What Is Financial Wellness? 4 Key Aspects of Financial Health & Well-Being

Keystone Financial Group |

Are you financially healthy? Look for these 4 factors...

In 2015, the Consumer Financial Protection Bureau conducted a research project to define financial well-being in a way that is easy to understand for consumers. This was an important step in creating a reliable tool to measure and assess financial well-being, which is the ultimate goal we want all of our clients to achieve!

The research project was extensive, using a thorough methodology that included insights from existing research, expert opinions, and most importantly, the experiences and voices of consumers. Through 60 hours of in-depth, one-on-one interviews with working-age and retired consumers, the study identified four key elements that define financial well-being:

1.) Control over day-to-day and month-to-month finances: Being able to manage your everyday expenses and bills without feeling overwhelmed or struggling to make ends meet.

Having control over your day-to-day and month-to-month finances means being able to effectively manage your money without feeling overwhelmed or stressed about meeting your basic expenses and bills. It involves having a budget in place that allows you to track your income and expenses, and making informed decisions about how you allocate your money. It also means being able to prioritize your spending based on your needs and wants, and avoiding unnecessary or impulsive purchases that can derail your financial stability.

Having control over your finances also includes managing debt responsibly, such as paying off credit card balances in full and on time, and not relying on high-interest loans or payday lenders. It involves building healthy financial habits, such as saving regularly, living within your means, and being mindful of your spending behaviors. When you have control over your day-to-day and month-to-month finances, you can experience a sense of security and peace of mind, knowing that you have a plan in place to manage your money effectively.

2.) Capacity to absorb a financial shock: Having enough savings or resources to handle unexpected expenses or emergencies without going into debt or facing financial hardship.

This means having an emergency fund that can cover unexpected medical bills, car repairs, or other unforeseen circumstances without having to rely on credit cards or loans. This capacity to absorb financial shocks also includes having adequate insurance coverage, such as health insurance, auto insurance, disability insurance, and home insurance, to protect against unexpected events that can result in financial setbacks.

Having a buffer against financial shocks is crucial to financial well-being, as it provides a sense of financial security and resilience. It can help you avoid going into debt or experiencing financial stress when unexpected expenses arise, and allow you to maintain your financial stability even during challenging times. Building an emergency fund and having appropriate insurance coverage are important steps in developing the capacity to absorb financial shocks and protecting yourself from potential financial hardships.

3.) On track to meet financial goals: Making progress towards achieving the financial milestones that are important to you.

This can include saving for retirement, paying off debts, buying a home, or saving for education or other long-term goals. It involves setting clear financial goals that are specific, measurable, achievable, relevant, and time-bound (SMART), and developing a plan to work towards those goals.

Being on track to meet your financial goals also requires regularly reviewing your progress and making adjustments to your financial plan as needed. It may involve seeking professional financial advice or guidance to optimize your investment strategies or develop a debt repayment plan. It also means being disciplined and consistent in saving and investing, and avoiding unnecessary risks or impulsive decisions that can derail your progress towards your financial goals.

Achieving your financial goals can provide a sense of accomplishment and satisfaction, and it can contribute to your overall financial well-being. It can help you build financial security, create a better future for yourself and your family, and give you peace of mind knowing that you are taking steps towards a financially successful life!

4.) Financial freedom to make choices: Having enough financial resources to make choices that align with your values, priorities, and goals.

This means having discretionary income that allows you to enjoy life and pursue activities that bring you joy and fulfillment, such as traveling, hobbies, or charitable giving. Financial freedom also means having the flexibility to make choices about your career, education, or lifestyle without being solely driven by financial constraints.

Having financial freedom provides a sense of autonomy and empowerment, allowing you to live life on your own terms and make decisions that align with your personal values and goals. It can contribute to your overall well-being by reducing financial stress, increasing your sense of control and security, and enhancing your ability to pursue opportunities that are meaningful to you.

As you can see, this definition of financial wellness recognizes that financial well-being has both objective and subjective components. It acknowledges that people have different financial goals that are equally important and meaningful to them, and that financial well-being is not solely dependent on a certain income or asset level.

This comprehensive definition of financial well-being emphasizes the importance of financial stability, goal-setting, and the ability to make choices that align with one's values. It goes beyond addressing a single financial issue, such as student loan debt or emergency savings, and recognizes that a holistic approach is needed to achieve true financial wellness.

As professionals in the industry, our goal is to help our clients reach their financial goals, including a comfortable retirement which is a critical aspect of financial well-being. To do so, it's important to use a consistent definition of financial wellness.

By offering comprehensive and authentic solutions that address both the subjective and objective components of financial well-being, we work to help individuals meet their financial needs, and empower them to see the bigger picture of what they need to do to achieve their financial goals.

Want professional help with any of these 4 key elements? Reach out to our office for a free initial strategy session!




Study Link: https://files.consumerfinance.gov/f/201408_cfpb_report_financial-wellness-at-work.pdf



The information presented here is for educational purposes only and is not a solicitation for the purchase of any financial product. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting financial professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.