There are many definitions of financial wellbeing and financial wellness. The one we use at Well Excel was developed by the Consumer Financial Protection Bureau by listening to consumers (CFPB, 2015b). The CFPB defines financial wellbeing as comprising four elements: having financial security and freedom of choice, now and in the future (Figure 1). The CFPB views financial wellbeing as “a continuum – ranging from severe financial stress to being highly satisfied with one’s financial situation” (CFPB, 2015a). They conclude that with learning, effort, opportunity and support, we can move along the continuum to greater financial wellbeing.
Figure 1. The four elements of financial wellbeing according to the Consumer Financial Protection Bureau (reproduced from CFPB, 2015b).
Financial wellbeing is not objective
If you don’t have a high income, there is good news: you don’t have to be wealthy to achieve financial wellbeing. The CFPB’s research team describe financial wellbeing as a “highly personal state, not fully described by objective financial measures” (CFPB, 2015b). In other words, some people have a high level of financial wellbeing even though they are far from affluent. Equally, there are well-off people with low levels of financial wellbeing. If it’s not all about how much you earn, what does contribute to financial wellbeing?
Professor Elaine Kempson and her team from The University of Bristol developed a model that describes the factors that influence financial wellbeing (Figure 2) (Kempson et al., 2017). This model is useful as it is makes clear that some factors are more within our control (financial knowledge and experience; attitudes, motivations and biases; and financially capable behavior), while others are less so (social and economic environment). This can help alleviate the feeling some of us experience when financially stressed that it’s all our fault. Some of us live in countries with limited government safety nets, where there are economic downturns, where healthcare is prohibitively expensive and where unemployment is high. We need to acknowledge that these influences are tremendously unfair or unlucky, but ultimately out of our control.
Figure 2. Kempson et. al’s Financial Wellbeing Conceptual Model (reproduced from ANZ Banking Group Ltd, 2018)
Financial wellbeing is not about income but financial behaviors
Kempson’s model has been used in research by a major Australian bank to measure people’s financial wellbeing using a scoring system, and to estimate the contributions of each factor to people’s overall score. The results are presented in Figure 3. This data supports the CFPB’s finding that objective household income plays much less of a role in overall financial wellbeing than we might imagine – a tiny 7% in this particular study.
Figure 3. Contribution of each factor to financial wellbeing (reproduced from ANZ Banking Group Ltd, 2018).
The most significant factor is financial behavior, accounting for 45% (almost half) of the overall financial wellbeing score. What might come as a surprise is that although money issues can seem incredibly complex, only two specific behaviors are especially important: (1) taking active steps to save money and (2) not borrowing for everyday expenses (i.e., using credit or loans). This is great news as our behavior is something that, with the right tools and strategies in place, we can change.
Practical Tool: Measuring financial wellbeing to know where to begin
Measuring financial wellbeing using a scoring system is powerful as it allows for advice and decision-making to be customized to our specific circumstances. For example, if we score low in financial wellbeing, this means we have day-to-day money issues like covering basic expenses and debt. Our financial plan should begin with the goals of managing debt and spending. If our score is a bit higher, or we’ve improved our situation since starting on the financial wellbeing journey, our financial plan can focus on future goals such as saving for an emergency fund. If our score is higher still, or we’ve moved through the stage of building an emergency fund, our plan should shift to even longer-term goals such as saving and investing for retirement.
- Complete the ANZ Financial Wellbeing Calculator here.
- Make a note of your score. Remember to be compassionate with yourself whatever the score. For benchmarking purposes, the average financial wellbeing score for adult Australians is 59/100 (ANZ Banking Group Ltd, 2018).
- If you scored more than 80/100, you are in the “No worries” group. You have behaviors that contribute positively to financial wellbeing, high levels of confidence managing money, and substantial amounts of savings, investments and superannuation (retirement funds).
- If you scored 51 – 80/100, you are in the “Doing OK” group. You’re in the middle of the range and part of the largest group (in Australia). You can meet your current commitments and have savings for the future. You are less likely than those in the “Getting by” group to have debt and tend to have income that is relatively stable.
- If you scored 31 – 50/100, you are in the “Getting by” group. Your financial behaviors, confidence in your money management skills and belief in your ability to control your financial future are below average. If you rely on wages, your income may vary each month. You may have had time off work in the last 2 years due to illness or unemployment.
- If you scored 30 or below, you are in the “Struggling” group. You are likely to have no savings. You find it a constant struggle to pay for regular expenses such as food and to meet bill and credit payments. You have low confidence in your money management skills, and limited belief in your ability to control your financial situation. People in this group scored the lowest of all groups in the two key financial behaviors of active saving and avoiding borrowing for everyday expenses.
- What is the next step recommended for you? Read the guidance that is tailored for your situation.
- Financial wellbeing is having financial security and freedom of choice, now and in the future.
- The biggest influence on financial wellbeing is NOT income but financial behaviors.
- The two most impactful behaviors for creating financial wellbeing are active saving and not borrowing for everyday expenses.
- It is possible to move along the continuum from financial stress to financial wellbeing through learning, effort, opportunity and support.
- Financial advice should be tailored to your specific circumstances. A financial wellbeing score can inform decisions about where to focus your efforts.
- ANZ Banking Group Ltd. (2018). Financial Wellbeing: A Survey of Adults in Australia 2018. https://www.anz.com.au/content/dam/anzcomau/documents/pdf/aboutus/wcmmigration/financial-wellbeing-aus18.pdf
- (2015a). Financial well-being: The goal of financial education. https://files.consumerfinance.gov/f/201501_cfpb_report_financial-well-being.pdf
- (2015b). Financial well-being: What it means and how to help. https://files.consumerfinance.gov/f/201501_cfpb_digest_financial-well-being.pdf
- Kempson, E., Finney, A., & Poppe, C. (2017). Financial Well-Being A Conceptual Model and Preliminary Analysis. https://doi.org/10.13140/RG.2.2.18737.68961