The 2019 TIAA Institute-GFLEC Personal Finance Index: Wellness

Financial Literacy in the United States and Its Link to Financial Wellness

Financial wellness and the P-Fin Index

Achieving and maintaining financial well-being, or financial wellness, is a goal shared across individuals. Financial wellness can be defined as a state of being wherein a person:

  • Has control over day-to-day, month-to-month finances.
  • Has the capacity to absorb a financial shock.
  • Is on track to meet his or her financial goals.
  • Has the financial freedom to make choices that allow enjoying life.

An increasing focus on financial well-being has manifested itself in the emergence and growth of employer-sponsored employee financial wellness programs. Such programs are more holistic in scope than predecessor programs which typically focused on a single aspect of personal finances, e.g., saving for a financially secure retirement. Financial literacy is typically a component of financial wellness programs as greater financial well-being is the ultimate objective of greater financial literacy.

But is there actually a link between financial literacy and financial well-being? Since the P-Fin Index provides such a comprehensive measure of financial literacy, it is well-suited for examining this question.

The 2019 P-Fin Index survey contained several questions, including new ones, indicative of financial wellness—either about behaviors that should promote financial wellness or about outcomes demonstrating financial wellness. These questions can be grouped under a wealth accumulation and debt rubric.
The wealth accumulation group includes questions related to:

  • Money management.
    • Do you track the things on which you spend money and the amount spent? W Planning and saving for retirement.
    • Do you save for retirement on a regular basis?
    • Have you ever tried to figure out how much you need to save for retirement?
       
  • Non-retirement savings.
    • Do you have any financial savings aside from retirement savings? W Capacity to handle a financial shock.
    • How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?

The debt group includes questions related to:

  • Debt management.
    • Do you make your loan payments on time each month? This includes things like a home mortgage, auto loans, student loans and credit card balances.
  • Debt constraint.
    • Do you agree or disagree with the following statement? Debt and debt payments
      prevent me from adequately addressing other financial priorities.

A strong link is found between P-Fin Index scores and these indicators of financial wellness. With regards to wealth accumulation, as the percentage of P-Fin Index questions answered correctly increases, individuals are more likely to:

  • Track their spending (Figure 10).
  • Save and plan for retirement (Figure 11).
  • Have non-retirement savings (Figure 12).
  • Have the capacity to handle a financial shock, i.e., they are less likely to be financially fragile (Figure 13).
P-Fin Index Figure #10
P-Fin Index Figure #11
P-Fin Index Figure #12
P-Fin Index Figure #13

With regards to debt and debt management, as the percentage of P-Fin Index questions answered correctly increases, individuals are:

  • More likely to make loan payments on time (Figure 14).
  • Less likely to be debt constrained (Figure 15).
P-Fin Index Figure #14
P-Fin Index Figure #15