What Do Subjective Assessments of Financial Well-Being Reflect?



Subjective financial assessments are used by social scientists as a measure of financial well-being and by households as the basis for action. Financial well-being, however, increasingly requires workers to build-up savings to meet hard-to-see future needs, specifically retirement, their children’s education, and paying off student loans.

This paper analyzes data from the FINRA Investor Education Foundation’s 2012 Financial Capability Survey to test whether subjective financial assessments 1) primarily reflect day-to-day, rather than distant, financial concerns; 2) increasingly reflect distant concerns if the household’s day-to-day finances are in reasonably good shape; and 3) increasingly reflect distant concerns if the worker is financially literate.

The paper found that:

  • Subjective financial assessments primarily reflect day-to-day conditions.
  • This remains the case even if the household’s day-to-day finances are in reasonably good shape.
  • Financial literacy enhances sensitivity to the lack of a retirement plan and having a mortgage greater than the value of one’s house, but it has no noticeable effect on sensitivity to life and medical insurance deficits, having an inactive retirement plan, not saving for college, or student debt burdens.

The policy implications of the findings are:

  • Subjective financial assessments have become a poor measure of financial well-being.
  • Workers by themselves cannot be expected to devote much effort to addressing distant deficits.
  • Initiatives to improve well-being must raise awareness – or compensate for the lack of awareness – of hard-to-see distant future deficits.