Can you measure your financial wellbeing?

Posted by TEBI on June 13, 2021

Can you measure your financial wellbeing?




If someone asked you whether you were physically fit, how would you go about answering that question?

To start with, is physical fitness absolute, or relative? For instance, would you consider fitness the same way if you were 80-years old as you would if you were 20?

There are also different kinds of fitness. Flexibility, is considered one type of physical fitness. Muscular strength is another. Are you only truly fit if you have both, or could you still consider yourself fit if you only had one or the other?

Fitness also relates to what it is that you need to do. You may not be fit enough to run a marathon, for example, but does that matter if you have no ambition to do so? You may still be fit enough to go on a hike, which is really your preferred pastime.


How do you feel?

Ultimately, the way you answer this question probably comes down to how you feel. Do you feel vigorous and healthy? Or do you run out of breath walking up the stairs? Can you do physical tasks comfortably, or do you need help lifting your groceries out of the car?

You might say that being fit means that you are confident in your physical well-being, and that you are physically able to choose the activities you want to do. You are not restricted by a lack of stamina, or flexibility or strength.

Financial wellbeing is much the same. Perhaps you might want to measure it in terms of absolutes – for instance, whether you have an emergency fund with three months’ worth of expenses, or if you ever miss work because of financial stress.

These are important markers. But, really, financial wellbeing is about how you feel about your financial situation.


Four elements

The Consumer Financial Protection Bureau (CFPB) in the US has put a lot of time into understanding, and defining, financial wellbeing. They found that it includes four elements:

  • Having control over your finances: This is really the practical, day-to-day side of things. Is your debt manageable? Are your monthly expenses lower than your income?
  • Having the capacity to absorb a financial shock: Essentially this is about having a financial cushion to protect you against large, unexpected expenses without having to take on debt or require help from family and friends.
  • Being on track to meet your financial goals: This covers having a financial plan and being confident that you are on track to meet it. It includes both short-term goals, such as paying off a student loan, or a mortgage, as well as longer-term goals such as building your wealth.
  • Feeling that you are able to make choices: Financial success means having options. If your finances are in a healthy state, that means you have at least some choice in how to spend your time – which restaurant to eat at or where to go on vacation.

For the CFPB, all of this can be distilled into a single sentence: “financial wellbeing implies having financial security and financial freedom of choice, in the present and in the future”.


Measurement tool

Importantly, all of this is relative. An 80-year old doesn’t need to be thinking so much about building their wealth for the future. A 25-year old may not need to worry about paying off a mortgage.

This is why, like physical fitness, much of your financial wellbeing comes down to how you feel.

To measure this state, the CFPB therefore developed a free and publicly available tool that anyone can use to get a sense of their own financial wellbeing. By answering just 10 multiple choice questions, anyone can assess where they stand.

Helpfully, the CFPB provides everyone with a score, which they can compare against the averages for different age groups, income brackets and employment status. It is a very useful way to get a simple picture of your financial wellbeing. It also easily distils the areas you need to think about.

To take the CFPB financial wellbeing survey, click here.


One of South Africa’s most respected financial journalists, PATRICK CAIRNS is a trusted commentator on the world of investments and the quirks of behavioural finance. Over more than a decade he has built a reputation for keeping the industry honest, and putting the interests of investors first.
Here are some more articles by Patrick Cairns:

Why investing is more like golf than football

If we’re serious about our health, why do we neglect our financial wellbeing?

Don’t let the stock market distract you



Complexity: another reason why you need advice

Why people invest in cryptocurrencies

Good stories, poor investments

SPAC or spam?

The great inflation debate

Is value making a comeback?


© The Evidence-Based Investor MMXXI


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