Self-Efficacy – The Key to Financial Well-Being

In his long career at Stanford University, world renowned psychologist Albert Bandura made a tremendous contribution to our understanding of human behavior and motivation.  One of his main areas of focus was the concept of self-efficacy—an individual’s belief in their own ability to succeed in accomplishing a specific goal or task.

In fact, Bandura’s research demonstrated that self-efficacy is the most powerful determinant of an individual’s thoughts, feelings, behaviors, and accomplishments.  He found that people with a strong sense of their capabilities also share these characteristics:

    1. View difficult tasks as challenges to be mastered
    2. Develop a deep interest in their activities
    3. Set challenging goals and maintain a strong commitment to reaching them
    4. Recover quickly from setbacks and disappointments

In contrast, individuals with a weak sense of self-efficacy share these characteristics:

    1. View difficult tasks as threats to be avoided
    2. Quickly lose confidence and dwell on personal deficiencies and other obstacles to achieving desired results
    3. Have low aspirations and weak commitment to goals
    4. Are slow to recover from setbacks and disappointments


Because self-efficacy has been shown to be a powerful catalyst for positive change, a number of researchers and educators have been exploring the connection between this psychological precept and higher levels of financial well-being.  In fact, one researcher concluded that financial self-efficacy appears to be the missing link between knowledge and effective action.”

In addition, it is important to understand that financial self-efficacy is not only related to one’s level of financial knowledge and skills.  A number of studies have demonstrated that several subjective factors—such as personality, family history, social and cultural norms, and frames of reference—also shape an individual’s sense of financial self-efficacy.


According to Bandura, there are four major sources of self-efficacy: 

    1. Experiencing success
    2. Choosing good role models
    3. Responding to encouragement
    4. Managing emotional responses

Therefore, because self-efficacy is task specific, it is important to consider how these four strategies can be applied to personal finance and utilized to nurture and strengthen your clients’ sense of financial self-efficacy.  It is also important to understand how you as a trusted advisor can support and facilitate these confidence building strategies:

1. Experiencing Success (aka “Performance Accomplishments”)

The most effective way to build a strong sense of self-efficacy is through performing a task successfully.  One example in the world of personal finance is creating a plan to reduce spending and pay off a large credit card balance.  The skills required to manage cash flow and the discipline needed to stick with the plan will inspire pride and motivate additional action steps that will strengthen financial well-being.  

In other words, helping your clients to define and design an effective debt reduction plan will likely lead to addressing other financial challenges as well.  Successfully completing one important financial task will increase confidence in their ability to tackle the next one! 

2. Choosing Role Models (aka “Vicarious Experience”)

Witnessing friends and family members mastering a money management task is another important source of financial self-efficacy.  According to Bandura, “Through their behavior and expressed ways of thinking, competent models transmit knowledge and teach observers effective skills and strategies for managing environmental demands.

For example, if a close friend of one of your clients relates how they researched several auto insurance policies before making a purchase, your client would likely do the same, trusting that they also have the skills and resources needed to do effective comparison shopping.  In addition, you can encourage your clients to become more aware role models who demonstrate various facets of financial well-being.

3. Responding to Encouragement (aka “Verbal Persuasion”)

Bandura also made the assertion that people can be persuaded to believe that they have the skills and capabilities to succeed.  Therefore, hearing and accepting encouragement from you, their trusted financial advisor, will help your clients to overcome self-doubt.  

By helping them to focus on their financial accomplishments, versus their mistakes, will increase their self-esteem; and, empower them to address both the emotional and practical challenges that comprise their financial well-being.  This shift in perspective will persuade them to give their best effort to overcoming financial challenges and achieving their financial goals.

4. Managing Emotional Responses (aka Emotional Arousal) 

Moods, emotional states, physical reactions, and stress levels can all impact how individuals feel about their personal abilities in a particular situation.  However, by learning how to minimize stress and elevate mood when facing difficult or challenging tasks, your clients can greatly improve their sense of self-efficacy.

For instance, paying monthly bills can be an anxiety producing activity for couples and touch off arguments regarding each other’s spending habits.  As a remedy, you can assist in establishing mutually defined ground rules for financial conversations that will help to facilitate respectful communication and shared financial goals.  In addition, helping your clients to clarify their values and to reflect on their “money scripts” will lead to a better understanding of each other and better communication.

Next Step—

To learn more about the role of self-efficacy in developing “real” financial well-being, I encourage you to read Derek Tharps’s excellent article—“Why Good Financial Behavior Isn’t Achievable Until You Believe That It Is”—published by the Nerd’s Eye View on  

Derek Tharp is the lead Researcher at and an assistant professor of finance at the University of Southern Maine.In this blog post, Derek provides an in-depth explanation of financial self-efficacy and an overview of current research.As a teaser, I have included the following excerpt from the introduction to his article:

Additional research on self-efficacy more generally suggests that performance accomplishments (e.g., helping our clients develop skills that they need to be confident in taking action), vicarious experience (e.g., serving as a good financial role model for our clients), verbal persuasion (e.g., providing encouragement when our clients need some financial coaching), and emotional arousal (e.g., encouraging/discouraging financial decision making when clients are in ideal/non-ideal levels of emotional activation) may all be effective ways that financial planners can help their clients build financial self-efficacy. As a result, financial planners who wish to help their clients implement better financial behaviors should not ignore the potential power of promoting financial self-efficacy. When it comes to helping clients make good decisions, helping clients believe they can accomplish the financial behavior in the first place is crucial!

- Carol Anderson