From Financial Literacy to Financial Capability and Financial Well-being: more than a semantic change Elaine Kempson Emeritus Professor, University of Bristol

Setting the scene Early debates concerned financial literacy In mid 2000s a shift to financial capability that is more than a semantic difference More recently still attention has shifted to the financial well-being of households And the need to understand the factors that influence both financial well-being and capable behaviours Recent work bringing these 3 areas together puts us in a much stronger position to design appropriate strategies for interventions

The traditional financial literacy approach Focus on knowledge and (more recently) skills Single measurable concept Normative but little consensus about how to measure it Policy focus tends to be on individuals’ abilities And a belief that financial literacy can be taught Emphasis on workshop training for adults & schools But does include some one-to-one coaching

Critique of this approach from policy-makers and others Knowledge and skills should not be seen as an end in their own right The evidence of the impact of knowledge on behaviours is mixed Primary concern should be consumer behaviour Behaviour is largely influenced by factors that can’t be taught: in-built biases beliefs and social norms and also by the socio-economic and regulatory environment

These concerns resulted in a shift in focus to financial capability Led by UK regulator & developed further by World Bank Focuses on behaviours & the factors that influence them Including ‘environmental’ as well as individual factors eg attitudes Not a single concept that is easily measurable But has a range of (unconnected) components Empirical basis and agreement about the components are and what should be measured

The components of ‘financial capability’ Vox populi approach used in 11 countries Across four continents; high to low income UK> PNG Primarily behaviour and a number of key dimensions consistently identified Day-to-day money management Living within your means Planning and keeping track of spending Planning for future needs: both expected and unexpected And in higher income populations Choosing and using appropriate financial products

Critique and policy implications Surveys have conflated financial capability (behaviours) and financial well-being (outcomes of those behaviours) Capable behaviours should not be seen as an end in themselves Only important if they improve financial well-being

How does this relate to financial well-being? Qualitative research suggests that financial well-being is a set of ‘outcomes’ the capacity to meet current commitments ,with sufficient spare money for a comfortable life, and the resilience to maintain this in the future And it is determined by the interplay of a range of factors behaviours knowledge and skills attitudes, motivations and behavioural biases and a range of socio-economic environmental factors

Attitudes, motivations A priori model of the determinants of financial well-being Behaviours Personal financial well-being Knowledge and skills Attitudes, motivations and biases Social and economic environment

The research and preliminary analysis Survey with an on-line survey of 2,006 adults Questionnaire content based on re-analysis of focus group scripts and review of research Asked about household and personal finances if manage both Or just personal ones (and controlled for this in analysis) Analysis within the four main domains to identify underlying factors Multi-variate analyses to identify the determinants of: Financial well-being Behaviours

A priori model of the determinants of financial well-being Behaviours Personal financial well-being Meeting day-to-day expenses Comfortably off Resilience for the future Knowledge and skills Attitudes, motivations and biases Social and economic environment

A priori model of the determinants of financial well-being Behaviours Spending restraint Not borrowing for daily needs Active saving for future Planning finances Monitoring finances Informed product choice Personal financial well-being Knowledge and skills Attitudes, motivations and biases Social and economic environment

Knowledge and experience A priori model of the determinants of financial well-being Knowledge and experience Broad exp of money management Understanding of risk Knowledge of product market place Behaviours Personal financial well-being Attitudes, motivations and biases Social and economic environment

Attitudes, motivations A priori model of the determinants of financial well-being Knowledge and skills Behaviours Personal financial well-being Attitudes, motivations and biases Time orientation Impulsivity control Social status Self control Locus of control Attitudes to spending borrowing and saving Social and economic environment

Social and economic environment A priori model of the determinants of financial well-being Behaviours Personal financial well-being Knowledge and skills Attitudes, motivations and biases Social and economic environment Income Income changes Expenditure changes Age, gender and family circumstances Housing tenure Work status Responsible for household/personal finances

Meeting current commitments Average score 90.8 Runs short of money for food and daily living expenses Ability to pay bills How often lacks money to pay bills at financial reminder

Meeting current commitments Most significant determinants are: Not borrowing for daily expenses Active saving Spending restraint Planning how to use income (negative and smaller) Locus of control Income fall Age Dependent children Unemployed/inactive (negative)

Feeling comfortable financially Average score 76.0 How often has money left over Assessment of financial situation How confident about finances in next 12 months How much control over finances they feel they have

Feeling comfortable financially Most significant determinants are: Not borrowing for daily expenses Active saving Spending restraint Planning how to use income (negative and smaller) Locus of control Knowledge of the financial marketplace (smaller effect) Income drop & expenditure increase Single adult household Age Unemployed/inactive (negative)

Resilience for the future Average score 73.4 How much could cover of an unexpected expense = a month’s income How much would need to borrow for such an expense How long could cover a drop in income by a third without borrowing Total savings in terms of number of month’s income

Resilience for the future Most significant determinants are: Active saving Not borrowing for daily expenses Spending restraint Planning how to use income (negative) Locus of control Impulsivity control (negative!) Attitudes to spending borrowing and saving Age Mortgagor (negative) Unemployed/inactive (negative)

Not borrowing for daily expenses Average score 93.3 Strategies used when run short of money Frequency of using credit for food and expenses Frequency of using credit to pay off other debts Frequency of over-drawing current account Most significant factors identified in regressions are: Attitudes to spending borrowing and saving Locus of control Single adult household (negative)

Spending restraint Ave score 70.5 Not running out of money because of overspending Prioritising spending on essentials Not impulse buying Saving rather than spending Most significant factors identified in regressions are: Attitudes to spending borrowing and saving Self control Impulsivity control Time orientation Understanding of managing financial risk Gender (male)

Active saving Average score 75.3 Saving for unexpected expense Making sure have money for bad times Trying to save for the future Trying to save regularly (Retirement planning) Most significant factors identified in regressions are: Attitudes to spending borrowing and saving Time orientation Locus of control Gender (female) Unemployed/inactive (negative)

Overview Behaviours and socio-economic factors are the main drivers of the three aspects of financial well-being Not borrowing for daily expenses Active saving Spending restraint Age Income drops Unemployed/inactive Psychological factors are the main drivers of the 3 key behaviours Not knowledge or experience And some appear to directly influence financial well-being

Interventions need to reflect this Main focus should be on changing behaviours Spending, borrowing and savings But not budgeting on its own And to change these need to focus on attitudes and other psychological factors Rather than knowledge and skills And need to focus on young adults

Interventions need to reflect this ctd Edutainment Social marketing Use of commitment devices Apps and on-line tools One-to one advice/counselling for those with serious problems Workshops of more limited value Selection bias Attitudes and other psychological factors more difficult to tackle in this format But policies to ensure income protection are also important Even in Norway!

From Financial Literacy to Financial Capability: more than a semantic change Elaine Kempson Emeritus Professor, University of Bristol