As we have talked with employers about financial wellness benefits, we’ve noticed that there is often confusion about the terms financial wellness and financial literacy. A lot of people use the terms interchangeably when the reality is that financial literacy is just one component of financial wellness.
In this article, we’ll define financial wellness and financial literacy, show how they are related, and then talk about what a meaningful benefit might look like for employers.
What is financial literacy?
In the finance world, everyone defines financial literacy a little differently. You can read more about that for yourself in this study. The bottom line is that financial literacy primarily has to do with financial knowledge and, only to a lesser extent, skills. It is also important to make the distinction that financial literacy does not guarantee that someone will act on their financial knowledge and skills. It just means that they are educated on personal finance and theoretically know what to do in different financial situations.
How is Financial Literacy measured?
Financial literacy is most often measured through surveys. These surveys test respondents’ knowledge of financial concepts like risk diversification, interest, inflation, and more to gauge the financial literacy of the populations that are being studied. Some recent examples include NFCC’s 2020 Consumer Financial Literacy Survey, The Charles Schwab Financial Literacy Survey, and The S&P Global FinLit Survey.
While you will more than likely never be a participant in a broad financial literacy survey, you can get a better sense of how financially literate you are by taking Savology’s 10-question financial literacy quiz. You can take the quiz as many times as you want and you will get different questions every time. At the end of the quiz, you can see how you compare to other Savology users and track your results over time.
What is financial wellness?
While financial literacy primarily has to do with financial knowledge, financial wellness is much more comprehensive. It refers to the actual and perceived state of your overall finances. It is affected by every part of your financial life, including financial markers like your income and savings levels, risk-related factors like your level of insurance coverage, and even social and emotional factors.
Most importantly, financial wellness requires action. It requires you to not only increase your awareness of your finances but also to take intentional and mindful steps towards achieving financial well-being. This includes kicking bad habits you may have (retail therapy, anyone?). However, it also includes developing good habits like saving more or making a budget, and most of all, having a solid financial plan and sticking to it.
The opposite of financial wellness is financial stress. We won’t go in-depth on financial stress in this article, but just be aware that the more financial stress you are experiencing, the harder it will be to experience financial wellness in your life. It may not surprise you to learn that your perception of your financial situation has as much of an effect on your financial wellness as any other factor. Here’s what the National Financial Educators Council have to say about it:
Beyond just your savings and income levels, [financial wellness] describes how you feel about your financial situation – that is, your money relationship. Some wealthy people experience heavy financial stress, while some low-income folks feel secure and satisfied with where they stand financially. Thus financial well-being has less to do with how much money you have than with your attitude and capabilities: do you have a budget you can stick to? Could you handle an unexpected expense? Do you feel overwhelmed, or do you feel inspired when you think about money?
So, as you can see, financial wellness is a broad concept that encompasses many aspects of financial life, but if we know anything, it’s that financial wellness is not just financial knowledge.
How is Financial Wellness Measured?
According to Prudential, financial wellness can be measured by looking at 3 aspects of a person’s financial life: day-to-day finances, financial goals, and risk management. Here are some examples of questions to help you consider your financial wellness in these 3 key areas:
- Day-to-day Finances
- Do you set and keep a budget?
- If you have a credit card, do you pay it off regularly or are you racking up debt by just paying the minimums?
- If you had an unexpected $1000 expense come up, would you be able to cover it? Would you be able to cover it with emergency savings, or would you have to dip into a retirement account or go into debt?
- Financial Goals
- Do you have a plan for retirement with savings goals? Are you on track to meet your goals?
- Are you maximizing employer contributions to retirement accounts?
- Do you have other savings goals? If so, do you know how much you need to save, and do you have a plan for getting there?
- Risk Management
- Do you have all of your savings in one pot, or are they spread out over a variety of savings accounts and investments?
- Do you have the necessary insurances to protect you and your family in case something ever happens? Some examples include health insurance, homeowner/renters insurance, auto insurance, life insurance, and disability insurance.
I know, it’s a lot to consider, but it’s vital if you want to get ahead on your finances and be on track to hit your goals. If you want to get a meaningful view into how you are doing without keeping track of a half-dozen spreadsheets or paying to meet with a financial advisor, sign up and get a personal financial plan through Savology. Savology looks at your financial situation from multiple angles and gives you helpful tools for tracking and improving your financial wellness.
One especially useful tool for self-evaluation is the report card. It grades you across multiple financial categories and gives you useful insight into why you got the grade and how you can improve.
The Relationship Between Financial Wellness and Financial Literacy
By this point in the article, it should be clear that while financial literacy and financial wellness are related, they are not the same thing. Simply put, financial literacy is knowledge and, just like other forms of knowledge, if you don’t apply your knowledge, it won’t do you any good and you’ll likely end up losing it.
In a 2013 study, researchers found that efforts to increase financial literacy through education alone had an extremely low correlation with changes in the financial behaviors of those they studied, just 0.1%. This correlation was even weaker among lower-income participants. The authors went on to suggest that for financial education to change behavior in lasting ways, it needs to be applied soon after learning. Otherwise, we forget. That’s just how brains work.
The National Financial Educators Council agrees. On their website, they have this to say about the relationship between financial literacy and financial wellness:
Financial wellness requires action, not just learning in the classroom. While financial discernment is without a doubt necessary for financial well-being, an application of that knowledge is required to modify habits for the better. Knowledge of a 401(k) plan is great and puts you ahead of most people, but without exploring the retirement savings options to your specific situation, that knowledge will be of no use and leave you as unprepared for retirement as someone who is financially illiterate.
So, as you can see, financial literacy is important for financial wellness, but without an opportunity to apply that knowledge, it is all but useless.
Financial Wellness as a Benefit
In the world of employer benefits, financial wellness has too often been limited to just one aspect of financial wellness, like financial literacy, early wage access, or retirement savings. However, we are seeing that more and more employers are moving toward a more holistic approach, and for good reason.
What Should a Good Financial Wellness Benefit Look Like?
We have already established that financial literacy is not financial wellness. So, a meaningful financial wellness benefit needs to go beyond simply improving employee financial literacy. It even needs to go beyond offering a 401(k) or HSA program. It’s about:
- Giving employees a clear picture of their current financial situation
- Helping them have a vision and plan for the future
- Cultivating healthy financial habits and connecting employees with resources to help them get there
Many of the financial wellness benefits currently available to employers are hyper-focused on just one element of financial wellness, whether it be financial education, budgeting, paying off debts, etc. While these are all worthy areas of attention, they fail to capture the bigger financial wellness picture.
Employers who work with Savology provide their employees a complete financial wellness benefit. Each employee receives a comprehensive digital financial plan that is unique to them. This financial plan includes a financial report card that gives them accurate insight into their current financial situation, guidance on what they can do to reach their goals, action items, activities, and much more. That financial awareness coupled with prompts to take action and educational resources makes a real difference in helping employees reach their financial goals. Employees also get access to a carefully curated list of service providers to help them close gaps in areas like insurances, budgeting, and savings goals. And finally, financial coaches can help employees in any area where technology alone falls short.
On the employer side, Savology offers a co-branded experience with detailed reporting on employee benefit adoption as well as aggregate employee wellness metrics so that the employer can track how their employees are doing and take any needed steps to ensure their wellness.
So, back to the question that started out the article. What is the difference between financial wellness and financial literacy? While financial literacy can promote financial wellness, just knowing about finance isn’t financial wellness in and of itself. In order to truly achieve financial wellness, that financial knowledge needs to be applied and healthy financial practices need to become habits. Taking a comprehensive approach to financial wellness is the only way to make a lasting impact.