What is a Financial Identity?

Like many others, I signed up last month to test ChatGPT, a conversational chatbot launched by OpenAI that offers web-based answers to nearly any type of inquiry. I was eager to ask it a very important question - what is a financial identity? ChatGPT defines financial identity like this, “financial identity refers to the ways in which an individual's financial status, history, and habits are represented and understood by financial institutions, employers, and other parties. It is an important aspect of an individual's overall identity, as it can impact their access to financial services, credit, and employment opportunities.”

ChatGPT is very smart, but how could that possibly be right? Should our financial identity be defined by the perspective of financial institutions, employers, and other third parties aiming at a narrow utilization of that “identity” for the purpose of a credit or employment decision? Is the way banks, employers, and other creditors see you your true and comprehensive financial identity? Identity is a very broad word - again, I refer to ChatGPT’s definition, “it refers to the qualities, beliefs, characteristics, and experiences that make a person unique. It is the sense of self that a person has and the characteristics that distinguish them from others.” That’s a solid definition of identity, so why does all of the web-hosted data that is scrubbed from around the world have such a myopic view of financial identity?

Let’s dive in deeper to understand how the narrowly-defined perspective is formed. Equifax, Experian, and Transunion are the credit bureaus used by a large majority of these institutions. These bureaus create a proprietary credit score using a fairly consistent set of data; your name, address, social security number, date of birth, and credit history - including your debts, payment history, and credit application activity. If you’re late on a mortgage or student loan payment, your creditor reports you to a credit bureau. If you don’t pay your taxes, they find out, and ding your score. If you have a good credit score it’s easier for you to obtain loans, credit cards, a job, and a bank account. If you don’t, then you find these same financial tools more challenging to access. Your payment and credit application behaviors and scores offer a tiny glimpse of your entire financial experience. You have little if any involvement in how these scores are generated, and you may struggle to change them if they erroneously leverage inaccurate or fraudulent data. As far as financial identity is concerned, there are several additional, meaningful data points that need consideration.

If you have ever worked with a financial advisor, you were obligated to complete a risk tolerance questionnaire. The objective of this form is to capture your attitude about risk and reward. A typical question might ask how you feel about a hypothetical scenario where you could gain $800, but lose $200 versus gaining $200 with no loss. These questionnaires fail to accurately document the complex emotions that you likely have about money and risk. You may believe you have a strong appetite for risk, so answer accordingly on the questionnaire. In reality, however, you may feel differently when it comes to moving your hard-earned money into a high risk investment portfolio. The inverse may also be true. You may communicate that you are unwilling to take any real risk with your money, but in reality, you’re eager for high returns and willing to invest in a fairly aggressive portfolio, happily accepting the risk tradeoff. Your responses to a risk tolerance questionnaire may also suggest a different preference for portfolio risk than that which you yourself transact in your own self-directed brokerage account. This nuanced and deeply personal approach to risk versus reward is most certainly an important part of your financial identity.

Financial wellness has gained significant attention over the past decade, a google search for the term results in over 563 million results. The Consumer Financial Protection Bureau (CFPB) defines financial well-being as “a condition wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.”* This aspect of financial identity is more emotional than third-party credit-based scores, but it is still measurable. Just as in the medical field, what looks healthy on the outside may be struggling with ailments wreaking havoc on the inside. Someone in a top income bracket may struggle with finding a state of financial well-being regardless of their large savings or investments. And the inverse is also true. Someone may appear to be struggling on the outside, but have confidence and security in their ability to achieve long term financial goals and manage or avoid debts; a perfect definition of financial health.

Today’s definition of financial identity is missing personal values, beliefs, and interests. The financial industry has poured billions of dollars into measuring, analyzing, categorizing, and investing in companies according to their commitment to ESG factors, or Environmental, Social, and Governance related measures of a company’s values. Values and interests play a significant role in our financial identities, finding expression in the products we choose to purchase, where and when and how we donate our hard-earned money, and how we invest. Our values drive every decision we make and are a core element of our identity. The current definition of financial identity ignores whether someone is late on a payment because their values dictated their personal priorities and may have been faced with a choice to pay off a credit card or feed their family. It abstracts what drives our decisions from behaviors and outcomes, and limits the very definition of identity to the ability of third parties to assume your actions based on limited and sometimes flawed data.

Your awareness and understanding of financial tools plays as critical a role in your financial identity as your access to and utilization of those tools. ChatGPT defines financial literacy as “an individual’s understanding of financial concepts and their ability to make informed financial decisions. This includes understanding basic financial concepts such as budgeting, saving, and investing, as well as more complex concepts such as taxes, insurance, and retirement planning.” I can’t help but wonder how literate someone needs to be in order to be “informed?” Rather than thinking of financial literacy as a destination, I think of it as an ever-evolving and undulating journey, understanding your specific options when they are most relevant. It often comes in small, time-bound spurts to address a pending financial decision, and once that decision is made, your focus and desire for deep understanding may shift. When I bought a home, I became “literate” about fixed and variable mortgage rates, points, terms, and dependencies. As soon as the decision about a lender was made, I moved on, forgetting much of the detail learned during my investigation and focusing my attention on new financial goals - including investing in college for my kids. Your never-ending financial literacy journey mirrors your financial identity and ideally maps to your specific goals, helping you achieve each one as it rises in priority.

Recall that your identity is the set of experiences that make you unique. Financial goals and the key performance metrics that are meaningful toward achieving each one are as unique as your fingerprints. It is your beliefs, experiences, and norms (i.e. your identity) that define your goals and the metrics that will help you determine when each is met. It’s clear, then, that another key component to your financial identity is your perspective on your own financial objectives and what it will take for you to believe that you achieved them.

You have likely heard something about each of these concepts related to your financial decisions - risk, wellness, values, literacy, and goals. Perhaps it’s time then that the definition of financial identity expands to include these parts our ourselves. When you reflect on yourself and learn to articulate each of these pieces of your financial identity, you may begin to feel more control over how they impact your decisions. Further, when you incorporate these parts of your identity into your decisions, with awareness, you may even begin to feel a greater sense of integrity in each financial transaction.

If you’re curious about your financial identity, take this quick survey now!

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