What is financial well-being? Financial well-being is a continuum, ranging from critical financial stress to being highly satisfied with one’s financial situation. Surprisingly, it is not purely associated with income level. For example, some people seem to have, and feel they have, a high level of financial well-being, even though they may be far from rich. On the other hand, some people with much higher incomes do not appear to have or feel they have a high level of financial well-being at all. Moreover, through learning and effort, and given reasonable opportunity and supports, it appears that people can move along the continuum to greater financial well-being.
To summarize, financial well-being can be defined as a state of being in which people can fully meet ongoing and future financial obligations. They can feel secure in their financial outlook and are able to make choices that allow enjoyment of life.
The definition of financial well-being proposed is based on the consumer perspective and flows from the open-ended interviews research teams conducted with a broadly diverse set of consumers across the United States, reinforced by interviews with financial practitioners. The specific individual goals and vision of a satisfying life differed greatly among respondents, yet there are two common themes that’s consistent. Those themes are security and freedom of choice, in the present and in the future.
More specifically, analysis of the interview transcripts and discussion with the panel of experts suggests that the concept of financial well-being has four central elements:
- Having control over day-to-day, month-to-month finances.
- Having the capacity to absorb a financial shock.
- Being on track to meet your financial goals; and
- Having the financial freedom to make the choices that allow you to enjoy life.
These elements of financial well-being have strong time-frame dimensions: the first and fourth pertain mainly to one’s present situation, and the second and third elements pertain to securing the future. Let’s look at each of the four elements in greater detail.
Having control over day-to-day, month-to-month finances…
Individuals who have a relatively high level of financial well-being feel in control of their day-to- day financial lives. These individuals manage their finances; their finances do not manage them. Such individuals are able to cover expenses and pay bills on time, and do not worry about having enough money to get by. This is the aspect of financial well-being that was mentioned most frequently during the qualitative interviews.
Having the capacity to absorb a financial shock…
Individuals who have a relatively high level of financial well-being also have the capacity to absorb a financial shock. Because of a combination of factors such as having a support system of family and friends, owning personal savings, and holding insurance of various types, their lives would not be up-ended if their car or home needed an emergency repair or if they were laid off temporarily from their job. They are able to cope with the financial challenges of unforeseen life events
Being on track to meet your financial goals… Individuals experiencing financial well-being also say they are on track to meet their financial goals. They have a formal or informal financial plan, and they are actively working toward goals such as saving to buy a car or home, paying off student loans, or saving for retirement.
Having the financial freedom to make choices that allow you to enjoy life…
Finally, individuals experiencing financial well-being perceive that they are able to make choices that allow them to enjoy life. They can splurge once in a while. They can afford “wants,” such as being able to go out to dinner or take a vacation, in addition to meeting their “needs,” and they are able to make choices such as to be generous toward their friends, family and community.
This fourth element came through strongly in the interviews, and was notable in the variety of ways it was expressed. For example, financial freedom might mean being able to be generous with family, friends and community, or having the ability to go back to school or leave one job to look for a better one, or to go out to dinner or on vacation, or to work less to spend time with family. Because individuals value such different things, traditional measures such as income or net worth, while important, do not fully capture this aspect of the concept of financial well-being. It is these deeply personal preferences and aspirations that give meaning and purpose to the often challenging day-to-day financial decisions and tradeoffs we all must make to achieve it.
Overall, thoughts expressed by working-age and older consumers about the meaning of financial well-being were remarkably similar. Older consumers, when they mentioned being on track to meet financial goals, were most often focused on end-of-life expenses or the related issue of whether their savings would last them to the end of their lives. Working-age consumers, on the other hand, were most often focused on preparing for retirement or paying off debt. The two themes that ranked highly only among the working-age cohort but not the older cohort were “home ownership (or lack thereof)” and “lifestyle.” Conversely, the older cohort mentioned the themes of “having a financial plan” and “provide for family” more frequently than the working-age cohort did.
Differences in focus between working-age and older consumers were revealed in how often they mentioned the various themes. Access to healthcare and health insurance was brought up more often by the older group, as was the importance of having a financial plan. When family was mentioned in older respondents’ interviews, it was generally in the context of avoiding the need for support from the family for the older consumer. Older consumers brought up quality employment somewhat less frequently than working-age consumers did, but it was still one of their most common themes. For example, older consumers often mentioned paid employment in the context of providing a financial cushion (being able to go back to work if their investments performed poorly), or alternatively as a strategy for providing resources to be able to afford vacations and other wants.
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