The beginning of a new year is a time many people use to take a fresh look at their physical health, evaluate how well they kept to their fitness goals last year, and either renew them or take a different approach. The same process should apply to financial health.
Looking at the good, bad, and everything in between on our financial ‘report cards’ can provide useful insights about what we’ve got right and what we need to work on. While most people have a fairly good grasp on what constitutes physical wellness, there are few consensus of the definition of financial well being.
In January of 2015, the Consumer Financial Protection Bureau (CFPB) released a report defining financial well being as: “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.” The Bureau settled on this definition after collecting research from both consumer surveys and financial experts, but it didn’t end there. This month, they took it one step further and released a testing tool composed of 10 key questions based on this definition.
Primarily designed for financial consultants and educators, the new testing tool provides consistent criteria for evaluating financial health. The Bureau expects advisors to be able to use the tool to get an initial, accurate picture of a client’s finances and then track their progress as they make positive changes.
The CFPB’s Four Gauges of Financial Wellness
The four main elements of the report and the new testing tool consist of the following aspects of financial health:
- Present Financial Security — this covers whether or not you feel in control of your daily and monthly finances.
- Outlook for Future Financial Security — this gauges your readiness for an unexpected financial ‘shock’ (perhaps a job loss).
- Present Financial Freedom of Choice — do you have the ability to make choices based on what you want and enjoy versus what you need?
- Future Financial Freedom of Choice — this criteria looks at whether you’re on course to meet your long-term financial goals (think paying off a mortgage, retirement planning).
As you can see, these focus on two key areas: (1) financial security, and (2) financial freedom.
Making it Personal
Whether or not you or your financial advisor use this tool created by the CFPB, just examining these four criteria is a healthy habit to incorporate into your new year goal setting session. As you look back on your financial wellness through the last year, can you answer positively for these four areas of your finances, or are any of them a little shakier than the others? Discovering where you have room to grow is a good opportunity to address any weaknesses before they become major problems in the future, so do just that — make a list of specific ways you can improve either the present or future state of your financial security and freedom.
Taking it a step further, are there any criteria not included under these four general qualities that you consider important to financial well being, whether yours personally, or everyone, in general? Whether these represent your strengths or weaknesses, right them down to remind yourself, or create a plan of action.
Awareness creates the opportunity for change — take advantage of it to improve your financial health in the coming year.