Financial well-being: Measuring financial perception and experiences in low- and moderate-income households

Thirty-nine percent of U.S. adults reported lacking sufficient liquidity to cover even a modest $400 emergency without borrowing or selling an asset, and 60 percent reported experiencing a financial shock (e.g. loss of income or car repair) in the prior year. While facing precarious financial situations may leave households unable to manage essential expenses and plan for the future, the research also suggests that U.S. households report feeling optimistic about their finances. These disparate findings suggest a complex interplay between a person's objective financial circumstances (such as their savings) and their own perceptions of their financial situation.

To better understand how people think about and experience their financial circumstances, researchers have recently engaged in efforts to define and measure "financial well-being," a term that encompasses a person's holistic financial state. Existing research typically uses relatively objective measures (e.g., income, savings, debt) to measure household financial circumstances. However, relatively little research has operationalized financial well-being using subjective measures (e.g., perception of one's financial circumstances, the sense of control over financial lives). This points to a potentially large gap in the research, as this subjective sense of well-being may capture a more complete picture of someone's financial reality than objective measures. For example, someone with low levels of liquid assets and a low income may not be captured in many traditional financial measures, even though it is integral to the overall financial security and well-being of a person.

In 2015, the Consumer Financial Protection Bureau (CFPB) developed the new Financial Well-Being Scale to comprehensively measure the way households internalize major financial circumstances, such as financial shocks, hardships, and experiences. The scale is scored between 0 and 100. Building on this foundational work, we have applied this scale to better understand the state of self-assessed financial well-being being of low- and moderate-income (LMI) households. The research relied on survey data obtained in 2017 through a continuing partnership between Washington University in St. Louis, Duke University, and Intuit, Inc. The survey was conducted immediately after tax filing and six months after that. (We administered the Household Financial Surveys to LMI households who consented to participate in the survey after filing their taxes in TurboTax Freedom Edition (TTFE), a free tax preparation and filing software program for qualified low-income users offered as part of the IRS Free File Alliance.)

How Does Financial Well-Being In LMI Households Compare To That Of The General Population?
We found that LMI households averaged 48 points for financial well-being while the average financial well-being score for the general U.S. population was 54. LMI households were more likely to report extremely low levels of financial well-being (scores between 19 and 44) while the general population was more likely to report moderately high financial well-being levels (scores between 55 and 74).