Financial Vulnerability
Financial vulnerability is the likelihood that an individual will experience financial hardship—a state of distress where they cannot maintain their standard of living. Unlike financial well-being, which primarily focuses on one's present financial state, financial vulnerability focuses on the future, specifically (1) the likelihood of having to deal with a financial hardship or setback and, ultimately, (2) the ability to overcome this financial hardship should it arise. Financial vulnerability involves the perceived likelihood of an unexpected financial setback and the ability to handle an unexpected financial setback) and the likelihood of an unforeseen financial setback and the ability to deal with an unexpected one.
Objective and Subjective Financial Vulnerability
Financial vulnerability has both subjective and objective components. Objective financial vulnerability deals with (1) the likelihood of a significant financial setback occurring and (2) a consumer's ability to handle an unexpected financial setback. Subjective financial vulnerability refers to (1) the consumer's perception of the likelihood of an unexpected financial setback occurring and (2) their perception of their ability to handle an unexpected financial setback financially.
Four situations illustrate the difference between subjective and objective financial vulnerability.
Tom is neither objectively nor subjectively vulnerable. He is financially sound, living within his means, and could handle an emergency financial setback if one were to arise soon. He is content with his level of financial security and not worried about an unexpected setback. Consequently, he is neither objectively and subjectively financially vulnerable.
In contrast, Todd is objectively vulnerable but not subjectively vulnerable. He is living beyond his means and trying to keep up with the Joneses. Consequently, he would have difficulties if an unexpected financial obligation arose. However, Todd’s objective level of financial vulnerability and his perceptions of his financial vulnerability do not align. In his mind, an unexpected financial emergency is very unlikely, and he believes he can deal with it if an emergency does arise.
Valarie is both objectively and subjectively financially vulnerable. However, unlike Todd, she realizes that an unexpected financial setback could occur and may have difficulty overcoming such an event. She may be living paycheck to paycheck or continuously spending way beyond her means despite earning a higher income. Because of this, she feels stressed about her financial circumstances. Either way, Valarie realizes she could be in financial trouble if an emergency arose.
Carrie is not objectively financially vulnerable but is subjectively vulnerable. Carrie is not objectively financially vulnerable and could likely handle a financial setback if one were to arise. Although realistic about her spending and effective at financial planning, Carrie constantly worries about potential “what if” scenarios and unexpected financial setbacks.
People's subjective assessment of their current and future state often influences their financial decisions. For instance, an individual’s perceived financial stress negatively influences academic performance, and perceived financial vulnerability can increase pro-social actions, such as making donations. When consumers are subjectively vulnerable, they often perceive higher financial scarcity, which can lead to a heightened focus on the short term rather than the future, resulting in tunnel vision and an enhanced likelihood of making suboptimal financial decisions.
Making Better Decisions in the Present
Non-judgmental awareness mindfulness” intervention is a vital tool for those who perceive themselves as highly financially vulnerable as it calms the mind and recalibrates the current financial state. The “openness to experience mindfulness” intervention—a tool for those who have accepted their current financial state or who do not feel financially vulnerable—may be a better tool as it would encourage action, allowing individuals to improve their financial state, thus mitigating objective financial vulnerability.
The potential of mindfulness in enhancing consumer, societal, and environmental well-being is well recognized. Research suggests mindfulness:
It may significantly shape consumers' money attitudes and credit intentions/use.
Mindfulness can be a therapeutic modality to promote financially prudent life decisions. I
Higher levels of mindfulness are associated with a reduced discrepancy between one's existing and desired financial state.
Mindfulness may improve one's relationship with money by reducing insecurities and increasing satisfaction with present circumstances.
It can also enhance one's knowledge of the true nature of money, reduce materialistic cravings, and magnify the strength of specific intrinsic values, such as community, relationships, and self-actualization.
