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What is financial wellbeing? A researcher based in Berlin recently asked me that question. I had a bit of a struggle answering, in part because I write and talk a lot about what financial wellbeing is not.
One straightforward definition of what financial well-being is comes from the Consumer Financial Protection Bureau. It published its first report on “Financial Well-Being in America” in 2017 and issued a updated report covering 2017-2020. Its definition is “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 them to enjoy life.” The authors of the report define this even more by saying financial well-being includes a feeling of control over day-to-day and month-to-month finances, the capacity to absorb a financial shock, being on point to reach financial goals, and having the means to make the choices that make life enjoyable.
The CFPB’s research showed that, on a scale between 0 and 100, around a third of U.S. adults scored 50 or below in financial wellbeing, another third scored between 51 and 60, and another third scored 61 or above. Income is not necessarily a predictor of financial wellbeing, as someone with lower income can have higher financial wellbeing than someone with higher income.
That last bit of information is where things start to get tricky, because it brings emotional wellbeing into the equation. Emotional wellbeing is defined by the National Institutes of Health as “an overall positive state of one’s emotions, life satisfaction, sense of meaning and purpose, and ability to pursue self-defined goals.”
Which comes first, emotional or financial wellbeing? What impact do they have on each other?
I have long contended that financial wellbeing embraces both financial and emotional components. It is not simply about having enough to be financially comfortable; it is also about being emotionally comfortable around the role of money in your life.
It is possible to have an abundance of money and still experience emotional, physical, or psychological strain that precludes having emotional wellbeing. I once worked with a client who could not sleep because she was obsessed with financial worry. She had a net worth of $15 million. Did she have financial wellbeing? She could certainly meet current and ongoing financial obligations, yet she did not feel secure in her financial future. She certainly had the money to make choices that would allow her to enjoy life, yet she was not making those choices. It would appear there was a direct emotional component that kept her from enjoying financial wellbeing.
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It is also possible for a person to lack financial wellbeing and still at least appear to enjoy emotional wellbeing. Take a person who is happily accumulating credit card debt every month to fund their lifestyle. They feel no stress. They feel secure in their financial future because of a money script that “the money will always appear.” They are using money (borrowed) to make choices that allow them to enjoy life. They have the money (borrowed) to pay current obligations. Their illusion of financial wellbeing falls apart when one looks at their financial future, which is anything but secure as their borrowing is unsustainable. The lack of stress is unrealistic and anchored in denial, which makes it an indicator of a lack of emotional wellbeing.
Emotional and financial wellbeing cannot be viewed as separate. Some level of financial security is necessary to support emotional wellbeing, and some level of emotional wellbeing is necessary to enjoy financial abundance. You cannot have one without the other.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.