The Money and Pensions Service is encouraging people to pay extra attention to their financial wellbeing during the Coronavirus pandemic, and to consider what protective steps they can take now to avoid financial worries down the line.
With Coronavirus likely to cause disruption for a significant amount of time this year, the government-backed organisation is urging people to spend some time planning ahead to reduce the impact on their finances.
What is Financial Wellbeing?
In general terms, financial wellbeing means how money can be used to increase our happiness. It is a broad subject, and there is a great deal of research to access on what makes us happy.
One or two universal truths have emerged from that research. Firstly, money itself does not make us happy, it is how we use it that matters. For example, Professor Tim Kasser of Knox College in America has produced plenty of research that shows the value of accumulating wealth for its own sake is in direct contradiction with happiness.
A second truth, best highlighted by the Harvard study on happiness, is that the largest contributor to our wellbeing is the quality of our social relationships.
In many ways, therefore, financial wellbeing is about how we use our money to support the other areas of wellbeing.
The Financial Wellbeing Book by Chris Budd, provides five parts to financial wellbeing. These are:
- A clear path to identifiable objectives
- Control of daily finances
- The ability to cope with a financial shock
- Financial options in life
- Clarity and security for those we leave behind
What Financial Wellbeing Is Not
The expression financial wellbeing is being used by a number of organisations in their marketing, for example some Fintech and financial institutions. Often, however, they seem less concerned about the wider issues of increasing happiness, but are using the concept in order that they can provide solutions in the form of financial products.
Whilst financial products certainly can help (for example with the ability to cope with a financial shock), I view financial wellbeing as a much broader topic.
It is important to remember that a person’s financial wellbeing may change, as they move through life stages their financial needs change. What might cause money worries for an employee at the start of their career can be different to those in the middle of their career and when they are approaching retirement.
Know Thyself
The first step to financial wellbeing, a clear path to identifiable objectives, is financial planning.
One way of summing up financial planning, therefore, would be: Work out what you want from life, then spend your money on that.
This may sound straightforward, however knowing what you really want from life is not that easy.
The first step is to understand what will make you happy, which will be unique to you (although will undoubtedly contain similarities to others).
The Role of the Financial Planner
How then can the financial planner help the client to be happier, not just wealthier?
Given the above, our first role will be to help our client work out what will truly make them happy.
This often means the use of coaching skills. Although this needs training, coaching skills are an essential part of helping a client work out what it is they want from life – to find purpose.
Another aspect is knowledge of financial wellbeing theories. This might include some of the research available on money and happiness, and also the study of behavioural finance.
In this way we help spread the idea that money is a tool to bring happiness, and not an end in itself, and ensure that the dialogue around financial planning is as broad as possible.
Barra Gorman FPFS
Chartered Financial Planner