Financial Health

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What is Financial Health

While there is no universal definition, financial health encompasses three important aspects of an individual’s financial life: financial security, financial control and financial freedom. It is a model for determining how well individuals are equipped to withstand financial shocks while creating the preconditions for building financial resilience or wealth.

FROM INCLUSION TO FINANCIAL HEALTH

Financial inclusion and financial health are fundamentally similar, though with different definitions regarding outcomes. While the ultimate intention of most financial interventions is to improve people’s lives, inclusion and health appear to be on different points of the spectrum, whether intentionally or not. For financial inclusion, the outcome is “to be included” – to have access to (at least one) account, which is being used (with some degree of regularity). Financial health seeks to understand how being “included” (or, not) impacts the financial security, freedom and resilience of individuals and communities. Ultimately, we would hope to learn which products and services, in what bundles, works for whom and in what settings.

From financial inclusion to financial health

The building blocks of financial health

Measuring financial health

The role of the private sector in driving financial health

Financial health and policy

Financial Security

Financial security is the ability to meet current and ongoing commitments, including basic needs and planned expenses such as food, rent, bills, debt payments, and health care. It also includes expenses earmarked for the future, such as saving for old age, and higher education costs. In addition to planned expenses, financial security also addresses the ability to manage unexpected or adverse events, such as car breakdowns, job loss or sudden health emergencies. This component is often termed as ‘financial resilience,’ or the ability to respond to and recover from shocks.

The following questions help describe whether or not an individual has succeeded in achieving financial security:

Are they able to successfully manage their financial commitments on a day-to-day basis?
Are they able to secure their financial future or demonstrate a forward-looking attitude in regards to their finances?
Are they prepared to handle both small emergencies and large shocks?

Financial Freedom

Financial freedom represents a financial condition beyond financial security. It is also more subjective than financial security as it emphasizes individual financial goals and things one values.

The following questions help determine whether an individual has reached a state of financial freedom::

Are they able to stay on track to meet their financial goals?
After paying off essential expenses and earmarking savings, is sufficient money left over for doing the things they enjoy?

Some definitions of financial health include the ability to feel in control of one’s finances, with no or limited financial distress. Financial control is a subjective measure of financial health because the feeling of ‘being in control’ or stressing can vary for individuals and households, despite similar financial conditions.

The following questions help describe whether or not an individual has succeeded in achieving financial control

Are they confident about their financial situation, presently and looking to the future?
Do they believe they have the ability to make changes to their financial lives for the better?

Financial Control

The following questions help describe whether or not an individual has succeeded in achieving financial control:

Are they confident about their financial situation, presently and looking to the future?
Do they believe they have the ability to make changes to their financial lives for the better?

The following questions help describe whether or not an individual has succeeded in achieving financial control:

Are they confident about their financial situation, presently and looking to the future?
Do they believe they have the ability to make changes to their financial lives for the better?

Why FINANCIAL HEALTH?

Financial health is an intricate subject, more layered and complex than the relatively straightforward concept of financial inclusion. With its focus on outcomes, financial health is arguably a more customer-centric approach, one that offers principles to define impact more holistically, measure it systematically and create it in a sustained and meaningful manner.

Defines impact in ways that are more customer-centric

Financial health accounts for both objective and subjective ways to define impact, embodying the principle that impact can mean different things to different people and is best defined by the individuals themselves.

Measures what matters

While conventional data on the number of registered and active accounts and transaction volumes and values remains relevant, financial health provides a deeper understanding of how financial services impact people’s lives. With a range of perceptive indicators such as ability to come up with liquid funds in a finite time period to having money left over after essential expenses, financial health offers a more nuanced approach to measuring the impact of the products and services our partners offer.

Measuring financial health is not as straightforward as measuring financial inclusion, given the complex nature of people’s lives and the environments they inhabit. As a starting point, it is important to separate the outcomes of financial health (what we are aiming for) from the drivers of financial health (how we get there). Second, it is important to consider both objective financial conditions such as income, debt to income ratio and net-worth as well as subjective perceptions such as a person’s confidence in their financial futures and a sense of control and freedom over their finances, in order to get a true picture of people’s financial lives.

What’s in it for the Private Sector, Policymakers and Development Community?

The Private Sector

For financial institutions, fintechs and others working to develop financial solutions for customers, financial health is a fresh lens with which to examine people's needs and aspirations, not to mention if interventions are in fact improving their lives. This kind of approach has both a social and commercial benefit, allowing organizations to build more financially healthy customers, and by implication, the financial health of their institutions. Financially healthy customers will save more, borrow responsibly and manage risks better. They could be more financially capable, and possibly use a diverse range of financial products and services that will keep them more than just financially included in the financial system, but rather more financially engaged.

Policymakers and Regulators

For governments and public institutions, financial health is a key objective reflected in their broader mandates to ensure the safety, productivity and welfare of their citizens. A financial health lens is then useful to formulate and enforce financial policies and regulations and drive public initiatives such as responsible financial education, customer protection, decent jobs and social safety mechanisms that improve the financial health of individuals and communities.

Development Community

For the development community that has been focused on impacting customers' lives through financial inclusion or the provision of affordable financial services, the financial health approach can offer a larger and more comprehensive perspective to measure, create and sustain impact. A financial health lens is needed to revisit and recast our efforts in financial inclusion, and to understand what products, in what bundles and in what settings contribute to the financial health of customers.

The global centre of financial health

The Global Centre of Financial Health in Singapore functions as an impartial financial health convener, innovation supporter and knowledge hub. It aims to develop a shared understanding of financial health through collaborations, the cultivation of data and insights, and thought leadership. It encompasses three pillars.

Capability	Capital	Community

The capability pillar draws from the community pillar to design and develop interventions that improve the financial health of end clients. This pillar rests on the principle of "test and learn", creating an experimental environment for innovators in the financial sector to build transformative solutions that enhance the financial health of end clients.	The capital pillar functions like an investment platform that provides grants to test, diversify and scale research and programmatic initiatives focused on financial health. This pillar will also explore venture capital, private equity and debt for financial health initiatives.	The community pillar focuses on global advocacy and research and insights to build and disseminate a body of knowledge on financial health, the building blocks of financial health, measurement frameworks and programmatic interventions.
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Financial health in Numbers

+5M

Active Clients
Reached by
UNCDF-supported FSPs

$31M

in Savings Mobilized
by Financial Service
Provider Partners

47

Public and Private Investments Completed

57

Local Governments
Supported

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