Research shows financial education (alone) is not effective in improving 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:
So employers are right to be prioritising ways to improve their employees’ financial wellbeing. Broadly, financial wellbeing is when a person:
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.
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
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:
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 Wagestream 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:
And of course Wagestream 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.
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.
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