Economy & Business
Financial wellbeing - A crusade for simplicity
In most developed societies physical wellbeing is provided for and taken as a right. Action on mental health and wellbeing is catching up, but our attention to financial wellbeing is way behind the times.
By Lee Faulkner
What is financial wellbeing?
Money worries are the biggest stress factor in most people’s lives - they can exacerbate any physical or mental health issues you might already be facing and can also damage your personal relationships. From an employer’s point of view, money stress can seriously impair an employee’s productivity.
People often think that financial wellbeing means being rich, or having enough assets to cover every lifecycle eventuality, but it’s not - there is no magic wand that can make everything better for you. What financial wellbeing does mean is being able to understand your own financial situation sufficiently well to feel in control of it. Gaining that understanding requires education, but there is a dearth of real help for most people with this - rich people can pay for advice (or pay for it indirectly via the commissions built into the price of the financial products they buy), well-connected people can ask their knowledgeable friends for help, but most others have nowhere to go and no-one to ask. That opens you up to scammers and unprofessional sales people who sell what’s best for their commission cheques rather than what’s best for you.
The asymmetry of knowledge between financial institutions and consumers is the root of all evil here, so how do we address it? By educating people about finance - education means you get to recognise and articulate your financial problems and objectives better, and helps you understand what’s going on around you. That understanding protects you and breeds confidence, and that confidence puts you back in control again so that you can act in the best way for yourself without pressure from anyone else.
So how do we start off this cycle?
Where else? At school!
As with so many other things in life, the best place to start is at school, and the earlier the better. I have lost track of the number of times I’ve heard people say, “I wish I’d learned that at school” or “why don’t they prepare kids for real life by teaching practical stuff like this?”. Understanding finance is an essential life skill, as vital these days as reading, writing, mathematics and IT. Every student graduating high school should have a basic knowledge of the lifecycle risks that await them - marriage/partnership, having kids, divorce, sickness, unemployment, retraining, longevity, disability and death - and they need to have the rudimentary skills to think through how they would deal with the financial consequences of each.
Every young adult should leave school knowing how to produce a household budget, how to manage debts, how compound interest works, what the difference is between a debit card and a credit card, what the likelihood of getting sick is and how long they might live. They need to be equipped with the knowledge to know what will happen if they do or don’t do certain things, like making loan repayments, saving for retirement or paying taxes.
Employers are wasting money
An employer doesn’t need to be overtly paternalistic to play a big role here - just being savvy at business is good enough. Any employee who is stressed because of money worries is an employee who is not productive. Any benefit that is granted to employees without an explanation of what it’s for, how it works, and what it’s worth, is money wasted and better spent elsewhere. How many employers throw money away because they don’t take the simple steps necessary to explain what they’re doing for their employees and why?
Most good employers already look after their employees’ physical health by providing health plans, gym memberships, sick leave, disability insurance, and so on. Some employers also help with the mental health of their employees by providing employee support and assistance programmes. Spending a small amount of time and energy on their employees’ financial wellbeing would be very worthwhile - it will boost productivity and increase the appreciation by employees of the money being spent on them by their employer.
Employers don’t need to create grandiose schemes to meet what most people need - simple, short, entertaining face-to-face seminars or webinars about budgeting, debt management, pension planning, insurance, and how to avoid scammers would fit the bill. From my practical experience, these are always very well received by pretty much everyone and would be worth every penny.
Rules of thumb - bring them back!
As financial services have become more and more “sophisticated”, i.e. complicated with voluminous information, they have moved further and further away from how people process information and what they need to know. If we make things simple, using language and illustrations that people can relate to, then the message sticks; if we bamboozle them with what financial services companies want to feed them, then we create anxiety and a loss of control. We need to move back to the age of simplicity and relevance, and a great way to do that is to reawaken the use of rules of thumb. Yes, they don’t work for everyone and, yes, they are approximate and extremely simple, but that’s the whole point - if you’re stumped and don’t know where to start, then try a rule of thumb to get going.
There are some really good financial rules of thumb that are quick and easy to remember and can be a permanent guide to help you at all stages of life. The most useful relate to budgeting, for example:
- Always keep three months’ of average outgoings as an emergency fund;
- Budget your spending by splitting it into Needs, Wants and Savings following the 50:30:20 rule;
- After retirement, target having between 50% and 75% of your pre-retirement income to maintain your standard of living.
To understand how inflation erodes the purchasing power of your money, or the value of your assets in real terms, use the “Rule of 72” - divide 72 by the annual inflation rate and the answer is the number of years over which the value will halve. So, for example, if inflation is 3% per annum, 72 divided by 3 is 24, so your assets will halve in value over 24 years.
My favourite is the “Half Your Age Rule” - divide your age by two and that is the total percentage of your salary you should be putting in to a pension fund every year to ensure a decent retirement (assuming you don’t have anything yet). It’s not very accurate, but it’s a great way of shocking you into doing something now!
If rules of thumb could be popularised, maybe by schools, employers, the government and financial institutions, then it’s a good start to increased financial wellbeing. And it’s so much better than doing nothing.
Financial institutions - misleading us is counterproductive
I don’t want to bash financial services institutions unnecessarily - we really couldn’t survive without them - but at times they are their own worst enemies. They create confusion and anxiety, rather than the comfort and security their products are supposed to provide. There are two key ways that controlling them better would boost financial education and wellbeing:
- Permit projections to be made in real terms only, that is with inflation stripped out. When you are making projections over long periods of time it is grossly misleading, and frankly ludicrous to project on any basis other than in real terms. People understand numbers in the language of today’s dollars, not the dollars of 2050. Not using real terms is like writing a book using the language we think people will speak in the future, rather than the one they speak today, and expecting us to understand it.
- Never project lump sum amounts - always convert them to annual income streams. If someone sees a projected value of a retirement fund as a big lump sum they get excited - it looks juicy and tempting, and “you’d be a fool not to”. But if you tell someone that if they retire at 65, they will likely live, on average, for another 20 years so you need to divide that big lump sum by 20 to see what you’d get each year, then reality sets in. People rarely, if ever, see or get big lump sums in their lives - they get regular income of smaller amounts, so we should mirror that and present things in the same way if we want them to appreciate what’s going on.
Banks and insurance companies are always fighting to keep the asymmetry gap wide - the less consumers know and understand about how financial institutions make profits the greater those profits will be. Cynical? No - ask any bank or insurance company director. We wouldn’t need regulators if there were no asymmetry. But it is in these companies’ best interests to close the gap - if they educate us and improve the way they communicate with us, then a feedback loop will start off and, ultimately, it will make them more responsive to what we need, and they’ll be able to sell us more.
A crusade for simplicity
The key to financial wellbeing is to understand your situation and to feel in control of it, and that means education. Schools, employers and government have a role to play, as do financial services companies themselves. We need to give easy tips to people that they can use and won’t forget, and we have to make life simple again if we want people to really understand what’s going on and to feel financially well.
A former president of my professional body, in his inaugural speech, set the theme of his presidency as “A crusade for simplicity” - that’s one crusade I hope we can all join.
Lee Faulkner is a Fellow of the Institute and Faculty of Actuaries, the UK’s actuarial body, and has more than 30 years’ experience in the world of financial services in Asia, Europe and Latin America. He runs his own financial wellbeing consultancy Don’t Sell To Me. He is a Taiwan Gold Card holder and now lives in Taipei.