The remarkable financial resilience of British households

As promised in my previous blog, I wanted to look more carefully at the apparent lack of correlation between people’s life satisfaction and their “actual” incomes. While people’s subjective financial situation is highly predictive of their overall life satisfaction, data about households’ actual incomes (equivalised for household size) seem almost irrelevant.

It more or less follows that there must be a lack of strong correlation between people’s actual incomes and their perceived subjective financial situation. This is indeed the case, for the simple reason that the vast majority of people in the UK self-classify themselves as doing OK financially. Across the entire sample (26,600 valid responses), around 75% say they are either “Living comfortably” or “Doing alright”, when asked about their financial situation.

What is pretty remarkable, to me anyway, is that almost 40% of people on very low net incomes — i.e., less than £1,000 per month (first row of chart)— still say they are “Doing alright” financially. Another nearly 20% on such low incomes say they are even better off, or “Living comfortably”. In the next income bracket up (2nd row in chart), but still below UK average, almost 70% say they are either “Doing alright” (43%) or “Living comfortably” (24%).

Of course, as my family in Finland used to remind me, managing household finances is “not about a high income, but about low expenditures”. No doubt people who have paid off their mortgage, say, or who live in a lower-cost part of the UK, or who live frugally by choice, can all be reasonably satisfied with their level of income despite that level being quite low in absolute terms.

Two other points to note about this analysis, though. First, this is pre-pandemic (because I also wanted to look at some variables that are only present in wave 10 of the “Understanding Society” survey, which was conducted in 2018–20). I know some households’ incomes have been hit hard, and it’s not that easy to adjust expenditure. However, here, too the signs are not too alarming, at least not on my reading of the data out there.

More importantly, though, in no way do I want to diminish the challenges facing those households that do find themselves struggling financially. I will return to this topic, too, but Finland’s experiment with a basic income was instructive. People who are constantly under mental strain due to their financial circumstances are not only more miserable, they are also less likely to be able to improve those circumstances.

It’s a physiological fact: a stress response is meant to ensure short-term survival, so the body shuts down “unnecessary” functionality, such as thinking longer-term. In the Finnish experiment, once the stress was relieved — in this case, via a (very modest) guaranteed income — on average, people were able to seek work and improve their circumstances. Contrary to some expectations (based on the assumption that people would love to just sit back and enjoy free money), employment among those on basic income actually went up.

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Tera Allas

Tera Allas

I help complex organisations make the right strategic decisions through innovative, insightful and incisive analysis and recommendations.

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