What does the phrase "financial well-being" mean to you? Does it mean having enough money to get by? Having all the money that you desire? Achieving a certain dollar threshold? Different people may have different definitions in mind.
The Consumer Financial Protection Bureau (CFPB) set out to find a common definition of financial well-being in order to measure it, and therefore determine the effectiveness of financial programs for consumers. CFPB interviewed consumers throughout the U.S. to find the most common components in everyone's concept of financial well-being, and was able to determine the following four elements:
- Security in the Present – Having control over your daily and monthly finances. Examples include having a steady cash flow to pay bills on time and keeping debt low.
- Security in the Future – Having enough resources in reserve to be able to withstand a financial shock. This can include cash, a good credit rating, health insurance, and friends and relatives that can back you up in times of a financial crisis.
- Freedom of Choice in the Present – The financial freedom to make enjoyable life choices such as going out to eat on occasion, taking a regular vacation, or choosing to work less and devote more time to family.
- Freedom of Choice in the Future – Having financial goals for the future, and meeting milestones toward those goals. Examples include regular contributions to retirement programs or regular loan payments.
With this definition, CFPB developed a ten-question test and a specialized scoring system to quantify financial well-being. The questions all have five answers to choose from, ranging from "completely" to "not at all" or from "always" to "never." Respective examples include "Because of my money situation, I feel like I will never have the things I want in life" and "I have money left over at the end of the month."
Responses are assigned values from zero to four. Because of the phrasing of the questions, with some having negative connotations, the values are not always the same throughout the category — for example, for some questions "completely" is assigned a value of four while for others it is zero.
Once the values are totaled, you can determine your financial well-being score through a table that relates the total response value to your score, depending on your age (either 18 to 61 or 62 and older) and whether you took the test yourself or somebody read the questions to you and recorded your response.
The potential scores for self-administered testing range from 14 to 86 for ages 18 to 61 and from 14 to 95 for ages 62 and above. When the questionnaire was administered by others, the range changes to 16 to 91 for ages 18 to 61 and from 18 to 87 for ages 62 and above.
What constitutes a good score? In general, a higher number indicates a greater sense of financial well-being but there is no established threshold for a good or bad score. The test serves as a useful benchmark to measure progress toward financial well-being, and it can also be used in context based on other financial information. In other words, do other elements of your financial situation bring the financial well-being results into question?
If you find the idea interesting, feel free to try the test. You can take the test and calculate your score here. Try taking the test now, and set a reminder for yourself to take it in another six months or one year to see if you are trending toward or away from financial well-being.