previous studies to include a broader sample of young people in the UK aged between 17 and 21 years, exploring how they spend their money and how they manage their finances. Findings from depth interviews and focus groups suggest that for all these participants there is recognition of the importance of structured financial planning and money management, but that in reality any such planning is via mental budgeting which may lead to over- and under-consumption patterns. This in turn may result in some younger consumers accruing significant and disorganised personal debt. For the providers of financial services, this presents opportunities to attract and educate new or switching customers, but at the same time, the reality that many younger consumers are setting themselves up for several years of extensive personal debt

Introduction
Research into how students manage their finances has been explored in the past both within the UK (e.g. Scott, Lewis and Lea [3]; Callender and Kempson [5]), and the rest of Europe (e.g. Vicenzi, Lea and Rumiati [6]; Lebens and Lewis [7]). In the UK, interest has been particularly evident over the past 10 years, as changes to student funding including the phasing out of maintenance grants, and the introduction of student loans and tuition fees led to the need for higher parental financial contributions and higher levels of student debt. The average debt for a UK student on graduation is now around £6000, compared to just £1,000 in 1992 [8]. Results from previous studies suggest that students’ initial intentions on starting their studies are to manage their finances and avoid the use of credit. However, over their years as undergraduates and as borrowing becomes a necessity, they accept excessive debt as inevitable, and careful financial planning and money management in the short and the long term is less likely to take place.

Author: Sue Eccles and Debbie Bird

Source: Lancaster University Management School

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