How do we know our efforts at improving our finances, securing our financial future, and achieving financial wellbeing, are actually successful? When can we say we have achieved or reached a state of financial wellbeing? Understanding what financial wellbeing actually means can help individuals and families achieve it. I consider this knowledge an important first step in the process, the reason I have chosen this as my very first article.
Most people consider financial wellbeing as having certain amount of money in the bank account. To some, it means living a debt-free life. It might also means job security to some. According to a study by Consumer Financial Protection Bureau, “consumers can experience financial wellbeing – or lack of it – regardless of income. It means that one can be at the top of income bracket, but still lack financial wellbeing. Likewise, one can be at the lower income bracket and still achieve financial wellbeing. The bottom line is that it doesn’t matter how much income you earn, what matters is how you are able to make the income work for you, by keeping and growing it.
So what exactly is financial wellbeing? Since this could mean different things to different individuals, I consider this a subjective experience or a personal state since it cannot be precisely measured objectively. But, this state or experience is a positive one!
I define financial well-being as a positive state of having the financial resources to meet current and future expenses; and having the freedom to make choices regarding the use of these resources. It is the state of having enough financial resources to cover known current expenses, emergencies, and future financial goals. So, to achieve financial well-being, four elements must be present, as depicted below:
Elements of Financial Wellbeing
| Present | Future | |
| Security | Control over your day- to-day, month-to-month finances |
Capacity to absorb a financial shock |
| Freedom of Choice | Financial freedom to make choices to enjoy life |
On track to meet your financial goals |
| Source: Consumer Financial Protection Bureau |
These elements present the four facts one must know in an effort to achieve financial wellbeing:
Fact #1
You must have the financial resources to meet your day-to-day and month-to- month expenses. The focus of the first fact is on meeting your present expenses. This keeps “you” in control of your expenses, rather than expenses being in control of you.
Fact #2
You must have the capacity to absorb a financial shock. After you are able to control your present expenses, the focus shifts to the future and emphasizes the ability to cover emergencies. Emergencies pose great threat to one’s financial stability unless adequately planned for.
Fact #3
You must have the freedom to make choices regarding the use of the financial resources to enjoy life. Amanda (of Dream beyond Debt), captured this fact by defining financial security as “the ability to spend money on what I want, and not on what’s available or what I can get the lowest price because that’s all I can afford”.
Fact #4
You must be on track to meet your financial goals. Achieving financial wellbeing means you do not derail! Once short term goals are achieved, concentrate on achieving long-term financial goals (I am assuming you have one or more already set, or will set one. Get your free goal worksheet here). Continuity is the key, so you must stay on track to meet these goals. Continuity is a very important step in achieving financial freedom. I crafted the six important steps to financial freedom in our signature AGALEC approach discussed here.
Knowing what financial wellbeing means and the facts /elements to keep in mind, it now becomes easy to focus on the strategies to achieve it.
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Remember, it is possible to end poverty in through financial education.
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