Context

As part of its role in the development of a Financial Capability Strategy for the UK, the Money Advice Service (MAS) has created a model, the Financial Capability Framework, which encompasses: ability (skills and knowledge), mindset (attitudes and motivation) and connection (ease and accessibility in relation to financial products) as well as external influences such as social norms. The strategy also encompasses a five-step model of financial well-being (unable to keep up, constantly struggling, making ends meet, resilient, secure), which is a broader measure of financial health and resilience (ability to withstand financial shocks, such as a reduction in income).

The aim of the study was to:

• Understand the Financial Capability Framework in greater detail and explore how all the components relate to each other.
• Explore resilience and examine the impact of financial shocks.
• Explore the relationship between financial capability and financial well-being.
• Investigate the type of interventions that might help or encourage people to improve their financial capability and/or well-being.

The study

This was a qualitative study carried out in five urban areas: London, Birmingham, Oldham, Cardiff and Glasgow. The participants were working age (aged 25 to 55) men and women, who were selected to include a variety of income groups (low, medium and high) and household compositions (singles and couples, with or without children).

The research was carried out in two stages:

• Face-to-face in-depth interviews across the five areas, to a total of 30 interviews. Participants were selected to include a range of financial capabilities (low, medium and high) and some had experienced financial shocks in the past twelve months (including divorce, separation, ill-health, reduced working hours and job loss).
• Six group discussions in, London, Cardiff and Glasgow. Participants were selected to include only those in three key financial well-being categories: constantly struggling, making ends meet and resilient.

The research was commissioned by MAS to inform development of the Financial Capability Strategy for the UK.

Key findings

• Most participants had some sort of strategy and were able to describe the difference between being ‘good’ and ‘bad’ with money. However, many held beliefs and attitudes that were potentially detrimental to financial capability, such as “saving is difficult” or “being good with money requires complicated financial know-how”. Social norms also influenced their decisions.
• Being able to respond well to financial shocks was found to depend on being adaptable and being prepared, and these factors were driven by participants’ emotions and sense of responsibility.
• there was little evidence within the sample of good preparation for shocks by saving or investing, and even those who had saved found that their savings lasted for less time than they had expected.
• people did not always respond appropriately to financial shocks – they were slow to respond or did not cut back enough, due to habit or reluctance to make lifestyle changes.
• mindset was found to be the primary component of financial capability, as it determines people’s motivations to apply their skills and to access financial products and support. Mindset comprises a complex set of reflective and automatic processes – those that are consciously thought through and those that are habitual, or ‘knee-jerk’. Social norms also influenced capability, particularly in families with children, who were particularly susceptible to how they appear to others.
• · Participants understood the concept of financial well-being and its links with resilience and adaptability. Well-being is not entirely dependent on income but is harder to achieve at the lowest income levels. Key indicators of risk to financial well-being were found to include not only life events such as job loss or ill health, but also behaviours such as increasing impulse purchases or stopping saving.

Many decisions are made automatically or with little thought, and social norms have a powerful influence, so encouraging behaviour change may require changing social norms as well as adopting behavioural approaches to influence people to become more prepared and adaptable.

Points to consider

• This was a qualitative study, with a small sample, so whilst care was taken to include participants from a wide range of backgrounds, the results cannot be generalised to the wider population. The sample did not include people with significant financial ability or connections barriers, and only those from the three middle categories of financial well-being were included at stage two.
• The research is highly relevant and topical as it informs the development of the Financial Capability Strategy for the UK.
• Further quantitative research would be required for the findings to be generalised to the wider population.
• The research can be used to feed into the design of further quantitative research projects or interventions, and also to understand the results of such studies in more detail.

Full report

Financial capability and wellbeing - full report