Toward a Holistic Measure of Financial Wellness: The Relationship between Perceived Financial Well-Being and Financial Vulnerability

In an age of increasing individual financial responsibility, there has been a proliferation of attention given to what constitutes financial wellness with two primary streams of work. In one stream, the focus has been on the individual’s perceptions of their financial wellness or perceived financial well-being (Bruggen et al. 2017; Netemeyer et al. 2018). In the other stream, the focus has been on external facts related to the individual’s objective financial state (Warmath et al., n.d.). Although the focus of both streams is to provide individuals with a means of assessing their financial state, the approach of each stream is vastly different. Proponents of a perceived approach to assessing financial wellness suggest that objective measures fail to capture the individual’s perspective on their financial state, while proponents of a more objective assessment assert that people are not equipped to assess their financial state on perceived measures alone. To date, research has only considered the uni-dimensional approach (i.e., either subjective or objective) to assessing financial wellness, our belief is that both streams offer unique and important insights into financial wellness. In this research, we seek a more holistic approach that considers the perceptual and situational components of financial wellness. Such an approach allows the individual to live their financial life driven primarily by the perceived well-being derived from financial choices while having insight into how vulnerable they might be to financial hardship from those choices. By bringing financial well-being and financial vulnerability into a holistic framework, we seek to develop a system that serves as a compass by which individuals can navigate their financial wellness Using the Bureau of Consumer Financial Protection’s National Financial Well-Being Survey (2017), we examined the relationship between financial well-being (CFPB 2017) and financial vulnerability (Warmath et al., n.d.) to understand how perceptions and facts of an individual’s financial situation co-existed. Overall, the correlation between financial well-being and financial vulnerability was .451 (p < .001) suggesting congruence between financial perceptions and current financial reality for the average person. Yet for each financial vulnerability tier, we found a wide distribution of financial well-being scores. Conversely, for a given level of financial well-being, we found a wide distribution of vulnerability to financial hardship. Our results identified (or perhaps confirmed) the presence of three groups: individuals who were overly worried about their financial situations; individuals who were not worried enough; and individuals who were very well calibrated in their perceptions of how they were doing financially. Demographic, behavioral, and attitudinal profiles of each group were explored. The fact that individuals may be experiencing high financial well-being and high financial vulnerability simultaneously suggests that these constructs are conceptually distinct. Bringing the two measures together into a holistic framework may provide individuals better insight into their financial wellness. Thus, interventions should target greater calibration between them as well as improved levels for each. Our framework answers the call in the consumer financial literature for a core metric while serving as a balanced outcome for the design of interventions. Given its simplicity, this framework may also serve as a financial health-check for individuals contemplating readiness for a major purchase or simply seeking a sense of whether they are financially well.