What emerged in the course of our research from the United States Consumer Financial Bureau is that financial well-being describes a continuum— ranging from severe financial stress to being highly satisfied with one’s financial situation—not strictly aligned 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 affluent. 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 continu- um to greater financial well-being.
In summary, financial well-being can be defined as a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life.
The definition of financial well-being is based on the consumer perspective and flows from the open-ended interviews and a research team conducted by
the USCPA 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 were two common themes that arose consistently: security and freedom of choice, in the present and in the future.
More specifically, analysis of the interview transcripts and discussion with a panel of experts suggests that the concept of financial well-being has four central elements. 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.
THE FOUR ELEMENTS OF FINANCIAL WELL-BEING
1. 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.
2. 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.
3. 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.
4. Having the financial freedom to make choices that allow you to enjoy life
Have the ability to make choices such as to be generous toward their friends, family and community. 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.
Consumers reported relying first and foremost on those close to them for financial information. When people face financial questions, they most frequently seek information from family and friends, then cast a wider net. They also learn passively from those close to them; interviewees reported observing and learning from both positive and negative examples of behaviors from those around them. Many reported having an identified financial go-to person among the people they know.