It’s tempting to think that all financial worries can be solved with more money. But it’s wrong. Almost a third of higher income families in the United States could be considered financially unhealthy. And a similar number of lower income families are actually fairly healthy financially.
It’s not that more money isn’t useful (it is, obviously) or that more money equals more problems (though, yep, sometimes that’s true). It’s that more money is not enough without financial health.
For the uninitiated: financial health means that your day-to-day activities make it possible for you to be resilient in the face of life’s inevitable ups and downs, and to take advantage of new opportunities when they arise.
Think about financial health this way. If you exercise daily, but follow each run with a handful of candy, how is your health going to be? What if that run takes place near a busy highway with poor air quality? What if you can’t run at all because you have no running shoes, or your neighborhood is unsafe and has no parks?
In the world of health, experts increasingly talk about the social determinants of health, meaning that one’s environment and lifestyle can play just as important a role as good healthcare. According to Dr. Thomas Frieden, director of the Center for Disease Control and Prevention, the largest impact on health comes from “changing the context to make individuals’ default decisions healthy” and from “socioeconomic factors.”
In other words, people’s health improves most when we clean up the air, make it difficult for people to smoke around each other, or stop serving sodas in schools. Achieving better health requires an interconnected set of interventions, which can show their effects over years.
The same is true of financial health. If you make a good income, but run up a credit card balance you never pay down or sink all your earnings into a bad investment, then your financial health will still suffer.
One memorable woman that I got to know through the U.S. Financial Diaries research project provides a good example. Let’s call her Katherine. When Katherine first started sharing data with the Diaries team, her income covered her expenses, and she was working hard to pay down her credit card debt and student loans.
But then her ten-year old car needed to be replaced. She was able to manage this first shock to her usual spending, buying herself a reliable, reasonably priced replacement car. Her new auto loan pushed her to her limits, but she was making it work — albeit with no cushion to spare. But then she “crunched” that car in an accident. She also had a big dental expense, and moved in with her boyfriend, which meant a longer drive to work and more money spent on gas. She tightened her financial belt, cutting spending on her gym membership and commuting at off-hours to avoid the stop-and-go traffic that was killer on her gas mileage.
Still, these setbacks to her financial health were real, and they got in the way of her ability to chase new opportunities. During the year of the Diaries project, Katherine was taking graduate school classes. But when we caught up with her recently, she had postponed the dream of a master’s degree. She felt weighted down by her existing obligations and didn’t want to take on even more debt.
IIn parts of the developing world, the lack of access to banks and other basic financial services makes it difficult to build financial health. In the U.S, the problem looks a bit different: According to the FDIC, the vast majority of people have access to financial services, but 57% of Americans still lack financial health.
In CFSI’s Consumer Financial Health Study, we found that the biggest drivers of financial health in the United States are having a regular savings habit and thinking longer term about the future. These two behaviors are stronger determinants of financial health than income itself. Income matters, but it is not enough.
Achieving financial health doesn’t mean you can never borrow — or eat candy — but it does mean that over time, you have to make more good choices than bad. The only way that people will be able to do that is if we shift the “social determinants” of financial health in their favor. I eat less candy when it’s not sitting in a bowl in my office. The same is true with financial choices. I’m more likely to save and plan ahead if I have easier, more fun ways to do it.
Katherine is like a runner who doesn’t have the right shoes. She is doing a lot of the right things, logging the miles and practicing her sprints, but her knees are starting to hurt anyway. She, and the millions like her, need more help making better financial decisions, big and small, if they are going to improve their financial health.
#FinHealthMatters Day is June 29. Add your voice to those talking about Financial Health by responding below, or blogging or tweeting using #FinHealthMatters! More resources are here.
