A person's financial well-being is about more than just finances, according to a new research paper from Morningstar behavioral economist Sarah Newcomb.
The paper – When More Is Less: Rethinking Financial Health – draws on results of a 2016 survey of U.S. adults to create a model of financial health using demographic, psychographic, emotional and behavioral variables.
Traditional definitions of financial wellness focus on the economic aspects of a person's life. A finance-only definition of well-being assumes that emotional well-being will automatically follow economic stability, according to Newcomb.
However, Morningstar's research shows otherwise.
"There are the clients who fear not having enough, despite every indication to the contrary," Newcomb writes. "There are those who are so fearful of making a wrong choice that they refuse to make any, leaving their wealth to slowly erode in cash accounts. Other clients, in contrast, spend too freely, choosing blissful ignorance about the damage done to their bottom line."
Ignoring the emotional aspects of clients' financial lives does them a great disservice, according to Newcomb.
Based on these findings, Morningstar developed a simple model of financial health that incorporates both the economic and the emotional aspects of well-being. According to this model, a person who isn't both economically sound and emotionally well is not financially healthy.
Morningstar shows that financial behavior and emotional well-being are affected by two simple mental factors that advisors can target to better help their clients achieve financial health. According to Newcomb, advisors can use this information to assess how healthy their clients are by adding two simple ideas to onboarding interviews and check-in conversations.
The first factor looks at economic stability and how "time is money." People who think further into the future tend to save more frequently and build larger savings balances in retirement and nonretirement accounts, according to the paper.
Compared with those with time horizons of less than a year, people with full financial life plans had, on average, 20 times more money saved. Even looking ahead by just a few years increased savings fourfold.
This effect was significant even when controlling for income, age, education and gender. ("In other words, life circumstances matter some, but perspective matters more," Newcomb says.)
