Improving the quality of life and enjoying a high level of financial well-being is the ultimate goal of many economic and social policies. Especially after the great recession and the global economic downturn in 2007, having stable financial well-being and being able to cope with everyday economic threats is a critical skill for U.S. households. However, what it means to have a stable financial life and well-being, and how we can attain it is under scrutiny. Studies from several academic disciplines aim to define what financial well-being is. Recently, Consumer Financial Protection Bureau (CFPB) developed Financial Well-Being scale that is aimed at measuring financial well-being of Americans to see how an individual is faring regarding financial well-being and to reflect consumers’ perspectives in measuring financial well-being.
While our study is in line with broader efforts to define financial well-being, this study contributes to the field by exploring the latent structures of financial well-being using the CFPB Financial Well-Being scale. Replicating CFPB financial well-being score first and then extends to find the better fitting model; this presents the more explicit pictures on how financial well-being should be understood and what Americans think of financial well-being is.
Data & Method
Data: This study uses the public use file of the 2017 National Financial Well-Being Survey. The total sample is 6,112 and is nationally representative with the survey weight.
Measures: First, this study replicated to find the baseline financial well-being structures as directed in the CFPB financial well-being scale technical report. Then, the authors expanded the previous study by trying to find the best-fitting latent structures of the financial well-being and by examining the item discrimination and difficulty distribution based on Item Response Theory (IRT) using Mplus v. 8.
First, the authors were able to successfully replicate the CFPB’s financial well-being scale development procedures. Then, the authors expanded the results by fitting a three-factor model using latent factors-financial management, financial freedom, and financial insecurity. The model comparison results showed that the three-factor model based on the authors’ study statistically significantly fitted better to the data, which indicates that financial management, freedom, and insecurity are important factors in explaining financial well-being. Also, this study found that people’s confidence in handling day-to-day spending are higher than dealing with unpredictable future events, even small one. In other words, Americans feel financially insecure for small, yet inconstant changes, even though they can make ends meet, pay bills, manage their life currently.
Conclusions and implication
Reviewing the latent factor structures enhances the understanding of the true picture of financial well-being, and how Americans perceive it. This study also examines how financial management, freedom, and insecurity are important and how it can, as a combination or separately, affects the perception of financial well-being.