The links between our ability to manage money and our psychological wellbeing are the subject of recent research by Dr Mark Taylor from the Institute for Social and Economic Research (ISER).

Dr Taylor’s report, Financial capability and wellbeing, has been produced for the Financial Service Authority (FSA), the independent body that regulates the financial services industry in the UK.

The report’s findings suggest younger people (under 35) - particularly those who may have dependent children, are divorced or separated, and/or living in rented accommodation for example – are more likely to be financially ‘incapable’. But the research also finds a clear link between this and higher mental stress, lower reported life satisfaction, and associated health problems.

The findings show that moving from low to average levels of financial capability increase an individual’s psychological wellbeing by 5.6%, their life satisfaction by 2.4%, and decreased anxiety and depression by 15%.

Dr Taylor said: ‘The report indicates clearly that an ability to manage finances well leads to an improvement in psychological well-being. The flip side of that is that there is a clear link between poor financial management and stress, lower life satisfaction and health problems like anxiety or depression.’

The report is feeding into a programme of research being undertaken by the FSA, which is working to produce a range of information programmes and literature to help people manage their money and finances more generally more effectively.

Chris Pond, the FSA's director of financial capability:

"Especially in these anxious times, feeling in control of money matters - rather than being controlled by them - can significantly reduce stress, enhancing the sense of well-being. That is particularly true of those affected by the threat of unemployment and by family breakdown. The research contributes towards a deeper understanding of how financial capability affects individuals, helping the FSA's financial capability work to be targeted appropriately."

Dr Taylor, has now been commissioned to undertake some follow up research for the FSA into what determines financial capability and on savings behaviour and financial capability.