Financial Education, Literacy, or Wellness?

I was talking with a friend recently who is a big fan of words and language, which could explain the presence of more bookshelves in her house than I’ve ever seen in anyone else’s house. We started talking about the language and words involved in my role at Financial Finesse. I’ve noticed an evolution in terminology during my 5 years here. There have been three terms that have been used a lot by our employees, our clients and in the general corporate environment. I see the terms evolving in the corporate workplace and a few members of our financial planning team discussed the evolution recently and found that the evolution of the terms aligns with the evolution in the way people process information.

Term 1: Financial Education. In my early days here, I would hear clients refer to us as a part of their financial education program. This had something to do, I think, with the timing of regulations requiring 401k plan administrators to provide a financial education component. Financial education is a wonderful thing, but it does not really accomplish the goals that legislators had when they added financial education regulations. Financial education programs have largely fallen short of expectations and in my opinion, they don’t work all that well.

Here’s what I mean by that. A lot of financial education efforts teach people what a stock is, what a bond is, what a mutual fund is, etc. That’s a great thing! But while it’s good to know these things, knowledge alone doesn’t produce great results. That’s where the next step, the next term, comes into play.

Term 2: Financial Literacy. Financial education is a great way for people to understand various terms used in the world of personal finance. Financial literacy is where that knowledge begins to take effect and create a platform for change. It’s taking the knowledge and integrating and understanding it.

It reminds me of helping my son with trigonometry homework. Earlier in the year, he had a few formulas memorized. He couldn’t tell me what they meant or how they were used, but he had them memorized. Now, he can tell me why one formula would be used rather than another and he can anticipate where a problem will take him. He has gone from confusion to memorization to synthesized, useful information.

Moving from financial education to financial literacy is taking the basics (what’s a stock, bond, mutual fund, etc) and understanding how they play out in the real world. Knowing what a stock is, that’s great financial knowledge. Understanding what percentage of your 401k should be in stocks vs. bonds vs. cash is a quick illustration of how financial education turns into financial literacy. Still, there is another step in the evolution of financial behaviors, and financial terminology.

Term 3: Financial Wellness. This is where the rubber meets the road and is the “Holy Grail” of corporate financial wellness programs. Having an employee base that has significantly improved financial health is the goal for the financial wellness programs of our client base. In real world terms, financial wellness builds upon financial literacy and is linked to action steps. In the example of education = knowing what a stock is, literacy = knowing what percentage of your portfolio is appropriately invested in stocks, financial wellness would be actually implementing that asset allocation strategy, re-balancing periodically and knowing how that impacts your retirement preparedness.

Financial wellness is a state of financial well-being where an individual has achieved the following:

  • Minimal financial stress
  • A strong financial foundation consisting of little or no debt, an emergency savings fund and living below their means
  • An ongoing plan that puts them on track to reach future financial goals

Olympic hurdlers didn’t go straight from crawling to winning medals. There was a process that started with crawling, walking, running, hurdling and then putting it all together at a high rate of speed. No matter where you are today financially – even if it’s at a crawl – you have the ability to move yourself forward by increasing your financial education, achieving financial literacy and reaching the goal of being in a state of financial wellness.

 

 

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