Perceptions or behavior? An evaluation of CFPB's financial well-being scale using household financial ratios

Abstract

This article creates a typology to assess four categories of financial well-being based on a combination of household financial ratios. Most financial well-being scales are based on subjective measures (i.e., perceptions), as objective markers have not reliably encapsulated financial well-being. We define a conceptual model, the equilibrium model of the household (EMH), and use discriminant analysis to extract categories of financial well-being. The continuum of these categories is financially distressed (lowest), financially fragile, financially stable, and financially flourishing (highest). Our results demonstrate these categories are consistent with the Consumer Financial Protection Bureau's (CFPB) Financial Well-Being Scale, a subjective scale. Higher CFPB scores were associated with higher category ranks. Our results provide additional evidence to support construct validity of the CFPB scale and may offer more actionability to the CFPB scores because specific financial outcomes/behaviors associated with our categories of financial well-being correspond to ranges of the CFPB scale. However, we argue that the claim whereby the CFPB scale measures a concept beyond traditional financial measures is imprecise and may even reflect the existence of noise in the CFPB's data, raising questions about its reliability.