Context

Ability to manage money and take control of finances are regarded as desirable skills by UK policy makers. By making appropriate financial decisions, households in any income level can mitigate the negative effects of events such as economic downturns. However, the recent recession, falling incomes and rising prices are causing pressures on households, as is the lack of knowledge many have about financial matters. Programmes to improve financial capability exist, but many adults have not had access to these.

The study

This study analyses the relative impacts of financial capability and income on psychological health using multivariate analysis of data from the British Household Panel Survey (BHPS) between 1991-2006. This panel survey interviews the same nationally representative sample of people each year, giving an annual record of key financial and personal data including income, housing tenure, working status, health and household composition. The authors construct a financial capability indicator using factor analysis. This is then adjusted for both household income and the current macroeconomic climate, and also assessed over time, to see how financial capability changes.

Part of the BHPS is the General Health Questionnaire (GHQ), a widely used 12 question self-completion survey of psychological health. Data from the GHQ element of the BHPS is included in the model to explore how financial capability affects psychological health. The study analyses men and women separately, as their psychological health may be impacted on differently by factors such as household structure, labour supply and preferences.

Key findings

• For both men and women, low financial capability has significant and substantial psychological costs over and above those associated with low income or deprivation. For men the size of this effect is similar to that associated with being unemployed. For women the size of the effect is similar in magnitude to that of being divorced. High financial capability is linked with good psychological health for both men and women.
• Getting divorced, being unemployed or on a low income all impact on psychological health, but the effects of these are all exacerbated by having low financial capability.
• Increasing financial capability and improving financial management skills would reduce stress-related illness and provide lasting benefits to individuals and the wider society and economy.
• If financial capability can be improved, policy makers should also find that the psychological impact of major life events such as divorce can be lessened, particularly during times of recession.
• The report concludes that financial capability can be considered to be an important determinant of mental disorder.

Points to consider

• The authors identify three potential limitations to their research:
• The GHQ is very widely used, but is also non-specific. This means it cannot be used to discriminate between different types of mental disorder.
  • Psychological health may be affected by financial capability of others in the household or family, rather than just by an individual’s own financial capability. This research does not consider the inter-relations e.g. between husband and wife, and how the financial capability of one partner may influence the other.
  • There may also be events in people’s lives that are not covered by the BHPS questionnaire. These could affect financial capability and/ or mental wellbeing, but if they are not captured in the data, this may to an extent confound the effects found in the statistical modelling.
• This study shows key insights into the links between financial capability and mental health.

Full report

Financial capability, income and psychological well-being - full report