The difference between financial wellness and financial literacy

There’s a wide gulf between the idea of knowing about finance and actually being financially healthy. To learn more about how to be financially well in an ever-more-complicated world, we spoke with Blake Allison, CEO and president of LifeCents and founder and chairman of Valor, a community-based empowerment program for families with veterans.

ABERMAN: Well, let’s start at the beginning, if you don’t mind: what is financial literacy, and how would you compare that to wellness?

ALLISON: Financial wellness is looking at an individual’s overall financial health and wellbeing. So, people are able to manage their resources, their expenses and income on a monthly basis, looking at longer term goals. Financial literacy is a component of that, where I think that’s more of a dated concept where community organizations and government agencies were really promoting financial literacy a couple decades ago, and about ten years ago, you saw this transition to this idea of wellness, and more than just understanding concepts.

We really have to look at behavior change. So, there’s a lot of behavioral economics rolled up into financial wellness, where we want to change behavior. So, it’s not just that you have acquired the knowledge that you know you need a budget, or you know you need to save for retirement, and you might know how to do it. Instead, we’ve got to transform that information into action. And so, I think the wellness dimension is really that transformation of helping people establish good habits, break bad ones, and plan for the longer term.

ABERMAN: So, in effect, it’s the difference between, say, me making sure that you understand the implications of taking a mortgage on, vis-a-vis actually having the mentality of being able to manage the right size house, and the right sized mortgage, to reach my long term objective of retirement, for example?

ALLISON: Yes. So, looking at the holistic view of an individual, I think, is also important. Where before you even consider that mortgage, or buying a home, you have to have a holistic view of yourself, what your needs are, what your priorities are. I think a lot of times, people will make decisions before they are fully aware of what their capacity is to take on that obligation. They might not understand the other goals that they need to address first.

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There’s a great example through our Valor program where a service member and his fiancee came to us a couple years years ago, wanted to buy that home. We went through the license program, which is the online financial health and wellness app, and were able to provide him with that awareness, and that financial health assessment, that profile of himself and his fiancee’s situation, and highlighted the fact that he didn’t have a great credit score. So, naturally, he’s going to get a higher interest rate, which is going to drive up his payments, which is going to make it harder for him to pay down the debts, which he did have, and also, he really didn’t have much in the terms of retirement savings.

So, what we he did is, we connected him, after going through his assessment, to a local nonprofit partner, who was able to sit down with him in a coaching capacity, and worked with him to improve his credit score, paid down those debts, and actually put a little bit of savings in the bank. So, he wound up delaying that purchase decision for about eight months, but then he was able to get better terms on that mortgage. He avoided paying three points on a mortgage on a $300,000 house. That was nine grand.

ABERMAN: And that’s the thing, I think, that is the difference, maybe, between financial health and wellness. If somebody understands the true financial implications, someone sits them down to say, hey, by the way, just so you know that laptop you’re about to buy on your credit card, you’re gonna end up spending six thousand dollars on that laptop, is it really worth it to you? And so, I get it, and that’s why we’re talking about why it’s important. You know, my grandfather used to tell me, John, he’d say, in his nice New York accent, nobody gives you money for nothing, and money doesn’t come with an instruction manual. I’ve always carried that thought with me. LifeCents, your business, you’re working with governments and companies, not with individuals directly. Why is that?

ALLISON: So, we look at this as reaching people. So, when we work with employers, or financial services companies, government agencies, typically we’re going in in a very intentional way, whether helping the employees when they’re making very important financial decisions, like enrollment in their employee benefits, having any understanding of what their needs are, so when they sit down at open enrollment, they have an understanding of what benefits are going be most important to them, most valuable to them and their families, but in the context of their overall financial life.

When we work with government agencies, we’re also looking at, we’re reaching people where they are maybe getting down payment assistance, for buying a home. And financial services companies is very broad, but there’s a lot that can be done working with financial services companies, where, when you have a very progressive partner or client in that industry, the idea that people can go through our program, LifeCents.

And there are elements of gamification, which you might be familiar with. Things like badges, points, rewards, things like that. But if you go through LifeCents and earn three badges, and you’re working with bank X, maybe that bank is going to waive an application fee, or give you a little bit lower interest rate on your loan. And so, there are a lot of very progressive ways to use financial wellness to drive very positive, very measurable outcomes.

ABERMAN: So, at the end of the day, what we’re getting at is an employer, bank, so forth, they’re actually trying to make people’s lives better, rather than extract value from them.

ALLISON: Correct!

ABERMAN: I like that! Which leads me to my last question for you, Blake: I see in your background, and as you talk with me today, an awful lot of passion about this. Why did you choose this particular mission for your life?

ALLISON: It’s very interesting. So, I think I’ve always had an affinity to personal finance, and over the years, organically, I’ve been presented with offers to become a wealth manager or a financial advisor. I have an undergraduate degree and a graduate degree in finance, so I thought, wow, that could be a great fit. But what I discovered is that there is this ever-growing chasm between what consumers know, what people know about their financial life, about the financial products and services that are currently available to them, but yet this tremendous innovation in financial services, and new products coming into market.

If people don’t understand the basics, with the products in front of them, how can they make decisions about more complex products? And so, I think one very simple example: thirty years ago, we only had fifteen year and thirty year fixed-rate mortgages. When we have these hybrids and optional arms and things like that, that’s where people got in a load of trouble. So, I think that’s where there’s opportunity to help in that way.

ABERMAN: So, you may not have known my grandfather, but you’re doing my grandfather’s work. You’re helping the community. Blake Allison, thanks lot for coming into the studio today.

ALLISON: Yeah, thanks very much for having me.