How to Assess Your Financial Wellness

September 29, 2014

Last week, we started to explore the concept of financial wellness, a term used to describe our complete financial picture or overall financial health. The following question was presented as food for thought – what does financial wellness mean to you?

I received a wide range of personal definitions of this popular term. Many people used specific financial status measures to describe what financial wellness meant to them. Examples included the following:

  • Low debt-to-income ratio
  • Having minimal debt or no debt
  • Bringing in enough income to meet current living expenses and to save for other long-term goals
  • Having a fully funded emergency fund

Other people were less concerned with actual financial ratios and defined financial wellness as a state of financial well-being using more subjective measures related to personal thoughts and beliefs. Here are some of the responses that I have seen based on discussions and financial consultations:

  • Satisfaction with current financial status
  • Absence of financial stress (or minimal stress)
  • Self-sufficiency (a.k.a., a sense of “financial freedom”)
  • Contentment with current financial situation
  • Having confidence in the ability to make informed financial decisions

Many people told me they choose to define financial wellness by the actual financial behaviors they exhibit (or would like to start practicing real soon). Some examples of these important actions included:

  • Following a budget or personal spending plan
  • Spending less than they earn each month
  • Actively saving for goals such as retirement, college, emergencies, and major purchases such as a house or car
  • Setting and reviewing financial life goals on a regular basis

I was impressed with the answers that I received! Most people seemed to have a fairly good sense of their current state of financial wellness. There was a common theme of wanting to do better. Some expressed gratitude and contentment while others focused on a strong desire to improve their financial health or take steps to gain a little more control of their finances.

Having spent a great deal of time exploring this topic as part of my Ph.D. studies in Personal Financial Planning at Kansas State University, I have some pretty strong opinions on this whole discussion of financial wellness. Let me start by saying that I believe that all of previous responses to the “what is financial wellness” question are correct. Technically, financial wellness is a multidimensional concept that cannot be measured in its entirety by a single assessment tool.

According to So-Hyun Joo, a prolific researcher who has focused on this topic, financial wellness consists of both objective and subjective measures. This is important to note because we may feel like things are okay with our personal finances but the reality of our net worth statements, retirement savings, or an unbiased view of our debt inventory may tell a different story. Similarly, it is also possible to be in great shape financially but lack the confidence to appreciate and enjoy wealth.

How can you measure your own financial wellness? If you have access to a Financial Wellness Assessment through your employer, that is a good place to start. If not, try grading your responses to the following statements using the A to F grading scale:

I am satisfied with my current financial situation.

I am comfortable with the amount of debt I have.

I am confident in my ability to make informed financial decisions.

I follow a budget/personal spending plan on a regular basis.

My income exceeds my expenses.

I have an emergency savings fund.

I pay off my credit card balances in full each month.

I pay my bills on time each month.

I set financial life goals and review my progress on a regular basis.

I have general knowledge of personal finance matters.

I am saving enough to fund long-term goals like retirement.

In general, I have minimal financial stress.

After you have graded yourself on the statements above, consider taking your assessment a step further and measure your current financial status. (If you are reluctant to actually see your financial situation on paper, that is usually a sign you need to take action.) Here are some tools to measure where you stand (i.e., objective financial status):

Complete a Budget and Net Worth Statement.

Calculate your Debt to Income Ratio.

Calculate your Personal Savings Rate.

So, how did you do? Hopefully you made the financial wellness grade, but if there were some areas in need of improvement (i.e., lots of C’s, D’s, and the dreaded F’s) there is hope! The simple fact that you are reading a financial wellness blog is a step in the right direction.

In reality, the self-assessment process isn’t always fun when it comes to personal finance matters. However, exploring your overall financial health is a necessary step to improving your personal financial wellness.   The real challenge is going beyond the act of assessing your financial wellness and taking those all important steps to behavioral change.