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Research Paper FSA Occasional Paper Series 34

Financial capability and wellbeing: evidence from the BHPS

Authors

Publication date

01 May 2009

Abstract

This report presents the analysis from the project ‘Financial capability and
wellbeing: Evidence from the BHPS.’ The project focuses on the potential
relationships between people’s ability to manage and take control of their finances
(their ‘financial capability’) and their psychological wellbeing. One of the Financial
Services Authority’s (FSA’s) four statutory objectives, set by the Financial Services
and Markets Act (FSMA) 2000, is to promote public understanding of the financial
system. Under this remit, the FSA leads the UK’s National Strategy for Financial
Capability, which brings together industry, government and the third sector to
deliver financial capability programmes which create confident, capable consumers,
doing so in ways that people will most understand and in places most useful to
them. These programmes target different groups, such as expectant parents,
employees, young people and hard-to-reach groups, with tailored initiatives
designed to improve financial skills. This research explores how levels of financial
capability might relate to and affect psychological wellbeing.
This insight contributes towards a deeper understanding of how financial capability
affects individuals, helping the FSA’s financial capability work to be targeted more
appropriately. Part of this is identifying new ways to work with trusted
intermediaries and stakeholders with an interest in psychological wellbeing,
resulting in a wider reach of financial capability programmes. In addition, the
findings will help to inform the evaluation of policies and programmes against the
statutory objective of promoting public understanding, and the FSA’s strategic aim
of creating more capable and confident consumers.
It is important to note that financial capability is not correlated with income
(Atkinson et al 2006); people across society require financial management skills to
be in control of their money, regardless of how much money they have. Although
financial management is important at any time, in the current economic downturn,
reaching a wide swathe of the population is even more vital, as an increasing
number of people find themselves in difficult financial situations. This research
makes a valuable contribution towards the development of effective policy and
practice aimed at improving the UK’s financial management in this difficult time
and beyond.
We use data from the British Household Panel Survey (BHPS) to construct indices
of financial capability, based on the hypothesis is that there is some underlying
factor (financial capability) which is better captured by reviewing a range of
indicators of a person’s current financial situation than by any of the specific
items of information. We describe how financial capability varies according to
individual and household characteristics. Then we examine in detail the
relationship between financial capability and psychological wellbeing, using
multivariate statistical models.

Subjects

Income Dynamics, Well Being, and Finance

Links

http://www.fsa.gov.uk/pages/Library/research/economic/Occasional/index.shtml

Notes

press alert; occasional paper


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