Financial literacy awareness will not get a plan participant ready to retire! Possessing knowledge of what is needed to have a financial literacy awareness isn’t always power – especially when it comes to achieving financial wellness.
First, individuals must understand their negative behaviors when it comes to managing their money. Then, individuals must learn to eliminate negative behaviors while at the same time reinforcing positive ones. As Kris Alban, executive vice president at Enrich Financial Wellness wrote in a recent BenefitsPro column, “Knowledge isn’t enough.”
It is similar to the distinction between being aware of a problem, versus dealing with that same problem head on. Financial literacy awareness is a great start, but it won’t solve the problem. Merely understanding that a problem exists, understanding why the problem exists, and knowing what behaviors perpetuate it, should help the person dealing with the problem get closer to solving it. It’s the same with having a strong financial wellness awareness.
As Mr. Alban aptly pointed out, financial literacy and financial wellness are not the same thing. 401ktv has written about this previously as well. Financial literacy awareness precedes true financial wellness. In other words, one must possess financial literacy awareness in order to seek and achieve financial wellness. Still, having financial literacy doesn’t translate to financial health.
Mr. Alban put it this way: Financial literacy pertains to understanding “key financial concepts and possesses the ability and confidence to manage personal finances through appropriate short-term decision making and sound, long-range financial planning, while mindful of life events and changing economic conditions.” By contrast, he wrote, “Financial wellness is having the knowledge, ability, and desire to make intelligent financial decisions and having the capacity to live a happy life within one’s means.”
Emotions play a large part in how individuals interact with and handle money. This is most obvious in times of crisis, such as the past two years as Americans struggled financially during the Covid-19 pandemic. Personal struggles or over-confidence can also manifest in money troubles. Mr. Alban wrote, “Someone who is highly impulsive and lacking in self-control may have trouble saving for the future no matter their level of financial literacy. Someone who is overconfident in their retirement preparation may think it will somehow all work out even though they aren’t taking the necessary steps – and may even be making risky decisions.”
Therefore, employers should consider financial wellness programs that delve into the psychology of money and help employees understand the “why” behind the financial decisions they make. This will help them learn to make positive changes in those behaviors so they can manage their finances better going forward.
This includes helping employees understand the financial behaviors they should adopt based on their age and life stage, Mr. Alban noted. But it’s more than that, “… helping them understand the strengths and weaknesses of their financial behavior based on personality type can be what engages them in long-term changes,” he wrote. Gaining an understanding of how emotions and behaviors influence their financial decisions can help employees make long-term shifts, such as reducing unnecessary spending, boosting savings, eliminating debt, and starting or improving retirement savings, according to Mr. Alban.
Effective financial wellness programs benefit employers, too. Improved levels of financial wellness lead to a more productive workforce and lower healthcare costs, Mr. Alban noted. Done right, financial wellness is a win for everyone. But it’s up to employers to help make those victories happen.