Blog 02

What is financial well-being? Age wise perceptions comparison

Dr Nishani Ekanayake 

University of Lincoln

Over the last decade, financial well-being has been gaining increasing attention in policy-making, research, and in the financial sector. With the outbreak of the COVID-19 pandemic, special attention is witnesses for the concept of financial well-being with policymakers and on the other hand due to the surge in digitalization of financial markets, which disrupts the role of traditional banking. With this trend, financial- well-being has become a target of interest in the business of financial institutions (Riitsalu et al., 2024).

However, little is known about the meaning of financial well-being and how the meaning evolves with the age factor. The meaning given to financial well-being change over the course of one’s life, representing different stages of life. This article tries to understand the definition of financial well-being and its changing nature with age. Thus, it would help us to better conceptualise and operationalize the concept through the support of literature. Financial well-being could be interpreted as feeling good about one’s personal financial situation and being able to afford a desirable lifestyle now and in the future (Riitsalu et al.,2024). There are several terms used, sometimes interchangeably with financial well-being: financial wellness, financial health, financial satisfaction, financial comfort, financial resilience (Nibud, 2018; Schmidtke et al., 2020; Sorgente & Lanz, 2017; Xiao & Porto, 2017). A recent policy document (UNSGSA, 2021) explicitly states financial well-being to be a synonym for financial health: “Financial health – or wellbeing – is an emerging concept that addresses the financial side of individuals’ and families’ ability to thrive in society.” Financial well-being has been defined by Brüggen et al. (2017) as “the perception of being able to sustain current and anticipated desired living standards and financial freedom.” The Consumer Financial Protection Bureau (CFPB, 2015) defines it as “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life.” In a study of financial socialisation of young adults conducted in the United States, Rea et al. (2019, p. 261) found that those they studied interpret financial well-being as “as an ability to balance taking care of their money for stability and freedom to live independently from their parents, with feeling unconstrained by their finances.”

The study done by Riitsalu et al., (2024) have constructed age related definitions for financial well-being based on participants’ accounts on how they perceive the concept. In their study, the researchers interviewed 47 individuals whom belong to three age groups; 17-23 (young adults), 26-47 (middle-aged) and 55-64 (near retirement) and constructed age-based definitions for financial well-being. Their constructed definition for financial well-being in for youth is: “Financial well-being means keeping the current lifestyle and reaching a desired lifestyle in the future, and it includes being able to cover necessary expenses and obligations, ideally being able to afford in the future anything one desires. That kind of life is enabled by financial freedom with passive income or stable and good income that allows regular savings”. In their study, several young respondents mentioned plans to earn passive income in the future without having to work full time: “Financial well-being is when you do not have to work, and you earn passive income”. Again, they did not see it as extreme wealth but as earning enough from investments to cover daily costs. Some of young participants have explicitly stated that viewing financial well-being as wealth is incorrect, for example: “In my opinion, financial well-being is that you have a home where you live, and you are satisfied with it, you have a car that you drive and get all your stuff done. And you have some money set aside, so when you wish to buy something, you can afford it. I do not mean some large amounts, in fact not much is needed for being satisfied with what you have”. Young responded made it clear that they did not wish to have to earn money in the same fashion as previous generations, for example: “Modern youth does not want to be employed and live from payday to payday like our parents and many others do”. As to the findings of Riitsalu et al., (2024), two components are looked for by younger individuals: achieving desired lifestyle in the future and reaching financial freedom. Youth interpreted financial freedom as earning sufficient passive income and not having to work in the traditional way that previous generations saw as the default option. This is similar to the principles of the FIRE (Financial Independence Retire Early) movement of Taylor & Davies (2021). FIRE is a movement of people devoted to a program of extreme savings and investment with the goal of retiring far earlier than traditional budgets and retirement plans would permit.

What does financial well-being mean for middle-aged? As to the study of Riitsalu et al., (2024), middle aged perceived financial well-being as the ability to make ends meet and not having to worry about finances. One participant mentioned that “I experience financial well being when I meet every day needs when I go grocery shopping and do not need to look at the costs” while to another it is when he doesn’t have to worry about money. For some middle-aged financial well-being means financial security, while for others it referred to freedom of choice in decision-making. Once financial security was secured, the second could be achieved: Freedom of choice. Freedom in the sense of having to work less, travel for pleasure and to master one’s own time. Further, It was mentioned that as one’s income increased, so did one’s spending, but there might be less time left to enjoy life. As a result, when more money meant more work, there was no happiness and life satisfaction left, and thus no financial well-being. In summary, for middle-aged individuals, financial well-being meant that their needs were met, they had the freedom to buy whatever they wanted, and travel wherever they want whenever with financial security. As a result, they described the present and future components of financial well-being without aspiring for financial freedom described by the youth.

In the study of Riitsalu et al., (2024), individuals close to retirement age defined financial well-being mainly as financial independence from others, a situation where all their needs were met. Accordingly financial well-being also meant that at retirement they were able to financially support their close family members, such as their children, i.e. helping children with purchasing a new home. Some mentioned having set aside “funeral money,” a component of financial well-being at retirement age. However, the two important antecedents of financial well-being in near retirement were identified as health and employment options. Without one or both of these, it was impossible to earn sufficient income that was needed for securing financial well-being. In conclusion, individuals nearing retirement age associate financial well-being with present and future financial independence. The two most distinct aims of securing financial well-being in near retirement group: having “funeral money” or savings for later in life and having money to support their families.

Among the middle-aged and older respondents, a forward-looking component of financial well-being is visible: financial freedom or independence, interpreted as a freedom of choice, similar to the definition given by Consumer Financial Protection Bureau (CFPB, 2015). They saw it as having the freedom to choose how to earn and spend money without being forced into certain choices by their financial situation. It meant striking a better balance between work and leisure time. In the older group, financial independence was prioritised, which was understood as not needing financial support from anyone until the end of the life, including being able to cover one’s own funeral costs. Values become less materialistic when an individual is middle-aged. High value is being given to build a social status in the younger generation when compared to middle-aged who are focused more on enjoying life.

This article shows that the meaning of financial well-being varies across age groups, as does the interpretation of its components. Thus, financial well-being is not a static concept, and the definition differs on how individuals perceive it in different life stages. Many perceives financial well-being as the ability to keep the current lifestyle, which entails making ends meet without stress and feeling secure about one´s personal or household´s finances. The study of Riitsalu et al., (2024 ) constructed a general meaning on financial well-being as keeping the current lifestyle and reaching the desired lifestyle in the future, including being able to cover necessary expenses and obligations and ideally being able to afford anything one desires in the future. For young people, an additional aspiration is to reach financial freedom or independence as promoted by the FIRE movement. For middle-aged and older individuals, financial freedom means a different thing – it is the freedom to earn and spend as one wishes without the expectation of earning sufficient passive income for never having to work again, as the young do. For the oldest generation, it also means not being financially dependent on anyone, being able to support children, and having sufficient funds for one’s own funeral. It is thus evident that the interpretation of financial well-being varies across age groups.