Giving Compass' Take:

• The authors at Brookings discuss the financial well-being in low- and moderate-income households.

• What household demographic and financial characteristics predict financial well-being? What is the relationship between hardships and changes in financial well-being?

• Learn about Brooking’s ideas of what better housing policy looks like.

Thirty-nine percent of U.S. adults reported lacking sufficient liquidity to cover even a modest $400 emergency without borrowing or selling an asset, and 60 percent reported experiencing a financial shock (e.g., loss of income or car repair) in the prior year. While facing precarious financial situations may leave households unable to manage essential expenses and plan for the future, the research also suggests that U.S. households report feeling optimistic about their finances. These disparate findings suggest a complex interplay between a person’s objective financial circumstances (such as their savings) and their own perceptions of their financial situation.

To better understand how people think about and experience their financial circumstances, researchers have recently engaged in efforts to define and measure “financial well-being,” a term that encompasses a person’s holistic financial state. Existing research typically uses relatively objective measures (e.g., income, savings, debt) to measure household financial circumstances. However, relatively little research has operationalized financial well-being using subjective measures (e.g., perception of one’s financial circumstances, the sense of control over financial lives). This points to a potentially large gap in the research, as this subjective sense of well-being may capture a more complete picture of someone’s financial reality than objective measures. For example, someone with low levels of liquid assets and a low income may still be able to rely on friends and family or informal income streams to help buffer them against financial shocks. This dynamic may not be captured in many traditional financial measures, even though it is integral to the overall financial security and well-being of a person.

Read the full article about financial well-being in low and moderate income households by Stephen Roll, Olga Kondratjeva, and Michal Grinstein-Weiss at Brookings.