Modelling financial satisfaction across life stages: A latent class approach

• We allow the drivers of financial satisfaction to vary across life stages.
• Our modelling approach is based on a latent class ordered probit model.
• Four life stages are supported by the data.
• The effect of labour income is largely limited to the earliest life stage.
• Investment income and housing equity are important later on in the life cycle.

We explore the determinants of financial satisfaction using a modelling framework which allows the drivers of financial satisfaction to vary across life stages. Given that financial satisfaction is measured as an ordered variable, our modelling approach is based on a latent class ordered probit model with an ordered probit class assignment function. Our analysis of household survey data indicates that four life stages are supported by the data. Our results suggest that such flexibility is important in understanding the drivers of financial satisfaction over the life cycle since there is a substantial amount of parameter heterogeneity across the four classes.