Last week we explored the concept of Wellbeing as defined in Tom Rath and Jim Harter’s book Wellbeing – The Five Essential Elements. We looked at Career, Social, Physical and Community Wellbeing.
This week we are going to go into more detail about Financial Wellbeing.
Financial Wellbeing is about effectively managing your economic life. The authors note that it is difficult to be happy in any area of life if you cannot meet your basic needs (remember Maslow’s Hierarchy of Needs?), but that the amount of money we have, beyond a certain point, has less of an impact on our overall wellbeing than the concepts of “financial security” and effectively managing our finances (see “Happiness at What Price?” for more details: Of course, financial security is going to mean different things to different people. To one person having $1,000,000 at retirement would be financial security but another person might need much less or more than that to feel secure.
“People with high Financial Wellbeing manage their personal finances well and spend their money wisely. They buy experiences instead of just material possessions, and they give to others instead of always spending on themselves. At a basic level, they are satisfied with their overall standard of living.” (Rath & Harter, 2010, p 154).
There are several important concepts in that statement. People with high Financial Wellbeing:
- Manage their personal finances well
- Spend their money wisely
- Buy experiences instead of just material possessions
- Give to others
- Are satisfied with their overall standard of living
Let’s discuss a few of those concepts.
Give to Others
The authors cite three studies that showed that spending money on yourself may temporarily make you feel good, but after time that good feeling fades. While spending money on yourself does not boost wellbeing, spending money on others does. When we help others out we feel good, even if it is just a little bit of money.
While spending on material goods doesn’t increase wellbeing long-term, spending on experiences does. Think about some of the material items you purchased over the past year, and then think about some of the experiences you purchased in the last year. Experiences can include trips or something as simple as going out to a nice dinner or going to a movie. Do the material items or experiences give you the most happiness? Most people would agree that experiences give them the most happiness. Things that come to mind for me are date nights with my wife, going to a movie as a family, and taking a trip over Spring Break. With experiences we get to look forward to the event, enjoy the event and have fond memories of it. It is interesting to note that for those that earn less than $25,000 per year experiences and material purchases show similar gains in wellbeing, but after $25,000 experiences provide two to three times the levels of wellbeing when compared to material purchases.
Manage Personal Finances Well
This concept brings us back to many of the things we discuss with people; budgeting, protecting yourself from identity theft, having a basic estate plan in place, saving for emergencies, investing for the future, etc. The authors also suggest you establish default systems, such as direct deposit, automatic deduction for investments and enrolling in your 401(k) at work so savings is automatic.
It is important to remember that all areas of Wellbeing work together – you can’t just focus on one area and ignore the others.
The authors have a paragraph that puts everything into perspective:
“One of the best ways to create more good days is by setting positive defaults…You can intentionally choose to spend more time with people you enjoy most and engage your strengths as much as possible. You can structure your finances to minimize the worry caused by debt. You can make exercise a standard part of your routine. You can make healthier decisions in the supermarket so you don’t have to trust yourself when you have a craving a few days later. And you can make commitments to community, religious, or volunteer groups, knowing that you will follow through once you’ve signed up in advance. Through these daily choices, you create stronger friendships, families, workplaces, and communities” (Rath & Harter, 2010, p 112).