Individuals with higher levels of financial capability – a combination of financial knowledge, attitudes, decisions, and behaviours – are more likely to have better financial wellbeing (Muir et al, 2017). But, what is financial wellbeing exactly? And, what can be done to proactively manage your finances and ability to respond to financial hardship?
Dr Jack Noone is a Senior Research Fellow at the Centre for Social Impact at UNSW. He says financial wellbeing is about a person’s ability to meet their expenses and have some left over, so they can afford some extras.
‘It is also important for people to feel in control of their finances and also feel financially secure. So there are three parts to it: meeting expenses, being in control, and feeling secure – both now and in the future,’ he tells Wellbeing by Teacher.
There are numerous factors that can influence a person’s financial wellbeing. Noone says he can summarise them into two categories.
‘The first are factors that are in your control – like your financial capability, the skills you have with money and your ability to make good decisions and different financial behaviours.
‘Then there are all the factors that are outside of people’s control. COVID-19 is a really good example of a factor that’s affecting people’s financial wellbeing – some more than others. Those working in industries like entertainment or hospitality have been particularly affected. Yes, they could cut back their spending, re-skill for new employment opportunities and maintain social distancing, but these people will still struggle until the effects of COVID recede.’
Individual, family and societal factors
Individual, household, community and societal factors can all influence financial wellbeing, and often they’re all interrelated, Noone says.
‘At the individual level, the one we talk about the most is financial capability and that’s about people’s attitudes, knowledge, skills, their motivations, and their financial behaviours as well. The easy way to think about it is – we all know some people who are really good with money and some people who aren’t so good with money and that comes down to financial capability. But, we can learn to be better with money.’
At an individual level, there are several things that can influence your finances, including income level, gender, health status and age.
These factors can also be felt at a household or family level. Using gender as the example, Noone says that, often women spend more time out of the workforce after having children, which has huge disadvantages on their financial wellbeing and superannuation in the future.
‘Another family level one is about how children are socialised with money by their parents. Some of us have had discussions with our parents about money and the research shows a small positive relationship between what happens when you’re a child and your financial wellbeing later on in life.’
At a societal level, financial wellbeing can be influenced by economic policies and government decisions, stock prices, the housing market, and much more. For example, changes to policies governing superannuation may have a direct impact on a person’s financial wellbeing, and changes to the rate and eligibility requirements of income support payments could have an impact on the financial wellbeing of people with low incomes.
Financial inclusion – what is it and why is it important?
Financial inclusion is another driver of financial wellbeing. It means that a person has access to appropriate and affordable financial services and products. Financial exclusion, in contrast, is a potential barrier to financial wellbeing.
‘To give you an example of financial exclusion; say a person has got into debt and they can’t access a loan through traditional bank loans, so they have to go to an alternative loan provider. They may be charging a really, really high interest rate, which that person is not going to be able to pay back but they have to because there’s really no other choice. So that would mean they’re financially excluded, because that’s really inappropriate for their circumstance,’ Noone explains.
‘In Australia, most people are financially included. They’ve got a bank account, they can access money if they need to, but a small proportion are financially excluded and that’s where policies are really important to support those people.’
Financial wellbeing – who is most at risk?
The ability to manage personal finances and cope with financial shocks is important, but some people are able to deal with it better than others.
In 2017-18, the top 20 per cent of households by income held over 42 per cent of total wealth. Low income households were most likely to rely on government pensions and allowances as their main source of income (Australian Bureau of Statistics, 2019).
Noone says there are particular demographic groups that are more disadvantaged than others, but that doesn’t mean that everyone in that group experiences it in the same way.
‘Women, for example, report lower levels of financial wellbeing than men and if you break that down even further, and look at women on lower incomes, that disparity becomes even greater,’ Noone says.
‘Other groups that are typically disadvantaged in terms of their financial wellbeing are young people, First Nations people, culturally or linguistically diverse people, refugees, people with low paying jobs, people with disabilities, care-givers are another good example.’
How to proactively manage our financial wellbeing
For someone experiencing low financial wellbeing or financial stress, it’s important to remember that there is help out there. Noone recommends reaching out to services like Moneysmart, the Salvation Army, or The National Debt Helpline, who provide free financial counselling services and advice to help people in the short- medium-, and long-term.
‘I would also encourage people to jump on the internet and see what services might be available to them. Many of these services are not-for-profit, so they rely on your support to keep providing their services,’ he says.
In his research on financial planning, Noone says he’s found that people who tend to look to the past or in the ‘here and now’ are not so great at financial planning, compared to people who are more future orientated.
‘If you’re the kind of person who does think about the past quite a lot, then you’d just want to make sure that you have your financial future in check. Managing money, it comes down to what drives people’s financial behaviours. People’s attitudes towards money and their knowledge of money are really quite important, so it’s vital to know as much as you can about how to care for your own financial wellbeing.’
References and further reading
Australian Bureau of Statistics. (2019). Household Income and Wealth, Australia, 2017-18. https://www.abs.gov.au/statistics/economy/finance/household-income-and-wealth-australia/2017-18.
Muir, K., Hamilton, M., Noone, J.H., Marjolin, A, Salignac, F., & Saunders, P. (2017). Exploring Financial Wellbeing in the Australian Context. Centre for Social Impact & Social Policy Research Centre – University of New South Wales Sydney, for Financial Literacy Australia
Salignac, F., Hamilton, M., Noone, J., Marjolin, A., & Muir, K. (2020). Conceptualizing financial wellbeing: An ecological life-course approach. Journal of Happiness Studies, 21(5), 1581-1602