In 2018, the Financial Industry Regulatory Authority (FINRA) conducted a National Financial Capability Study (NFCS), which was designed to measure and analyze people’s experiences of and perceptions to their personal finances. One of the things revealed by the study is that many Americans find their personal finances to be a significant source of stress. More than 50% claim that thinking about their finances causes them anxiety.

Improving and maintaining financial wellbeing is the key not only to fiscal stability but also to relieving financial stress. The NFCS also showed that quality education is imperative for improving financial capability.

Understanding Financial Capability

Over the years there has been much talk about financial literacy. This is defined as the ability to manage money effectively. According to the current NFCS study, financial literacy has fallen to 34% from 42% in 2009. The main reason for this decline is a noticeable lack of education regarding not just how to handle money, but also how to avoid and/or deal with debt.

Financial capability is a more recent term that has come to replace financial literacy because it encompasses more than just the ability to manage money. Financial capability is the first step on the road to security. It involves a combination of knowledge, skills, and attitude towards managing personal finances. The financial decisions a person makes depend on several factors, including where they are in life, their available finances, and events that occur. Financial capability develops based on three different types of life cycle events:

• General experiences: These include things that most people go through, such as education and adulthood.
• Expected experiences: These include getting a job, finding a home, starting a family, and paying bills.
• Unexpected experiences: These include loss of a job, medical expenses, and car repairs.

Financial capability enables an individual to act in their best interest when dealing with any of the above situations. It also empowers them to choose and use services when needed and helps them to avoid financial crises. Financial capability can only be reached through quality education.

What Does Financial Education Entail?

Financial education is important — many believe it should be a mandatory course track for high school students. The amount and quality of knowledge on the subject correlates directly with positive financial capability.

People who have a solid financial education are not only more likely to save money, they are also less likely to fall into a cycle of debt. There are several key components to good financial education, including:

• Basic budgeting: Being able to set and maintain a budget is the foundation of financial wellbeing. These days, it is easy to create a budget because there are a plethora of apps and software programs out there. Many of them are user-friendly, even for people who are not math wizards. When used properly, they can help people keep track of where exactly their money is going. People who do not follow a budget often find it hard to save money and can fall into a debt crisis when they have a financial emergency.
• Interest influences: Many people don’t have a full understanding of the different aspects of interest, such as compound interest. But understanding the intricacies and influences of interest is very important, particularly when it comes down to borrowing, because this can mean the difference between taking out a small loan and paying back money for years to come. Interest is an important concept to understand early on as part of financial education.
• Shrewd saving: Saving is one of the most important aspects of financial wellbeing, but many people do not prioritize this as much as they ought to. Often, things like retirement savings are ignored because they seem to be so far in the future. But when a person learns to save early on, this will equip them will financial skills for the rest of their life.
• Diminishing debt: Being able to avoid getting sucked into a debt cycle is important, particularly for younger people, many of whom are already burdened with student loan debt. It’s a lot easier to lose a healthy credit status than it is to regain it; many people who are just entering the workforce are unaware of how easy it is to damage their credit rating. This is why they need to learn about it early on so that they can use credit responsibly.
• Identity protection: Identity theft is a bigger threat than ever. More and more people are shopping and banking online, which can make their financial information vulnerable. Understanding how identity theft and financial fraud can happen is the first step to avoiding it. The next step is learning how to protect personal financial information with features such as:
  • Password protection
  • Online document security
  • Use of passcodes
  • Closing all unused accounts

Where to Get Financial Education

The goal of education is financial wellbeing. The aspects of financial wellbeing include:

• Maintaining control over daily and monthly finances
• Being equipped to handle a financial emergency
• Staying on track to reach financial goals
• Having financial freedom to enjoy life

Each of these aspects is equally important, and enables people to manage their money in the present and the future.

There are several ways people can access education and thus improve their financial capability, such as:

• Online resources: There are many financial education resources online that include information on:
  • Financial literacy for all ages
  • Budgeting
  • How to start an emergency fund
  • How to save money on groceries
  • How to calculate debt-to-income ratio
• Workplace programs: More and more companies are offering their employees financial wellness programs. These include giving access to resources such as budgeting apps, offering financial counseling and debt management seminars, and providing safe and affordable employee loans.
• Financial planning tools: Planning and money management knowledge is crucial for financial wellbeing. There is a wide range of tools and apps available to help people manage their finances. Some of the most useful include:
  • You Need a Budget
  • Mvelopes
  • Mint
  • Money Dance

Poor Financial Capability is Crippling

Without quality financial education, people lack financial capability. Without financial capability, people suffer multiple problems, such as:

• Not saving for emergencies
• Mishandling personal finances
• Overspending
• Suffering from financial worries and anxiety
• Getting caught in the debt trap

It’s worth taking home the results of the NFCS study. Poor financial knowledge and skill is a problem that needs addressing now. Financial well-being and competency should not be viewed as a privilege—it is an essential need and education should be made available for everyone.

As an employer or HR manager you can use these findings to start up a financial wellness program in your organization. You can help your employees with their economic education so personal finance is no longer a source of anxiety, but rather an important step in reaching their financial goals.