What is Financial Well-being, and Why Does it Matter?
Understanding the pillars of financial well-being – spending, saving, borrowing and planning – to help achieve financial freedom
Nearly 40 years ago, the National Endowment for Financial Education became one of the first organizations to wholly dedicate its efforts to delivering free, quality financial education to Americans, and specifically to younger generations. Their hope was to help people navigate financial decisions and identify choices that would improve their financial well-being. Today, their legacy lives on through Financial Literacy Month, a month-long observance in April dedicated to the importance of finances.
As a bank, financial literacy and the financial well-being of people is pretty important to us. To commemorate Financial Literacy Month, and to help unpack how Capital One is helping customers and communities 365 days a year to achieve financial well-being, we spoke with our own Mili Mittal, VP of CreditWise.
Understanding the Pillars of Financial Well-being
At Capital One, we believe financial well-being is fundamental to creating thriving individuals and communities, which is core to our mission to change banking for good. At an individual level, we define financial well-being as the ability to spend wisely, build savings for the short- and long-term, manage credit and debt, and handle things life may throw at you while planning for the future. There’s no one-size-fits-all approach to achieve financial well-being, but luckily there are plenty of resources, products, and tools available to help people improve their financial lives.
“Financial well-being is unique to each individual because finances are very personal and everyone’s circumstances are different,” says Mittal. “For some, feeling financially secure means knowing they can handle a financial emergency. For others, it’s being on track to reach their goals or having the financial freedom to make the choices that allow them to enjoy life.”
At Capital One, we recommend people develop financial goals around four key interrelated areas – spending, saving, borrowing and planning – to help achieve financial peace of mind, confidence and a state of well-being.
“Knowing is half the battle”, and keeping track of what you earn and spend each month is one of the most important money management goals to work toward. “When it comes to spending, you should know your income, and track your spending so you know when you might need to adjust and by how much. A helpful way to organize is by bucketing your recurring, fixed bills versus your discretionary, variable spend. If you have a sense of what your average monthly discretionary spend is and you’re tracking spend daily or weekly, you’ll know to adjust before it’s too late.” says Mittal.
You’ve likely heard the old adage to “live within your means”, which means that what you spend each month is less than the money you bring in each month. Today, this advice still rings true, and there’s a specific step you can take to better control your spending in the event you want to save more. “It’s important to step back, evaluate past money decisions and understand where (or when) you might be overspending relative to your goals. It’s helpful to understand your state of mind when you spend, so you can be more targeted in adjusting your spending patterns.” says Mittal. Studies like the Capital One Mind Over Money study shed light on how deep stress can impact financial decision making and offers valuable tips to help you make better financial choices.
That's why Capital One has created resources that can help you track toward your spending goals. Capital One’s Learn and Grow offers educational content, with tips and how-to’s like How to Make a Budget. And we created Capital One Shopping, a free browser tool, to help you find great deals when you shop online, while Eno, your Capital One assistant, notifies you about suspicious charges, when a bill is higher than usual or when a free trial is about to end.
If the pandemic taught us anything, it taught us that financial emergencies are bound to happen and we need to plan for the future. Last year, overall consumer debt declined due to decreased spending, yet about 56% of Millennials accrued more credit card debt during the pandemic. The reason? Millennials were the most likely to have had their income compromised and least likely to have had adequate emergency savings.
Saving involves setting aside money today to prepare for the future – both the short- and long-term. “We recommend that folks hang on to the savings habits cultivated during COVID-19 and/or make it a priority to create a financial safety net,” Mittal says. “Savings are designed to protect you and your family, at least in part, from losing your financial security or derailing your long-term financial goals in the event something unexpected happens.”
Working toward a short- and long-term savings goal looks different for everyone, but the good news is that there are plenty of ways to save, even if money is tight, so that you can make the most of every penny you earn. Get started with an emergency fund by learning how much you should save and where, and learn about tips for saving for your future, such as starting a high-yield savings account like Capital One 360, which earns higher than average interest on your balance amount.
