Financial Well-Being, Part 3: A New Path to Financial Literacy

Welcome back to our continuing series on financial health in the American workplace. If you missed parts one and two in this series, we covered financial stress and its deleterious effects on both individuals and their employers, as well as new solutions coming out of the workplace itself to help break the cycle of debt facing the approximately 42% of American employees who report feeling financial stress, according to a study from Salary Finance, Inside the Wallets of Working Americans: the 2^nd Annual Salary Finance Report.

The ongoing personal debt crisis affects people across nearly every income level, with negative repercussions for employers as well as employees. And it’s not a problem to be solved simply through the proliferation of new online and app-based fintech tools, even though they have been heralded as the solution to the financial wellness gap here in the U.S.

While these new technologies offer unprecedented access to user-friendly, and to some, hitherto inaccessible financial services, without money to spare or financial literacy to understand the game beyond the app, they can still fall short of their goal of financial inclusion. Some potential users might not even have the bandwidth to become engaged with them. Right off the press, in Salary Finance’s most recently fielded research, which reflects employees’ thinking as COVID-19 was raging through the United States, we found that as far as financial literacy was concerned, the top 3 topics people would find most helpful to learn more about were:

What to do if I lose income
How to build up emergency savings
How to reduce spending

Earlier this year, Salary Finance’s 2020 research confirmed that financial stress is itself a considerable drain: those with financial stress are 11 times more likely to have sleep disturbances and lose an average of 3 hours a week and 1.6 sick days a year due to their stress levels. All in all, this is projected to cost employers an estimated 13 to 18% of annual salary costs this year. Financial stress is a burden to those who carry it as well as those around them, and it’s not going away until we address its root cause. Lack of financial literacy adds to this stress, but as we’ll discuss in this article, while gaining a level of financial literacy can help, it is not a panacea for the root cause.

Financial literacy among Americans is not just low—it is currently on a decline. According to a study published by the FINRA Investor Education Foundation on American individuals’ financial awareness, while in 2009, 42% of respondents answered four out of five financial questions correctly, that number dropped to just 37% in 2015. And currently, the United States holds 14^th place for its proportion of financially literate adults, just above Botswana in the global rankings.

According to a study put out by the World Bank Development Research Group in tandem with the George Washington University School of Business, the U.S. economy — the world’s largest — is made up of people only 57% of whom are financially literate. Unfortunately, we can solve neither high financial stress nor low financial literacy with higher salaries alone. According to the Salary Finance research, 32% of all respondents ran out of money before payday — and the same percentage of those in the over-$200,000 income bracket did, as well.

Money management, rather than just money, is what’s lacking, but apparently it’s not so easy to educate people about finances. Looking at a meta-analysis of the relationship between financial education and resulting financial literacy, Financial Literacy, Financial Education and Downstream Financial Behaviors, it becomes apparent that while not necessarily counterproductive, financial literacy interventions seldom lead to meaningful improvement.

The research, an analysis of 201 prior studies on the subject, including a broad array of educational methods from workshops to one-on-one counseling, found that overall, these endeavors accounted for a negligible 0.1% of the variance in surveyed financial behaviors. Looking at the data for only low-income groups, the effects of financial literacy education were even lower. If more traditional financial education doesn’t leave participants with improved financial education, leaving them essentially no better off than they were before, how, then, can we impart meaningful financial knowledge, which is essential for financial wellness?

Salary Finance found that individuals turn to the same general sources of financial advice, determined less by their Financial Fitness Score (which we discussed in more depth in the first part of this series) and more based on three factors: their pre-existing degree of financial literacy; the amount of money they have available to invest; and their level of comfort with each specific advisory option. The counsel they turned to came from a small pool of choices, and while overall those with higher financial wellness were more likely to go to banks and financial advisors, online sources showed up as equally popular among people of all financial fitness levels. This backs up the hypothesis that new digital fintech offerings are offering new levels of inclusivity.

However, while digital services are opening up access to financial tools and advice to a growing population across the financial fitness spectrum, there are numerous factors getting in the way of people improving their financial situations. And here, Salary Finance’s Financial Fitness Scores again come into play. When asked, “Thinking about some of the things that may be stopping you from making better money and financial decisions, do you agree or disagree that…,” respondents with lower Financial Fitness Scores were more likely to choose, out of nine possible options, that they were less likely to engage with financial education because they felt intimidated or were not sure where to turn to for advice. Furthermore, timing matters — in other words, when financial lessons are learned, can be the key factor in their retention and practical implementation. As we know, mainly by using learned knowledge shortly after it’s obtained, can we cement it before it recedes to the backs of our minds.

However, as we began to investigate last time, employers are in a unique position to be of service to their employees here. The workplace, already the site of financial planning vehicles such as retirement savings, is also a natural place to discuss financial literacy. The same reasons that support offering employees financial benefits also support financial literacy programs for employees. Key among these reasons is employee sentiment: this year’s Salary Finance report found employees had high levels of trust in their employers’ ability and desire to financially help them — and these rates were high even among those feeling financially stressed.

How can employers begin to take a proactive role in the financial literacy of their employees? First, they must understand their employees’ needs — starting with their Financial Fitness Score range — and, crucially, what their employees actually want. While what they need differs across the score range, what they want remains more constant. At every level, people rarely ranked seminars and general financial education among the top 10 desired benefits. Rather, employees across the board ranked one-on-one, personal financial guidance much higher.

But individually tailoring guidance can be expensive — and this is where technology comes in. Rather than simply offering people tools to save or invest money, as with many new fintech apps, technology can be used instead to aid in the learning process in user-friendly, personal, yet also anonymous ways. This personalized touch can also help improve knowledge retention by focusing on just-in-time education, or teaching lessons when they’re actually relevant to the individual and rather than within the broader arc of a financial literacy curriculum. This can range from the simplest of interventions, such as providing people with their credit scores, to more in-depth analysis and intervention in a situation occurring in real-time.

Financial literacy initiatives cannot take a one-size-fits-all approach. Employers must understand what their employees want and need, which, as we’ve seen, can be widely varied. Employers could consider a survey or programs that would target issues applicable across a range of ages and income levels, such as credit card debt. But beyond these concrete options, we can see that connecting employees to financial tools and education through personalized, workplace-based technology can be a path toward a more financially inclusive future.

Next time, we will go into greater detail on how applied technology can play a critical role in increasing financial inclusion.