The impact of life events on financial capability

The FSA has just published a new study showing that, not only do life events such as redundancy, bereavement and child birth change people's ability to make good financial decisions, but that those decisions can be particularly far-reaching.

These are also points at which people are likely to need to make fundamental changes to their finances, and they are points at which they are particularly in need of understanding, support and good advice.

According to the report:

• Having a baby is associated with a reduction in financial capability and a 19% increase in financial problems for an average individual, even when income is accounted for.
• Becoming unemployed decreases financial capability and increases financial problems by 63%, controlling for income changes. If an individual receives Jobseeker’s Allowance, financial problems are increased by 88%.
• Divorcing or separating increases financial problems by 17% on average and causes a decrease in financial capability, even when controlling for income. This impact is stronger for women.
• Retirement increases financial problems by 31%, accounting for income changes.

Some life events have a positive impact on financial capability:

• Those entering work experience a 27% decrease in financial problems and an increase in financial capability, even accounting for the extra income.
• Having an employed partner leads to a 15% decrease in financial problems and an increase in financial capability, with income controlled for.
• Getting married leads to double the improvement in financial capability to that which is experienced annually in the sample as a whole, accounting for the possible increase in income.
• Those above 55 tend to have higher than average financial capability.

Interestingly, being good with money improves your psychological wellbeing.

All this suggests is that retail and private banks with really well thought through life event programmes, with trained sales staff who understand the effects of these events on people's ability to make good financial decisions, will have a real sustainable competitive advantage.