Financial Literacy Deficit Contributes to Financial Stress

Financial literacy deficit concerns are something which all plan sponsors should know about.  Financial stress is a common challenge for many American adults.  Poor financial literacy is a growing condition exacerbated by the Covid-19 pandemic.  The resulting financial and economic uncertainty that has plagued everyone – plan participants especially – for nearly the past two years.

However, a 2021 study from the FINRA Investor Education Foundation & Global Financial Literacy Excellence Center, recently cited in BenefitsPro, shows interesting findings.  The article pointed out that employers need to understand that the root cause of financial stress isn’t actually the pandemic or debt itself.  According to the study, the real cause of financial stress is a low level of financial literacy.  This  condition then translates into poor financial behaviors.  The study data shows that while Covid-19 made Americans’ financial stress worse, it did not cause the problem!

Financial stress is caused by a variety of issues, including lack of income, family circumstances, and social pressures, the study found.  Financial literacy is the foundation upon which good money habits and financial security are built.  The research looked at financial stress as a factor of those who could correctly answer questions about interest rates, inflation, and risk diversification.  These criteria placed survey respondents in the “financially literate” research category.  According to the findings:

  • 51% (vs. 63% who could not answer the questions) reported feeling stressed when thinking about their personal finances
  • 38% (vs. 55%) said they felt stressed when talking about their own personal finances

In addition, high levels of financial stress only make the problem worse.  This condition then leads to poor financial decision-making.  Previous studies have also linked this to a financial literacy deficit.  People with high levels of financial stress tend to have credit card debt and other consumer loans.  They also overdraw their checking account, make late payments, withdraw funds early from their retirement accounts, and take out high-interest-rate loans.  In addition, this demographic is less likely to own their own home, invest money, or have emergency savings and retirement accounts.

The study found that having enough money is key to assuaging financial stress.  But more importantly is for individuals to know how to manage the money they do have.  People with poor money management skills both make bad financial decisions in the present, and they consistently fail to plan for the future.

Why is this significant for employers?  American adults don’t leave their financial stress at home – they bring it into the workplace.  This costs U.S. companies about $2,800 annually per employee, according to Salary Finance, again cited in BenefitsPro.  However, employees want and value help to better their financial situation.  A 2020 John Hancock study, also cited in BenefitsPro, found that 86% of financially stressed employees expect their employers to offer financial wellness programs.  This will reduce the financial literacy deficit.

By doing so, employers can help financially stressed workers in the following ways:

  1. Improve financial knowledge.  This includes educating employees about key financial topics and providing the tools they need to improve money behaviors.
  2. Help workers to save for financial emergencies.  Even a small savings can help reduce financial stress.  Financial wellness programs offer opportunities for employers to automate savings to make saving money easier.
  3. Reduce anxiety and stress.  A 2019 study from Enrich showed that financial wellness program participants experienced a 23% average reduction in money stress over a 12-month period.

Financial wellness is good for employers and employees.  For their part, employers can help reduce the costs of high turnover, absenteeism, and backfilling positions, as well as healthcare expenses.  Employees realize a better quality of life, higher productivity, and are happier and more engaged at work.  They’re also able to retire on time—one of the biggest wins of all.


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