Money management skills more important than income in determining psychological health says new research

Girl holding piggy bank

New research shows that a person’s inability to control their finances is becoming more and more closely linked with poor mental health regardless of how much money they have.

The research by Mark Taylor, Stephen Jenkins and Amanda Sacker shows that for both men and women, poor money management skills have significant and substantial psychological costs over and above those associated with low income or deprivation. For men the effect is similar to that of being made unemployed, while for women it is similar to going through a divorce. High financial capability was associated with higher levels of psychological health for both men and women.

Using data from the British Household Panel Survey the researchers constructed a measure of financial capability that used variables that relate directly to people’s abilities to make ends meet and their money management and then investigated the relative impacts of financial capability and income on psychological health. Mark explained:

“Financial capability is conceptually different from income or material wellbeing and reflects people’s ability to control their finances, make appropriate financial decisions, understand how to manage credit and debt and identify appropriate products and services. Regardless of how much money they have, people require financial management skills. Over the last three decades credit has become more widely available, responsibility for provision in retirement has increasingly fallen onto individuals and the costs of higher education are increasingly borne by students. Therefore the consequences of a lack of financial capability are becoming progressively more serious.”

The researchers say their results suggest that improving people’s financial management skills would have substantial effects on stress-related illnesses and the outcomes associated with such problems, and therefore have lasting benefits for individuals and the wider economy.

Marks said:

“Furthermore, low financial capability exacerbates the psychological costs associated with being divorced or unemployed and of having low income. An implication is that by improving financial capability policy makers can reduce the psychological impacts of experiencing such life events. Therefore as well as the expected benefits of reducing problem debt, welfare dependency and poverty and increasing savings, our results indicate that improving financial capability will also have wider impacts through improving psychological health.”

The researchers conclude that the sizes of these improvements in psychological health dwarf those associated with raising household incomes, indicating that the ability to manage income is more important than the level of income in determining psychological health.


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