How’s Your Financial Well-Being?
The Consumer Financial Protection Bureau chatted with a lot of people like you and me about what makes up personal financial well-being and then, naturally, published a report on what it learned. We might instinctively think we know what makes people feel good about their money: having plenty on hand! Surely that’s part of the answer, but the CFPB dug a bit deeper to get at what really matters.
The CFPB reduced its conversations with consumers to four elements that define financial well-being. If you’re feeling anxious about your money situation, the CFPB’s four-piece breakdown of financial well-being may help you understand exactly what sort of changes you need to make to boost your money health.
Four Elements of Financial Well-Being
Here’s how the CFPB defines financial well-being, in four pieces:
1. Feeling in Control
Control and stress are closely tied. We know people who feel they have little control in their jobs are more stressed about and less happy with their work than are employees who have some control over what happens to them at work.
Similarly, if your finances are out of control, naturally you feel worried about money. But being in control is about more than simply having enough money to pay bills. Pro-actively managing your money, no matter how much you have, also helps you feel in control. As the CFPB report says, “These individuals [people with a relatively high level of financial well-being] manage their finances; their finances do not manage them.”
Okay, that sounds catchy, but also a bit vague. Exactly what can you do to feel in control of your finances? A few ideas:
- Have a spending plan that includes planned savings
- Don’t obsess, but self-educate on investing, and don’t practice “set it and forget it” when it comes to managing your nest egg
- Pay down debt
2. Capacity to Absorb a Financial Shock
Many families are one paycheck away from financial catastrophe. That sure makes it tough to sleep well at night!
Instead of sleeping aids, try these ideas to improve this piece of your financial well-being:
- Do what you have to do—including taking a second, part-time job for a while if necessary—to build an emergency fund. Otherwise you may end up in desperation at a payday lender when you get hit with a short-term money setback, and you do not want to go there!
- Are your car, home, and personal belongings insured? How about medical insurance?
3. Being on Track to Meet Your Financial Goals
I think there are two parts to this piece of financial well-being: First, do you have financial goals? Second, if you do have goals, are you on course to achieve your goals?
You can’t know if you’re on track to have saved a nest egg of the size you will need to enjoy the sort of retirement lifestyle you would like (or to retire, at all!), if you haven’t set nest egg goals.
For improved financial well-being under this element, try these steps:
- With your family, set goals for when you would like to retire and how you would like to live in retirement. Also, what will your retirement look like? Maybe you’d like to continue working part-time as long as you have a couple of functioning brain cells!
- One you’ve set goals, put together a formal or informal financial plan that meets those goals. Mainly this will be about setting spending limits and brainstorming creative ways to earn more so you can save enough to meet your long-term retirement goals.
4. Having the Financial Freedom to Make Choices that Allow You to Enjoy Life
For me, this one is huge. The CFPB describes this piece of financial well-being with these examples: “…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.”
I think this part of financial well-being is higher level than the first three. Before you can experience this sort of money freedom, you need first to 1) gain control of your money, 2) be ready to absorb a financial shock, and 3) set goals and know you’re on track to meet them. With those done, you’ll then feel the freedom, without stress, to be more generous with your time and money, to treat yourself (but remember: you don’t have to spend money to have fun!), and devote more time to family and recreations and less to paid employment. This is a great place to be!
How’s Your Financial Well-Being?
How do you feel about your financial well-being? If your feeling is not what you’d like, of the four elements identified by the CFPB, where do you think you need to focus first to improve things?