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The idea that money generally, and the state of our finances, in particular, should be an essential contributor to our happiness seems obvious. When we handle money wisely give it an appropriate amount of significance in our lives—not too little, not too much, it makes us happy and contributes to our fulfillment and contentment.
However, if you read much of the psychological research on the financial well-being of consumers, you would not think so. Early on, researchers used an individual’s income, spending pattern, amount of debt, net worth, or even debt to income ratio as objective indicators of their financial well-being. The logic was that having more money or net worth, and lower debt is indicative of greater money happiness.
Recent research uses a different approach. Here’s how the Consumer Financial Protection Bureau (CFPB) defines financial well-being:
“Financial well-being can be defined 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 enjoyment of life.”
I found this to be a consumption and spending-oriented definition of happiness from money. Decoding it, it appears to say that for our well-being we need to have enough money to maintain our lifestyles and service our debts. Additionally, we need confidence that we will continue to earn and have enough money to do these things in the future. The last part of the definition is a bit vague because, in truth, “being able to make choices that allow enjoyment of life” often has nothing to do with money. One can argue, for example, that choosing a compatible long-term partner is a matter of far more than how fat your (and their) wallet is. (Or at least it should be). However, in strictly money terms, I interpreted the definition as saying that we should have enough money to buy stuff (products and experiences) that we enjoy using, now and in the future.
In writing this definition, the CFPB asked psychology and personal finance experts what they thought the concept of financial well-being should contain. The experts suggested four dimensions of financial well-being.
- Having control over our day-to-day, month-to-month finances
- Having the capacity to absorb a financial shock
- Being on track to meet our financial goals
- Having the financial freedom to make choices that allow us to enjoy life
The list seems to be about an individual’s thoughts and actions about money. What is missing altogether is the person's emotions about money, especially positive ones. That is a shame.
A recent paper is even more forceful in emphasizing the stress-relief and security aspects of financial well-being. It defines financial well-being as two related but distinct concepts, which the authors define (in their own words) as:
“1) current money management stress – encompassing feelings of being stressed/ worried about one’s current financial situation, being unable to manage money effectively today to meet financial obligations, and live the life one wants to live; and 2) expected future financial security – encompassing perceptions of having a secure future and meeting future financial goals.”
Where’s the joy and contentment in financial wellbeing?
On this blog, I wrote recently about encountering an old woman in a remote Indian village three decades ago, who barely had anything, let alone a fat bank balance. She remains the most generous human being I have met in my life, by a long, long margin.
In the increasingly popular minimalism sub-culture, the 100 Thing Challenge is very popular. The idea behind it is to reduce possessions in our lives to the bare essential number that contribute positively to our life experiences and get rid of everything else. Its motto could easily be written as “Reduce possessions and increase happiness.” Over the years, I have met many minimalists and voluntary simplifiers who have very little money, and even lower aspirations of earning significant amounts in the future. Yet they are perfectly content with their finances and happy with the role money plays in their lives.
The lesson from examples like these is that considering financial well-being only in terms of how much we can buy or consume (or pay back for our past consumption) presents an incomplete, and perhaps even misleading, picture about the role that money plays in our lives. Our relationship with money need not be centered around constantly buying new things and feeling less stress and more security when we are able to do so. Financial well-being needs a third dimension that measures the joy and contentment that comes from leading a full life in which money plays a supporting role instead of being the star of the show.
