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  • Emily Macpherson

Financial Capability - Why and How to Improve It

Financial Capability Image

Your net worth and access to financial resources are very different to your ability to take control of your finances and manage your money. Rather than being about how much money you have, your financial capability is concerned with understanding how to manage your finances, including debt and savings, and making appropriate financial decisions as well as identifying appropriate products and services.

It really comes down to control. The more financially capable we become, the easier it is for us to control our economic resources efficiently, to exploit knowledge of financial information, and to gain control.

Research studies conducted in to the impact feelings of control have on overall well-being have consistently demonstrated that when we feel more in control of outcomes, we enjoy higher levels of psychological well-being.

More specifically, a study carried out by The Institute for Social and Economic Research at the University of Essex[1] examined the impact of financial capability on an individual’s psychological health, independent of the impacts associated with income, financial resources and financial shocks more generally. The researchers identified that there are psychological benefits associated with high financial capability, and that improving financial capability will have wider impacts through improving psychological health.

Household size, composition, income and expenditure will all impact on the degree of financial capability required, and these skills become increasingly important in times of economic downturn when additional pressures are placed on household finances.

There are many ways to improve your financial capability, but here are three key areas to consider as a starting point for action:

Control over Day to Day Finances; do you know what is coming in and what is going out each month? Here is a link to our expenditure analysis template that should prompt you to capture your regular expenditure.

Capacity to Absorb Financial Shock; how would you cope if you or a partner were out of work for a period of time, or in the event of a family illness? Consider what level of savings you have available and investigate any entitlement to sick pay. Do you have any protection arrangements in place, and if so do you know what you are covered for? Contact Neil for an independent review if you would like greater clarity the risks you should be considering.

Confidence in Your Ability to Meet Financial Goals; whether you would like to buy a house, fund a child’s education, retire on target or achieve all of these things, do you know whether you are on track?

You first need to be clear on what your goals are. Our self-assessment tool can help you to identify how well your finances are supporting you, and start you thinking about what is truly important to you.

Once you know what your goals are, cash flow modelling is a great way of mapping out your inflows (income) and outflows (outgoings) over time to identify whether or not you are on target. Read Jane’s Story to find out more about cash flow modelling and how it can support you.

If you would like to discuss your personal finances with an experienced financial planner, please do not hesitate to contact us.

[1] Financial capability, income and psychological wellbeing – M Taylor, S Jenkins, A Sacker 2011

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