Working paper

This paper provides a basis for a broader understanding of the factors that shape financial wellbeing and the capacity of individuals to experience economic security.

In Australia inequality is increasing, wage growth has stagnated, underemployment rates are high and rising, housing is increasingly expensive and there is a growing sense of insecurity. With the erosion of the welfare state, individual decision- making and responsibility for financing education, housing, caring, health and retirement are replacing collective provisioning and risk pooling. Furthermore, the risks associated with financial crises are increasingly borne by individuals and households. The growing influence of economics, especially behavioural economics, in social policy is also reinforcing the importance of individual choice and responsibility. At the same time, there has been mounting popular interest in individual subjective wellbeing. In this context, financial wellbeing as a concept has become popular in the overlapping fields of social policy, service delivery and personal financial products. Agencies such as the Consumer Financial Protection Bureau in the United States, the Financial Conduct Authority in the United Kingdom and Financial Literacy Australia are all engaged in developing financial wellbeing concepts for integration into their business planning frameworks (CFPB 2015a, 2015b; FCA 2016; FLA 2016).

There have been several attempts to recognise the multidimensional nature of financial decisions and economic security. These important first steps pave the way for further research that examines not only why people make the choices they do, but also the personal, systemic and structural factors that constrain or enable opportunities. In this paper, we trace the shifts in focus from financial exclusion through inclusion, literacy and capability to resilience and wellbeing. In a period of increasing economic insecurity, policies designed to improve personal financial wellbeing should be very welcome. As a component of overall wellbeing, financial wellbeing has the potential to contribute to a fuller understanding of economic security and social cohesion.

Current attempts to aggregate social and economic factors, particular policies (financial inclusion and literacy) and individual behaviours, attitudes and skills into one construct are, however, theoretically and methodologically underdeveloped. We argue that the concepts underlying the design of financial wellbeing policies, programs and practices require more careful consideration if this potential is to be realised. At stake is whether financial wellbeing policies, programs and practices will actually improve financial wellbeing, will have no effect or will have the unintended consequence of entrenching inequality and poverty.

As a work in progress, financial wellbeing faces difficult conceptual challenges. We argue that relying on methodologies primarily centred on the individual distorts a framework that also seeks to incorporate other domains. Rather, financial wellbeing policy design should start with concepts that centre on the social as its primary unit of analysis. Amartya Sen’s capability approach has been influential in social policy and has contributed to various attempts at defining and measuring subjective wellbeing to assess progress beyond the narrowly defined gross domestic product (GDP). As an evaluative tool, Sen’s capability approach can be usefully deployed in meeting these challenges, but alone this will not be sufficient. Explanatory theories are also required to make sense of the processes that underpin poverty and inequality. Further research and debate are urgently needed to define the relationships between the social and individual factors included in financial wellbeing constructs, and their relative significance in determining financial wellbeing, before effective financial wellbeing policy can be designed, implemented and evaluated.  

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