We all face financial decisions every day. How we make these decisions is based on our understanding of money and financial habits. If you’ve ever wondered about the difference between financial literacy and financial education, and what they mean for your employees, then read on.
The importance of financial wellbeing is a topic we feel strongly about. We’ve already explored how financial education at work can empower your employees and boost their work performance.
For this to happen, there needs to be a grounding in how finances work. And this is when financial education and literacy become important.
What is financial literacy?
When considering the question of what financial literacy is, there are certain overlaps with financial education. Those who are financially literate have a better understanding of their money and how to deal with both day-to-day matters and planning for the future.
When you see financial literacy at work, you observe people who make good financial decisions. They understand how to use their income so that they can save, manage debt, and create an emergency fund.
Being financially literate means that, even with low levels of disposable income, people can make the right decisions about their money.
Some behaviours you may notice from those who are financially literate include:
- Using a pay rise to improve their financial situation instead of increasing their discretionary spending (like extravagant living).
- Ensuring that if they dip into an emergency fund, they refill it as soon as they can.
- Look for investment opportunities to grow their wealth.
More often than not, those who are financially literate don’t just live in the here and now. While they can enjoy the benefits that money can bring, they always have an eye on the future.
Importantly, financially literate people typically have solid plans in place that mean that they budget and save effectively.
Why is financial literacy important?
When looking at the difference between financial literacy and financial education, you may be left wondering why financial literacy is important.
With financial literacy, people are well-placed to manage their money with confidence. They are in a strong position to navigate life’s financial bumps in the road. Plus, they can manage major financial issues.
Financial literacy is important when it comes to assessing important questions like how many credit cards to have, when to consider a payday loan, or whether to use Buy Now Pay Later. The choices people make when faced with these financial tools is a test of someone’s level of financial literacy.
There are business benefits to financially literate employees
As an employer or business owner, you’ll benefit from employees who are financially literate. Reports show that financial literacy at work leads to employees who:
- Have more focus at work (meaning increased productivity).
- Are less stressed (so they can concentrate more easily on work).
- Stay at their workplace for longer (so retention rates increase).
- Are absent from work less often (lower levels of absenteeism).
- Are prepared to invest in their own education and to upskill.
So is financial literacy a result of financial education? And what’s the difference between financial literacy and financial education? Let’s find out.
What is financial education?
When considering the differences between financial literacy and financial education, there are some clear links.
Financially educated employees are capable of making positive decisions with their money because they have developed knowledge of personal finances.
Those who are financially educated may be more likely to have higher levels of financial wellbeing and be more financially resilient. That’s because they may have a full understanding of the consequences that their decisions may bring.
How are financial literacy and financial education linked?
With this in mind, it can be helpful to consider that financial education can be the stepping stone to financial literacy. This means that in answer to the question are financial literacy and financial education the same, the answer is no. But they are very closely linked.
Financial education is the process of acquiring the knowledge and skills that lead to financial literacy.
This means that any activity that helps someone to increase their knowledge, understanding, or skills with money counts as financial education.
Financial education goes beyond practical actions. That’s because financial education permeates to someone’s thought patterns and behaviours. It also leads to a change in attitude in how someone handles and views money.
Equipped with the correct financial knowledge, you can expect people to:
- Manage money well and have good levels of financial wellbeing.
- Know the basics of budgeting.
- Make better-informed financial decisions.
- Grasp the basics such as how to read a payslip.
- Understand how mortgages, loans, and credit cards work.
- Acknowledge that needs and wants are different.
Why is financial education important?
When looking at the importance of employee financial education, you need to consider whether financial literacy and financial education are linked.
Having explored the benefits that come as a result of employee financial literacy, it becomes clear that employee financial education is just as important.
Without the basics of financial education, employees aren’t able to go out and make the informed decisions that financially literate people make. They would lack the knowledge needed to understand principles such as compounding interest, what makes a savings account attractive, and how debt works.
Low levels of financial education can make it harder for someone to make positive choices with their money because they may not understand the consequences of their decisions. This can lead to financial choices that are not conducive to financial wellbeing.
Some examples of this include using short-term, high-cost credit for unnecessary spending. Or even prioritising the wrong bills when things get a little tight and falling behind on important payments like a mortgage.
The difference between financial literacy and financial education
While some people may think that financial literacy and financial education are the same, they are in fact distinct from each other, with subtle differences between the two.
Here’s the crux of it. For employees to become financially literate, they must go through the process of financial education.
Gaining financial knowledge could be a formal process that takes place within the working environment. Or it could be something as simple as using their spare time to gain valuable knowledge and advice.
People form financial habits through repeated financial behaviours. Often, people observe family members’ financial decisions and use this as a basis for their own decisions. If these decisions are not well-informed, then it can lead to a cycle of financial stress.
Designing your financial wellbeing strategy
With the cost-of-living crisis biting, and with inflation at a 40-year high, being able to manage finances has never been more important. Of course, businesses are struggling with their own increased costs too.
By designing and implementing a financial wellbeing strategy in your organisation that includes elements of financial education, you’re actively helping employees become more financially well. Helping your employees to understand the difference between financial literacy and financial education will empower them. By assisting your employees with financial education, and leading them towards financial literacy, you have a workforce who:
- Have a full understanding of what they earn and how they spend.
- Are confident of exploring ways to deal with financial difficulties without resorting to bad debt.
- Have clear plans about how they’re going to pay for retirement.
Of course, this all leads to your employees experiencing a better quality of life, but it also leads to them performing better in the workplace. Taking the time to consider the financial literacy and financial education of your employees really does lead to a win-win situation.
The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circ*mstances.
