Jennifer Coats is a Senior Clinical Professor and Director of the Master of Finance Program at Colorado State University. Vickie Bajtelsmit is Professor Emerita at Colorado State University.
Our recent study for the Pension Research Council explores how key drivers of financial well-being (FWB) relate to a range of FWB outcomes. We find that several key components matter: people’s income, confidence in their financial decision-making (financial self-efficacy), financial literacy, and willingness to delay spending, are all influential for shaping their FWB. Financial planners can consider these attributes when developing customized strategies to help their clients achieve their financial goals.
What is Financial Well-being?
FWB has no single definition, and researchers use a range of related concepts to deepen our understanding of it. Many studies measure FWB by asking individuals how they perceive how well they are doing, often using subjective ratings of financial satisfaction or retirement preparedness. Another common approach evaluates financial behaviors that are determinants of FWB, such as saving, managing debt, planning for retirement, and participating in the stock market. A third method focuses on quantitative outcomes that reflect the combined effects of income and financial behaviors, including levels of retirement savings and wealth. Increasingly, researchers are also adopting multidimensional measures that integrate several aspects of FWB into a single scale, such as the Consumer Financial Protection Bureau’s widely used FWB Scale.
Patience, Confidence, and Knowledge
To build a more comprehensive view of the concept, we evaluated 20 different FWB metrics spanning perceptions, behaviors, outcomes, and combined measures. We found that the same set of factors is linked to higher levels of FWB, regardless of which metric is used. A key contribution of our work is the finding that an individual’s patience, measured by the personal discount rate, plays a critical role in shaping FWB. The discount rate reflects how willing someone is to trade off money today for a larger amount in the future. People with lower discount rates are more patient and more inclined to delay spending in exchange for a modest return on investment.
We found that a lower discount rate – reflecting greater patience – is linked to improvements in the FWB scale, as well as to higher financial satisfaction, stronger feelings of retirement preparedness, homeownership, greater housing wealth, and 11 of the 13 financial behaviors we examined. Alongside self-perceived health, this factor stood out for its consistent and significant relationship with FWB. Other influential factors include a willingness to take calculated risks, financial self-efficacy (confidence), and financial literacy.
The Right Combination
Because these factors are widely recognized as contributors to individual measures of FWB, our findings align with prior research. Further, we show that the strength of these relationships depends significantly on people’s other characteristics. For example, financial literacy is positively associated with FWB for middle-income individuals, yet it has little to no effect at lower or higher income levels. Higher financial literacy is especially beneficial for people who are also confident in their financial abilities and who have lower discount rates. Even among those with strong financial knowledge, individuals who are less confident or less patient appear to face greater challenges turning that knowledge into meaningful improvements in FWB.
Applying Our Findings
Our results point to several practical implications. Financial advisers and financial educators may find it useful to tailor their guidance to individuals’ levels of patience. Using brief questionnaires to gauge a client’s discount rate can give both the practitioner and the client a concrete sense of how patience affects financial choices. Financial education efforts should place greater emphasis on understanding the time value of money, which can motivate saving and investing. Individuals who are less patient but have saving or investing goals are likely to benefit from working with counselors who help them become more comfortable with delaying consumption. Educators and financial literacy programs should also focus on strengthening clients’ decision-making confidence, in addition to their knowledge and ability.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
