Given the prominence of academic research on happiness, well-being, and behavioral finance, it’s only natural for financial planners to integrate insights from positive psychology in their practice. Rather than focusing just on ensuring client’s financial stability, positive financial planning suggests that person’s money should be used as a tool to optimize client’s overall well-being.
Figure 1 shows the evolution of financial planning. In the positive financial planning framework, client’s wealth should be framed in terms of individual’s purpose in life, and the success should be attributed to the ability to optimize the quality of life and meeting client’s aspirations - not return on investment. In fact, increased income or return on investment barely raises the overall well-being. A study from Princeton University found that for incomes above $75,000, the correlation between an increase in happiness and income vanished.
Figure 2 illustrates the five elements, also known as PERMA, and goal categories related to each element. PERMA framework allows clients to see recommendations, cash flow analysis, and how solutions impact their goals and well-being. In using this approach, financial planners can also identify areas of concern.
Research on positive psychology and well-being indicates that individuals live a full life when they experience five elements[2]:
1. Positive emotion: life satisfaction, hopes, and joy
2. Engagement: passion, complete emersion into task/activity
3. Relationships: healthy, supportive and meaningful relationships
4. Meaning: feeling of purpose
5. Accomplishment: pursuit of success and achievement
It is invaluable to understand the concepts behind one's well-being and individuals should think through their goals using the PERMA elements.This will help the overall process of setting goals and will find better solutions for reaching one's goals.
photo by Valerie Kahan
Laurie Barry, CFP
Laurie P. Barry, CFP®, Wealth Advisor, Vice President-Wealth Management
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