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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

18. 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

19. 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)

20. 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

21. 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)

22. 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)

23. 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)

24. 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)

25. 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

26. 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

27. 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!

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