What is financial capability?
Financial capability describes people’s ability to manage their money effectively and make good financial decisions given their particular circumstances. The two frameworks focus on the three internal and external key components of financial capability:
- Ability (knowledge and skills).
- Mindset (attitudes and motivations).
- Connection to financial products, services and tools.
A person’s financial capability drives their financial behaviour, including how they manage their money day-to-day and whether they save. Financial behaviour is also affected by people’s means—ie, how much money they have—and external pressures, including big life events like having a baby.
Why does financial capability matter?
Millions of people in the UK struggle to make the most of their money; to budget effectively, plan for the future and make informed decisions. Around a third of the population (17 million) currently don’t make a budget. 84% of UK adults do not read full terms and conditions when taking out financial products and one in six people struggle to identify the balance on their bank statement. Nearly half (48 percent) of adults across the UK admit to falling into debt as a direct result of their social lives. This kind of poor financial behaviour leads to stress and reduced quality of life, and prevents people from realising their goals. It is therefore a priority to build financial capability across the UK.
To raise people’s level of financial capability, organisations working in this field—and the funders that support them—require a good understanding of what works. In-depth discussions with those working in the financial capability sector have revealed the need for a common approach to assessing the success of different interventions. This will make it possible to share what is currently known to be effective, build the evidence base, and ultimately help organisations have a greater impact on the people they are trying to help. The aim of the report is to help organisations better understand the evidence base on the effectiveness of different kinds of financial capability intervention, and to help the sector further develop its evaluation practice.
Using the frameworks and next steps
Each financial capability outcome area in the above frameworks has a set of corresponding detailed indicators underlying it which would suggest that the outcome has been achieved (or that progress has been made towards it). Indicators will also be developed for both the adult and children and young people frameworks corresponding to the four domains of financially capable behaviour and to financial wellbeing. Measurement tools will then be identified for each indicator which will enable organisations to robustly measure progress within their client group.
The Money Advice Service will lead on the further development of the outcome frameworks, working collaboratively with the sector to incorporate their expertise and build on existing good practice to ensure the final frameworks are practical, comprehensive and easy-to-use.
If you would like to submit any feedback on the frameworks—or be involved in their further development—please contact the Financial Capability Strategy team on email@example.com.