The financial resilience of households is essential for broader wellbeing and economic growth. Enhanced resilience reduces money-related mental health issues, leading to lower sickness absence, fewer preventable accidents, and increased productivity. People with financial resilience today are also more likely to save for the future in invested assets such as pensions, increasing investment capacity in the broader economy. Improving household financial resilience and increasing the number of UK households with savings should therefore be an essential part of a strategy for economic growth.
Financial security is the ability to afford your expenses – including secure, affordable housing – to live on your income, and to save for tomorrow and the longer-term. It also has an important emotional dimension. It means feeling secure – in control of your life, able to participate, and with the peace of mind that you have something to fall back on if needed.
Too many households don’t have the financial resilience needed to deal with unexpected expenses or volatile income without using high-cost credit, going into arrears or doing without essentials. One in ten UK adults have a high-cost loan (FCA, 2022). More than 3 million people may have borrowed from an illegal moneylender in the last three years (IPSOS/Fair4All Finance, 2023). This undermines people’s capacity to build true financial security, for today and for the longer term, through saving and ultimately through building wealth.
These challenges are deeply interconnected at the household level. A lack of financial resources creates a scarcity mindset, which can exhaust mental capacity and lead to poorer financial decisions (Mullainathan and Shafir, 2013) – a vicious circle. Our own research shows that this is further exacerbated by the experience of income volatility (Nest Insight, 2024). Again, this consumes mental bandwidth, creating a necessary focus on the short-term and on getting by day-to-day, rather than on planning for the longer-term and building financial security. The system also makes it harder for lower-income households to escape these challenges – the existence of a ‘poverty premium’ (Fair By Design, 2024) is well understood, but to this we add the identification of a volatility premium where people on variable income pay more in a system designed for regular income and bills.
Intervening to build resilience helps people to break out of this cycle. It helps them to carve out the time, money and headspace to save. Saving, in turn, makes households more resilient. But it also creates the platform from which longer-term security is built, whether though retirement saving, other forms of investment or accessing more secure, affordable long-term housing.
The benefits of improved resilience and security are many and varied. Much of the focus of discussion around these benefits has been – understandably – on the direct welfare benefits to individuals and households. Financial resilience underpins multiple wider positive societal outcomes. For example, research by debt charity StepChange, shows that having a savings buffer of £1000 reduces problem debt by almost half (StepChange, 2015), with indebtedness directly linked to poor mental health and a heightened risk of suicide (Money and Mental Health, 2019). There is evidence that even access to a small amount of emergency saving can help to facilitate escape from domestic violence and economic abuse (Surviving Economic Abuse, 2022; 2024). And starting saving has been linked to higher levels of life satisfaction, reduced anxiety and better sleep (MaPS, 2022; Money and Mental Health, 2018; Resolution Foundation, 2023).
This is the ‘micro’ level and social-justice-led case for intervention. But it is also the basis of a compelling macro-level case. Building a Nation of Savers is already one of the core pillars of the Money and Pensions Service UK strategy for financial wellbeing. Addressing low levels of financial resilience and security should also be an essential part of a strategy for economic growth, for at least two reasons:
1) Supporting productivity and growth
First, the individual benefits of improved resilience directly aggregate to support productivity and growth. As set out in a recent piece of related work on the economic case around better social mobility, “Economic growth starts with individuals. Without personal growth, there can be no national growth” (Haldane, 2022). Money-related mental ill-health is a major source of absenteeism from work, estimated to cost UK employers £3.7 billion annually (CEBR, 2023). Financial stress increases cognitive load and reduces capacity which also diminishes productivity (CEBR, 2023; CIPD, 2022; Resolution Foundation, 2023). So results like those described above around the mental health benefits of starting saving represent a significant potential route to improving that productivity, in addition to reducing costs to the health service. Recent research conducted in the US also shows that improving financial resilience could reduce the instances of workplace accidents as a result of increasing people’s capacity to focus. Financial worry leads to more distractions, and made truck drivers 50 percent more likely to have a preventable accident (Pitt Ohio, 2016). AARP research has also found a link between addressing low financial resilience and improved productivity (AARP, 2024).
There may also be additional long-term benefits. Interventions to increase financial resilience and support people to save won’t address endemic low levels of income. To save effectively, people need a liveable income and routinely positive cashflow. But at the margins, where having a savings buffer enables people to smooth shortfalls in income without, for example, foregoing meals or other essentials, this could also help with things like school attendance and educational attainment, further supporting both workforce skills development and economic growth over that longer-term.
