Understanding the Effect of Financial Behaviour on Mental Health: Evidence From Australia

Abstract

This paper uses the Household, Income and Labour Dynamics in Australia (HILDA) data from 2001 to 2022 to examine the relationship between individual financial behaviours and mental health. Two distinct types of financial behaviours (savings and debt) and their relationship with mental health (as measured by Mental Health Inventory-5) are considered over several annual waves. We examine causality between the two variables utilising an instrumental variable approach and find that stable financial behaviour significantly improves the mental health of individuals. Specifically, maintaining regular savings habits and making timely payments on credit card bills have a positive impact on the mental health of individuals. Furthermore, the impact of savings behaviour on mental health is stronger for men than women. Our results are robust to alternative measures of subjective wellbeing and estimation techniques. The findings from this study have substantial policy implications, indicating that stable financial habits can significantly contribute to improving mental health, which in turn can lead to higher productivity and employment.