Financial literacy is the first step in achieving financial wellness. Without financial literacy the average employee will have a difficult time grasping the concepts associated with being financially well. Financial literacy and financial wellness are not the same things. There is a major difference between being financially literate and achieving financial well-being.
Essentially, there are fundamental differences between financial literacy and financial wellness. Financial literacy addresses the ability to comprehend the terms and concepts from an education perspective. A number of individuals, many being retirement plan participants, have confused financial literacy with financial wellness. Some use the terms interchangeably. However, financial literacy means gaining awareness and understanding how money works and how to handle it responsibly. It generally includes topics such as how to create a budget, how to manage and pay off debt, and how to create savings for long-term goals, i.e., buying a home or building a retirement nest egg.
On the other hand, financial wellness differs from the literacy in that the former is the actual implementation of what you know. It’s one thing for individuals to know what they’re supposed to do. Don’t spend more money than you earn, live on a budget, don’t take on debt to purchase items you don’t have the cash to pay for now and save to build wealth for long-term goals such as retirement or a child’s college education. It’s quite another challenge to understand how to do those things consistently, or even to do them at all. Despite “knowing better,” some people still manage to dig themselves deep into debt and choose to pay the consequences later (literally).
All this to say, employers should invest in financial literacy to help their employees become more knowledgeable about how to manage their money day-to-day. Financial literacy and financial wellness are topics previously addressed at 401kTV, and we will continue to do so. Financial literacy is only step one, of the financial wellness equation. Once employees receive the education necessary to understand how they should handle their finances responsibly, then they must be coached to implement strategies that achieve financial well-being. In other words, helping your employees is a starting point for a process that’s ongoing. One must be held accountable for not only absorbing the knowledge, but actually putting it into practice and reaching their goals.
However, getting to the end goal comes with a shift in one’s money mindset and spending habits. Prudent financial strategy is not something that’s easily learned. We all have money stories that have been instilled in us since we were children. Some believe money can buy happiness (it doesn’t). Others believe they don’t make enough to support their lifestyle, and that more money is the answer to their financial woes (it isn’t). Still, others think there’s nothing wrong with living beneath a mountain of debt.
In order to change our “money story”, we must change ourselves. We may also need to revise our relationship with money. Personal finance writer, Nancy Rae Evans notes in her Embracing Money blog post on Financial Literacy vs. Financial Wellness. Being financially literate and taking the right steps to implement that knowledge makes one “feel like a financial grownup”. Her Financial Wellbeing Elements checklist may be a helpful resource you can share with your employees.
Financial literacy can be taught. Given that knowledge, employees can be coached to use their know-how to achieve financial wellness. So while financial literacy and financial wellness are far from the same thing, they do go hand in hand. From where we stand, financial education literacy and its result, financial wellness, make a lot of sense, indeed.