This was the first study of its kind done by the Consumer Financial Protection Bureau to measure the overall financial well-being of adults in US.
CFPB defines Financial Well-Being: “Financial well-being 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.”
More than 6,300 individuals were asked on the below questions (Table 1) and their answers were evaluated and scaled on a 0-100 range score of overall Financial Wellness.
Source: CFPB
In order to evaluate what are some of the main reasons for the financial well-being score, the evaluators looked at different subgroups as defined by 1) education, age, health, race, sex 2) Household and family characteristics 3) income & employment 4) savings & safety nets 5) financial experiences and 6) financial behaviors, skills & attitudes.
The average score for all US adults was a 54 (out of 100). However there was wide range and also distribution based on the subgroups mentioned above.
The score is meant to show what percent of that group have difficulty making ends meet. As an example more than 90% of group score from 11-40 had difficulty making ends meet. For score range of 51-60, 32% of people had difficulty with money. And for scores above 60, only 7% had hard time with money.
We’d like to look at this research not just to show that Financial Well-Being needs improvement in US, but also to use these subgroups to see where to focus our efforts in order to improve overall Financial Well-Being.
While some of the subgroups cannot be changed as they represent who one is (age, race, sex), some of the other criteria are changeable such as education, saving and financial behavior.
We’d like to show that there’s hope and much more can be done by taking the right steps, educating and improving your knowledge and understanding of money and this research proves it.
While certain achievements like education, employment and even income are important and add positively to your financial well-being there are other factors that, in my belief, are easier to change that could affect more your score.
See below the chart for income and employment. The change in financial well-being from a $40K household income to a $90K household income (Figure 13: Household Income) is just 5 points, from 51 to 56.
Source: CFPB
The chart for education attainment is below too (Figure 7: Education), and as you can see having a bachelor’s degree or having a high school degree the gap is just 5 points from 53 to 58, and just 3 points more for an advanced degree. Also to be noticed the race gap is even lower at 3-5 points gap.
Source: CFPB
The reason for bringing this up is that people focus so much on what they already have achieved or not, like education or high income as the only criteria for feeling positive about their financial well-being. This research shows that much more can be achieved with potentially less effort, but understanding and focus on the goals at hand.
The savings behavior and knowledge about money have a much bigger effect on overall financial well-being as seen in the chart below. While we saw at maximum 5 point increases for education, income or even race there’s a part where we can see double or triple that increase. It’s our knowledge and behavior towards money. It is, in my words, Financial Literacy.
In the chart below see the 18 points increase in Financial Wellness (from 41 to 59) if you can save just $5,000 versus less than $250 (Figure 17: Liquid Savings). Also if you can come up with $2000 vs. not being able to come up with that money, the gap in financial wellness is a huge 23 points (from 39 to 62, Figure 17: Able to absorb unexpected expense). These saving amounts are not that unachievable if we start saving periodically with a plan while having a significant effect in increasing our overall Financial well-being.
Source: CFPB
Lastly notice the behavior part of it and a big improvement of 12 points just by having a habit of saving, from 48 to 60 (Figure 24: Have a habit of saving). Financial knowledge and skill also add double digit points and Financial Confidence (which usually comes with understanding, saving and some skill) adds a significant 13 points (from 50 to 63, Figure 24: Confidence in ability to achieve a financial goal).
Source: CFPB
The CFPB concludes that “Encouragingly for financial educators and others who work to help consumers take greater control over their financial lives, a number of indicators that are the target outcomes of such programs, such as financial skills, confidence, and effective money management behaviors, appear to have strong and positive relationships with financial well-being.”
In conclusion, while certain factors like education, income & employment are important and do add to overall financial well-being, there are other factors that could be easier to implement and learn via financial knowledge, literacy and behavior that add much more to your overall Financial Well-Being.
This also means that at any point in time and no matter your education, social status, income, age, race or any other ‘out of your control’ factor you can increase your well-being by being focused, driven and having a well defined financial plan.
And if you find it hard to change who you are, change your circumstances.
