Financial wellness is important for individuals and their employers, in part because of the role it may play in retirement. Individuals benefit when they are financially healthy, because it makes them more prepared to retire on time and with enough money. Companies benefit, too, because along with the potential for better-controlled benefit- and other employment-related costs, on-time retirements make room for promotions, new hires, and fresh ideas.
One aspect of financial wellness is financial literacy. The former can be defined as a state wherein the individual has control of his or her ongoing finances, can absorb a financial shock when one arises, is on track toward meeting financial objectives, and maintains the financial ability to make choices in life.
Financial literacy is more basic. It involves understanding concepts underlying financial wellness — and may therefore be the starting point of an effective financial wellness program. After all, like the attainment of any goal, reaching a state of financial wellness is the final step in a series; understanding why the goal is important has to come first.
Recently, the link between financial wellness and financial literacy was explored, using a sampling of US adults. The findings showed that people with a greater understanding of financial concepts are more likely to save for retirement. The data was collected using a series of questions, resulting in a score the study calls a Personal Finance Index, or P-Fin.
Among those whose P-Fin score was between 76% and 100% correct, 88% were saving regularly for retirement. For people with a P-Fin score under 26% correct, just 37% were doing so.
The study found a strong link between financial literacy and indicators of financial wellness. For example, as the P-Fin scores rose with correctly answered questions, respondents were more likely to track their spending, to have non-retirement savings
(in addition to dedicated retirement savings), and to be less financially fragile.
One interesting result from the study (which came from TIAA and the Global Financial Literacy Excellence Center at the George Washington University School of Business), was that a strong majority of respondents (62%) showed good understanding of borrowing. More than half also understood saving (58%), earning (53%), and consuming (52%).
However, fewer than half (48%) of the survey’s respondents answered correctly on questions about investing. Other trouble spots were insuring (46%) and comprehending risk (38%).
Survey results varied based on gender, income, age, and other demographic factors. Men scored higher than women about their personal finances, and older, wealthier people scored higher than younger, less affluent individuals. Keeping these variances in mind could be helpful when addressing the financial education needs of your own workforce.
Click here to read more results from The 2019 TIAA Institute-GFLEC Personal Finance Index: Wellness.