Defining, measuring and predicting financial capability

• Context
• The study
• Key findings
• Points to consider

Context

There is a growing body of evidence that suggests that improving people’s ability to successfully deal with and manage their finances – their financial capability - has a direct and positive impact on individual wellbeing, and consequently an important impact on their health. Accordingly, financial capability initiatives have often been funded by charitable, statutory and third-sector organisations, adopting a holistic approach to improving the financial capability and therefore wellbeing of vulnerable individuals. However for these interventions to be successful, it is imperative to understand the different components that constitute financial capability.

The study

This 2016 technical report aimed to derive components that capture different aspects of financial capability, and explore levels and patterns of financial capability based on these components. The study used the Money Advice Service’s 2015 UK Financial Capability Survey, which was conducted by GfK and achieved a nationally representative sample of 3,461 respondents across the UK.

The report describes the process of deriving 13 financial capability components based on a combination of conceptual consideration and statistical analysis. These components can be duplicated for data collection and measurement in future editions of the Financial Capability survey. The components were derived statistically before being reconstructed manually to reflect previous research, which describes three levels of financial capability:

• Financial wellbeing outcomes;
• Financially capable behaviours;
• Financial capability enablers and inhibitors.

Key findings

There are 13 components that were shown to be robust indicators of financial capability falling under the framework mentioned above. The components have been designed to be universally applicable across the population. The resulting components are:

Outcomes:

1. Current financial wellbeing

2. Longer-term financial security

Behaviours:

• Manages well day to day

1. Manages credit use

2. Active saver

3. Keeps track

• Manages and prepares for life events

1. Building resilience

2. Works towards goals

• Enablers and Inhibitors

1. Saving mindset

2. Financial numeracy

3. Internet engagement

4. Financial confidence

5. Self-controlled spending

6. Financial engagement

• Some components scored fairly highly on average, with current financial wellbeing scoring 7.5 (out of 10); managing credit use (7.3); and saving mindset (7.9). However, some were much lower – for example, building resilience only scored 2.1 (out of 10).
• Overall, people scored poorly on the behaviours which were derived to represent managing and preparing for life events, but relatively well overall on the enabler and inhibitor components.
• Correlations between pairs of components are relatively low, particularly within the same level of the conceptual model.
• Financially capable behaviours are important predictors of financial capability outcomes, especially managing credit use in relation to current wellbeing and building resilience in relation to longer-term security.
• Enabler and inhibitor components are moderately important determinants of most financially capable behaviours as well as current financial wellbeing.
• Scores on current financial wellbeing ranged from 7.0 (out of 10) among people aged 25 to 34 to 8.8 among those aged 75 and above.
• Longer-term financial security fluctuated from 1.9 among the unemployed to 4.6 among part-time/self-employed and 4.7 among retirees.
• Household income plays a key role in financial capability scores at all levels of the conceptual model.
• Age and tenure are important determinants of the two outcome components (current financial wellbeing and longer-term financial security).
• Responsibilities for managing household finances and access to a current account are particularly important for explaining financial capability within the enabler/inhibitor components.
• The report concludes that financial capability wellbeing outcomes are well explained by financially capable behaviours and enablers and inhibitors.
• The results seem to support the design of a conceptual framework that distinguishes between different financial capability levels and has a wide and varied range of influences that have an effect on each level.

Points to consider

Methodological strengths and limitations:

• This report is based on a large sample that is weighted to be representative of the wider UK population, and the robust methodology (including statistical testing) ensures the reader can have a fair degree of confidence in the results.
• The author notes that it has not been possible to adequately cover all potential dimensions of financial capability in this report. They also note that insurance provision, pension saving and approaches to maximising income have not been represented adequately.

Relevance

• This report is relevant to all stakeholders, academics and policymakers who are interested in the conceptual and statistical building blocks that together underpin financial capability.

Generalisability/transferability

• This report uses a robust methodology and the results are based on a large sample. Therefore, these findings can be applied with a degree of confidence universally within the UK.