2) Increasing the savings ratio and creating a platform for increased investment
Second, because over time, supporting people to build financial resilience through increased saving will contribute to their capacity to also build wealth and assets, in ways which support economic investment and wider economic growth. Specifically, for example, we know that higher financial resilience contributes to people’s capacity to make higher voluntary retirement contributions (Suh, 2021). In the US, research through the pandemic found that those with even modest amounts of cash savings were less likely to see hardship-related leakage from their retirement accounts (Morningstar 2021) and that those with emergency savings were 70% more likely to contribute to a DC plan (Build Commonwealth, 2022). And recently, work to explore the racial wealth gap in the US retirement system has found that a significant driver of differences in retirement savings rates and balances between white workers and Black/African-American and Hispanic/Latino and some Asian-American households was the rates of account leakage, which are in turn related to pre-existing levels of cash savings (Collaborative for Equitable Retirement Savings, 2024). Building larger, more sufficient retirement savings is a core component of the government’s agenda for economic growth through a larger, more consolidated pensions sector investing more in UK growth assets. But people’s lack of financial resilience, and the direct tradeoffs this creates between higher contributions to a pension for tomorrow (with the attendant productive investment benefits of a larger long-term asset pool) on the one hand, with more immediate cash needs on the other, puts this objective at risk.
Importantly, our evidence shows that interventions that make accessible saving through the workplace the default for workers unless they choose to opt out are not only effective, but also highly inclusive. Opt-out payroll savings approaches support many people who didn’t have savings before to become savers, without reducing autonomy or choice (Nest Insight, 2024). At scale, such an intervention would support a positive shift in savings behaviours and would ensure that those most vulnerable to future financial shocks were the ones whose resilience was benefitting and who were therefore better able to also engage with longer-term saving and wealth-building goals.
In conclusion
The role that the pensions system can play in driving economic growth through the productive finance agenda is well established and a major focus of current policy and industry practice. To date, policy discussion of other forms of saving and the potential to support people to save have largely been framed as being about the benefits to those people at an individual level. Those benefits are real and important – financial resilience begets financial security begets economic dignity. But the case for a joined-up approach to supporting financial resilience and security goes beyond this when we consider the macro benefits. A strategy to improve household financial resilience and increase saving should be an essential part of a strategy for economic growth.
Will Sandbrook, Managing Director, Nest Insight and Jo Phillips, Director of Research and Innovation, Nest Insight
With thanks to the Money and Pensions Service (MaPS) for its support of this work as part of our opt-out workplace emergency savings programme, also supported by The BlackRock Foundation. To keep in touch with this project and with Nest Insight’s broader financial resilience and security work, please sign up here: Get the latest news from Nest Insight
References
AARP (2024). Does saving for emergencies improve productivity at work?
Build Commonwealth (2022). Emergency savings features that work for employees earning low and moderate incomes.
CIPD (2022). Reward management survey: Financial wellbeing and organisational support.
Collaborative for Equitable Retirement Savings (2024). Racial and gender disparities in 104(k) account balances: How large are they and what is causing them?
Fair By Design (2024). The poverty premium.
Financial Conduct Authority (2022). Financial Lives 2022 Survey: Insights on vulnerability and financial resilience relevant to the rising cost of living.
Haldane (2022). Who gets ahead: The business case.
IPSOS UK & Fair4All Finance (2023). As one door closes.
Money and Mental Health (2018). A silent killer: Breaking the link between financial difficult and suicide.
Money and Mental Health (2018). The facts: Money and mental health policy institute.
Money and Pensions Service (2022). Nation of Savers: A report from the UK adult financial wellbeing survey.
Morningstar (2021). The COVID-19 pandemic, retirement savings, and the financial security of American households.
Mullainathan & Shafir (2013). Scarcity: Why having too little means so much.
Nest Insight (2024). Opt-out autosave at work: A popular and proven way to powerfully boost people’s saving.
Nest Insight (2024). Fluctuation nation: Lifting the lid on millions of people managing volatile incomes.
Pitt Ohio (2016). Rainy Day Fund.
Resolution Foundation (2023). Isa isa baby.
StepChange Debt Charity (2015). Becoming a nation of savers.
Surviving Economic Abuse (2022). “Tsunami of need” for abuse victims: SEA and MAP issue stark warning ahead of winter cost of living.
Surviving Economic Abuse (2024).
The Centre for Economics and Business Research (2023). Financial wellbeing and productivity in the workplace.