The key to borrowing money is to do so strategically, Mittal explains. Borrowing can provide you with much needed financial freedom, the ability to take advantage of time-sensitive investment opportunities and raise your credit scores.
“Credit cards can be one of the most convenient and immediate borrowing options for consumers,” says Mittal. “Using a credit card responsibly can be a valuable way to build and maintain good credit, and can lead to earning rewards, such as cash back, that you can use to enjoy other experiences. The convenience of credit cards can be seductive, though. It’s important to borrow only as much money as you can afford to pay back.”
At Capital One, we strive to make borrowing and building credit easier. That’s why we offer the free credit monitoring tool, CreditWise, to help you develop a clear understanding of your credit, the knowledge necessary to proactively improve their scores, and the power to protect their credit so that they can enjoy the freedom that having a good credit score affords.
Planning for the future is imperative, as many of the most enjoyable things in life require financial planning. From going off to college to getting married, to planning for big life events such as starting a family, buying a home or setting your sights on retirement, making the commitment to planning can unleash a level of security and freedom that will serve you in the present and in the future.
But too many Americans put off planning. According to the U.S. Federal Reserve Board, 25% of American adults don’t have retirement savings or a pension. And the FINRA Investor Education Foundation reports that 48% of people with low investment knowledge feel anxious when thinking about their financial future.
“Getting the most out of your money starts with understanding the interrelationship of every financial decision and event in your life – which includes future life events,” says Mittal. By thinking about ourselves in the future, while keeping in mind our current self, we have a tendency to save more money for long-term purposes.
Now is the time to learn, overcome barriers, and get clear on what really matters to you. With the power of perspective and a plan in place, possibilities begin to appear where you might not have seen them before. “We designed Capital One Money Coaching, available for free to everyone whether you’re a Capital One customer or not, with life planning in mind to help you set goals and a personalized action plan to work toward them,” Mittal says.
With Money Coaching, and effective financial planning, you have the opportunity to change your relationship with money. To remove the burden of stress and anxiety, uncover what inspires you, what you dream about, and what makes you feel alive. With a financial plan in place, you can reach your goals in life faster, becoming more of who you really want to be.
The Connection Between Finances and Overall Well-being
In a 2019 study, Capital One found that stress dominated the financial mindspace of Americans with 77% of respondents reporting that they feel anxious about their financial situation and 58% reporting that finances control their lives. The study found that, under the effects of stress, people are worse at saving and budgeting, feel less in control, are more impulsive in how they spend their paycheck and are less likely to agree that success comes to those who work hard – making a clear connection between financial health and overall health.
Interestingly though, even during a seemingly stressful time, about 43% of Americans picked up a new financial habit as a result of the uncertainty of COVID-19, and 94% plan to continue that habit in 2021. The most popular include setting a budget, cutting spending, starting to save, tracking credit scores more closely and learning about investing.
“Although many people faced financial setbacks in 2020, there is a sense of optimism around being able to get back on track in 2021,” says Mittal. “The pandemic forced us to shift our attitudes about money and financial habits that we followed during more “normal” times, and evaluate what has (or hasn’t) worked to better prepare ourselves for the future and create financial resilience.”
Investing in the Financial Well-being of Our Communities
In addition to helping our customers achieve financial well-being, Capital One is also looking out for the health of our communities.
Through the Capital One Impact Initiative, we’re focused on creating a world where everyone has an equal opportunity to prosper by advocating for an inclusive society, building thriving communities and creating financial tools that enrich lives.
Mittal explains that, “while we ultimately want to help people build wealth, we must also work to remove barriers and increase access to opportunity.”
We’ve done this through investing in diverse communities and businesses, supporting organizations that expand educational and economic opportunity, particularly for Black and Latinx communities, providing capital to finance affordable housing developments, expanding mentoring, training and advisory programs, and providing opportunities for individuals who face impediments to unleash their potential and thrive in a rapidly changing employment market.
Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.