Financial Health, Part 1

What is financial well-beingIf we’re going to have a practice to achieve financial health, then we need to know just what that is.

I think all too often we equate our financial health with our level of income.  For most of us, we go to school to go to college to earn a degree to get a good job.  As we climb the ladder at work our income becomes a measure of how successful we have been in our efforts.

But income is not a very good indicator of financial well-being.  Consider two people, Jack and Jill, who both earn incomes at the $250,000 level so talked about in the news.  What do their levels of income tell us about them?  Are they equally financially healthy?

According to Wikipedia, in 2006 1.93% of American households had incomes exceeding $250,000, compared with a median household income of about $50,000.  So they earn a high income when compared with most Americans, and are probably either professionals or business owners with a high level of status.  But beyond that what can we infer?

Suppose both are 50 years old, and that Jack has a net worth of $125,000 while Jill has a net worth of $1.25 million.  What happens to either of these persons if they were to lose their jobs tomorrow?  Jack has less than half of his former annual income available to meet expenses, while Jill has five times that same amount available.  That is, assuming they consume at their current level of income Jack would burn through all of his assets in less than half a year, while Jill could meet five years of such expenditures.

Would you expect Jack and Jill to have the same level of anxiety if both lost their jobs tomorrow?  But that is exactly what the positive psychologists are suggesting when they use a person’s income to measure the impact of money on a person’s emotional happiness.

There is little correlation between income and happiness because income, by itself, has very little meaning regarding a person’s financial health. 

I will pursue this topic further in my next post.

One thought on “Financial Health, Part 1

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