I was at an academic conference recently where, as part of a group, I spent a great deal of time thinking about the financial vulnerability of American consumers. Public policy makers, in particular, are concerned that far too many Americans are financially vulnerable. And when we hear statistics like “59 percent of Americans do not have enough savings to cover a $500 or $1,000 unexpected expense,” they are alarming.
It turns out there is no widely-accepted definition of financial vulnerability. I spent the last couple of days looking at the psychological research on this issue and here are my thoughts about how to determine how financially vulnerable you are.
Going strictly by the dictionary definition, vulnerable means “capable of being physically or emotionally wounded.” For our purposes, it is reasonable to define financially vulnerability as “the degree to which a person is capable of being injured financially when an adverse event happens.”
Although many psychologists think of households as being vulnerable, the truth is that financial vulnerability is a property of each person, not a family or household. Within a single household, a child will be more financially vulnerable than its parents, and the primary income earner will usually be less vulnerable than a spouse who earns little or no income.
Many researchers, and especially the popular press, tend to cast financial vulnerability in “either-or” terms: A person is either financially vulnerable, or they are not. It seems to me, however, that it makes more sense to think of financial vulnerability as analogous to a credit score. We can imagine each one of us has a financial vulnerability score. Someone with a score of 90 is extremely vulnerable whereas someone whose score is 15 is relatively resilient to financial tsunamis.
A person’s financial vulnerability is a dynamic or changing state. Just as our credit score increases or decreases based on how we handle money, take on new debt, make a late payment, and so on, the consumer’s financial vulnerability increases or decreases as its markers change.
This brings us to the next question. What are the markers that add up to make a person’s financial vulnerability score? Based on the published research, there are two distinct types of markers: psychological and behavioral, that can indicate how vulnerable a person is. (As you read the next section, ask yourself to what extent each of these markers apply to you. That will determine how financially vulnerable you are).
Where the psychological markers refer to a vulnerable person’s psychological state, behavioral markers measure the actual behaviors (and condition) of an individual to determine how financially vulnerable they are.
At its heart, a high degree of financial vulnerability is a sign that the person’s financial situation is unstable, and there is no margin of safety in their life. I do not think there are any easy answers about how to become reduce financial vulnerability. However, knowing its markers, and learning that at least some of them such as understanding our own financial condition, and avoiding taking on more debt, are within a person’s control, is the first step towards reducing financial vulnerability.
My book titled “How to Price Effectively: A Guide for Managers & Entrepreneurs” is now available either as a free PDF or for purchase from Amazon. I teach marketing and pricing to MBA students at Rice University. You can find more information about me on my website or follow me on LinkedIn, Facebook, or Twitter @ud.