Money Matters, is it the reality or the perception that counts?

Wellbeing as a term can be a bit problematic. It conjures up images of pilates classes, yoga or Spa days. Another way to look at it is avoiding misery! 

And money matters. Money and sufficient money to live off avoids misery. But what does it mean to be managing ok financially? Is it just down to having lots of money or material wealth? Is it being debt-free? Able to afford a house and a holiday? Or is it none of these?

A 2020 paper by Simetrica-Jacobs for the Financial Conduct Authority (FCA) has shown that there is no clear relationship between total debt levels of an individual and their levels of personal wellbeing (life satisfaction). The only types of debt that were shown to have a significant negative relationship with wellbeing are arrears (that is, 2 or more consecutive missed and overdue debt repayments) and high-cost debt (debt that is costly to service because of high interest rates, such as current account overdrafts).

This isn’t surprising - living with arrears and high-cost debt are associated with financial strain, as opposed to standard debt which is regularly being repaid. Having difficulty  meeting your regular debt payments or taking high-cost overdrafts from one payday to the next both indicate that you are struggling to make ends meet, which almost certainly contributes to higher stress and anxiety levels.

To further investigate this issue, we conducted some longitudinal analysis on the Understanding Society survey - the largest household panel dataset in the UK. One of the questions asked in this survey is “How well would you say you yourself are managing financially these days?”

Financial security matters. A lot. The relationship between this variable and life satisfaction is remarkably strong and important. No surprise there.

Going from ‘finding it very difficult’ (the lowest category) to ‘doing alright’ (the second highest category) corresponds to a change of 1.4 points on the standard ONS life satisfaction scale (0 to 10). It is more than three times stronger than the effect of being in arrears as identified in the Simetrica paper, which is about 0.4 points. In fact, of all the key determinants of wellbeing that we’ve analysed in the Understanding Society data over the years (and have put into our unique poster Where’s WELLBY - on sale now on the the website), the only one that has a stronger negative impact than struggling financially is mental health - and they are theoretically expected to link and compound one another at times of financial stress.

But it seems that feeling financially insecure has the same negative impact on wellbeing whether you are rich or poor. Furthermore, what’s interesting is how this relationship varies based on whether you belong to the top 25%, middle 50% or bottom 25% of households ranked by household income. We expected to find that if you had less money to start with, debt or feeling unable to manage would be more damaging. Surprisingly, we found no evidence to support this. 

Indeed, this exercise confirms once more that when it comes to wellbeing, your attitudes and perceptions regarding the different aspects of your life matter more than objective measures. This shouldn’t be a surprise - since we are studying subjective wellbeing measures, it is only natural that they are most strongly influenced by other subjective factors rather than by objective variables.

Yet this relatively obvious finding has a clear and resounding policy implication. If the aim is to make people happy and improve their overall wellbeing (because you work in government, for example), then the most effective way to do so is not to give them cash payments, but to make them feel good. What increases your wellbeing the most is not being richer or consuming more, but being satisfied with your financial situation, and similarly so with your job, your marriage, your housing and so on.

Professor Paul Frijters and Chrisk Krekel from the LSE touches upon this topic in his Handbook for Wellbeing Policy-making (which we highly recommend). They write that the effects of increased private consumption on total societal wellbeing need to be heavily discounted because of adaptation (you quickly get used to higher income levels) and negative externalities (getting richer or buying a new shiny thing will make you happier, but at the same time it is likely to make some other people in your circles a bit more miserable because it lowers their own perceived status when they compare themselves to you).

So the bottom line for national governments should be clear - it’s not so much about raising everyone’s income levels or lowering their debt burden, but more about making sure that no one is feeling left behind or finding it difficult to make ends meet financially (or otherwise)!

So it’s not so much wellbeing as avoiding misery.