What is Financial Wellbeing?

Money plays an important role in the lives of individuals within a society. Being the medium of exchange (i.e. what we use to pay) for goods and services, it certainly affects the type and quality of lifestyle we lead, now and into the future.

From an individual's perspective, financial wellbeing is the state of being comfortable or happy with one's finances. It means having control over their day-to-day and month-to-month finances. This includes being able to cover expenses, pay bills on time, and generally not worry about having enough money to get by. It's about managing money effectively to ensure financial security in the present.

Financial wellbeing also involves the capacity to absorb financial shocks. This means having a safety net, such as savings or insurance, to handle unexpected expenses like a car repair or medical bill without it turning into a long-term financial setback. This aspect is crucial for feeling secure about the future.

Additionally, financial wellbeing includes the freedom to make choices that allow individuals to enjoy life. This could mean having the flexibility to spend on non-essential items, take vacations, or work less to spend more time with family. It's about having the financial freedom to do what makes them happy, both now and in the future.

Financial wellbeing therefore has a psychological component (how one feels) and a wealth component (how much money a person has).

While numerous studies have identified various factors that influence a person's financial wellbeing, there are two that standout as factors within the control of the individual. These are their financial literacy and and their income.

Financial literacy

Research highlights the crucial role of financial literacy in achieving financial wellbeing. Financial literacy involves understanding and effectively using financial skills like budgeting, personal financial management, and investing. Studies show that individuals with higher financial literacy are better at planning for retirement, managing debt, and maintaining financial resilience. They are also less likely to experience financial fragility, which is the inability to cope with unexpected financial shocks.

Income

It's not hard to understand why income is central to financial wellbeing. Having money coming in on a regular and secure basis means the individual can have confidence to pay for their living expenses and plan for the future. Studies have shown that financial wellbeing decreases with household income.

What this means is that strategies to improve your financial wellbeing inevitably need to involve building your financial literacy as well as increasing or securing your income.

Three stages of financial wellbeing

Being comfortable and happy with one's finances can mean different things to different people depending on their circumstances, perspectives on life and their level of wealth.

We have mapped out three important milestones when it comes to financial wellbeing.

Stage 1: Security

The first milestone on the financial wellbeing spectrum is to achieve security. This means being able to meet your living expenses, service your debts, cover unexpected expenses and have some money left over.

Stage 2: Prosperity

The second milestone on the financial wellbeing spectrum is to achieve prosperity. This means using the accumulated savings to build wealth, generate investment income to replace the need for personal exertion and "retire" comfortably.

Stage 3: Legacy

The third milestone on the financial wellbeing spectrum is to achieve your desired legacy. This means in the event you pass away or lose mental capacity, you have plans for the financial security of your loved ones, the transfer of your wealth and how you would like to be remembered.

Want a better picture of your financial landscape? Get started with our free Financial Health Check here and see where you're at today.