Financial education (alone) doesn’t improve financial wellbeing

Financial education (alone) is not effective in improving financial wellbeing. A harsh opening sentence? Yes. An accurate opening sentence? Unfortunately, yes. 

More and more organisations are realising the extent to which financial stress is affecting their employees and their bottom lines – they’re also realising the extent to which employee financial wellbeing is an important part of their broader employee wellbeing strategy. 

A new study pops up almost every other week that highlights the toll financial stress is having on Australians and employees across the globe. To name a few: 

• CommBank: 1 in 3 Australians can’t access $500 in emergency
• MLC: 46% of Australian’s live pay cheque to pay cheque 
• EY: 73% of people worry about covering everyday expenses
• University of Melbourne: 31% of Australians have difficulty paying for essential goods and services
• AMP: The Australian economy loses $30.9bn annually to employee financial stress (that is more than the entire GDP of countries such as Iceland, Jamaica, Estonia and Papua New Guinea)
  

So employers are right to be prioritising ways to improve their employees’ financial wellbeing. Broadly, financial wellbeing is when a person:

• Is able to meet expenses and has some money left over 
• Is in control of their finances
• Feels financially secure, now and in the future

In a work context, it’s the safety and security we all need to bring our full selves to work. Ranked as the number one employee concern, it is worth our attention as employers. The problem is, the efforts many organisations put into solving this challenge are often ineffective.

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The relationship between financial education and financial wellbeing

Increasing financial literacy through employee education seems like an obvious solution. If only people really understood how compound interest works or had more information about how to make good financial decisions, then surely they could avoid paying high interest rates on loans and credit cards or be motivated to save more. 

However, upon closer inspection it’s clear that financial education alone hasn’t succeeded in improving financial wellbeing. The way our brains are wired to process information typically works against us when it comes to making sound financial decisions and changing behaviour takes more than a single webinar or booklet. 

Here are some findings from around the world:

“There is no clear link between taking personal finance classes and saving more, paying off debts or raising your credit score.”

The Consumer Financial Protection Bureau

“Financial Literacy Education is widely believed to turn consumers into 'responsible' and 'empowered' ... motivated and competent to engage in financial behaviours that increase their own welfare. Although this vision is seductive… the belief in the efficacy of financial literacy education is largely based on ideology rather than evidence.”

Evidence and Ideology in Assessing the Effectiveness of Financial Literacy Education

“We conduct a meta-analysis of the relationship of financial literacy and of financial education to financial behaviours in 168 papers covering 201 prior studies. We find that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviours studied, with weaker effects in low-income samples.” 

Financial Literacy, Financial Education, and Downstream Financial Behaviours

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What’s the problem with financial education?

The reason financial education doesn’t work in isolation is to do with how we’re wired as humans. When it comes to money, these are three key barriers that prevent us from always making the best decisions:

1. Present bias: We give greater attention to our desires, our needs and our wants today versus those which may exist in the future. That’s why we’ll be more likely to spend $5 on coffee today rather than saving it for the future.
2. Overconfidence: The majority of us tend to be more optimistic than pessimistic. We know negative things can happen, but still don’t expect negative things to occur to us in the future so we don’t plan for it. This is what makes it difficult to establish and maintain a rainy day fund so we’re covered when a car breaks down in six months time.
3. Loss aversion: We have a tendency to place more weight on losses rather than gains. When it comes to investing, we’re more likely to feel the pain of a $100 loss than the joy of a $100 gain – this can hold us back over the longer term.

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How to make financial education more effective

The point of this is not to discount the importance of financial education – it’s to show that financial education needs to be provided alongside other tools that help overcome these behavioural barriers.

While we don’t believe we have all the answers yet, we have been working hard at Humanforce Thrive for the past three and a half years to build a set of financial tools based on insights from behavioural economics. A set of tools that recognises our inherent biases (and strengths), removes friction and builds automation into the process of improving employee financial wellbeing. These include:

• Track: So workers can see how much they’ve earned and create a greater connection between earning and spending
• Earned wage access: So workers can shorten budgeting periods and also reduce reliance on high-interest credit and loans
• Automated savings: So workers can create a savings goal, set a commitment and the money is moved automatically when they’re paid – meaning there’s no temptation to spend
• Coach: So workers can have 1:1 sessions where they discuss any issues and also strategies to achieve their goals

The impact?

• Six in 10 people primarily use the app to track their earnings
• 88% reduction in reliance on high cost credit 
• One in two people say there’s been an improvement in their ability to plan their finances
• Seven in 10 people feel more in control of their money
  

And of course Humanforce Thrive has financial education. Delivered in the right way – customised to an individual’s financial behaviours, in short and sharp doses and offered through timely nudges.

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What next?

Our latest Impact Assessment analyses data from 1 million transactions and 2,200 surveys to see how the ability to track pay in real-time, access earned wages and use actionable tips and tricks transforms an employee’s financial position.

Read the report in full to see more about the improvements companies like Freedom and Pizza Hut are seeing.