The Potential I See in the CFPB's New Financial Well-Being Scale
Financial well-being. We've been hearing the term a lot. (We even just had a "Financial Well-Being Summit"!)
But what does it mean? Is it a certain amount of money in the bank or a certain annual income? Is it developing a consistent savings habit, socking away a few dollars every month? Does it mean being debt free, or reaching a certain credit score, or owning your own home or business?
The Consumer Financial Protection Bureau (CFPB) tackled this question, but it didn't identify any magic numbers that signified financial well-being. Rather, after talking to people around the country, the CFPB identified four central elements of financial well-being: feeling in control of your finances, being able to withstand a financial shock, being on track to meet your financial goals and having the financial freedom to make choices that let you enjoy life.
I love this definition of financial well-being. I think it captures the essence of why we've struggled so long to distill perfect indicators of success: because money is so deeply personal. The definition reflects and embraces that; well-being is a personal sense of control and a feeling that you can handle the future.
On Friday, the CFPB took their definition one step further, releasing a questionnaire to measure an individual's financial well-being. The 10-item questionnaire (an abbreviated five-item version is also available) asks people to rank the extent to which statements like "Because of my money situation, I feel like I will never have the things I want in life" apply to them. This user guide provides more information about the research behind the scale and explains how to use it and how to compare individuals' scores.
This scale opens up enormous possibilities for us to better understand our work, in all its important complexities.
It means that while we have valued the work of credit counselors, financial coaches, Individual Development Account program managers, tax volunteers and all the other ways we work with people to stabilize their financial lives, we can all now measure the same thing: did our work – as diverse as it is – have an effect on a person's sense of financial well-being? Did it change how they feel about their own financial lives?
That doesn't mean we should throw out that other stuff; we can and should continue to track dollars saved, credit scores changed, debt reduced. Those figures are important and help us understand the results of a specific intervention. But we also know that tracking movement in those numbers can be tricky: if dollars saved doesn't go up, does it mean we failed, or does it mean that somewhere along the way a person was able to use their savings to handle an emergency, instead of turning to payday loans?
The promise in the financial well-being scale – a subjective and quantitative metric – is it allows us to transcend the limitations of objective quantitative measures. If the amount an individual has saved goes down because she handled a financial emergency without going into debt, I do hope her personal sense of financial well-being went up!
Imagine a world in which all of these different financial capability programs can report a single financial well-being metric that helps us understand whether people are moving forward on a continuum over time, and if not, give us some idea of why they are stumbling. Imagine how this will help us all to better understand not only whether our programs are making a difference, but when we need to make changes to program design. Imagine if we can use this to help us compare and contrast which program interventions increase financial well-being at a particular point in someone's life.
Imagine also what it looks like for all the new faces in the financial capability space—the housing agencies, the schools, the children's savings programs, the workforce programs—to have a simple, straightforward measure that they can easily implement and communicate.
I am looking forward to working with practitioners to implement this, to test out these theories and see what happens when we start to track financial well-being in this new, holistic way.
What does financial well-being mean to you? Tell us in the comments!