Financial health has become a bit of a buzz term. Ask any HR professional or leader if they think employee financial health is important, and you’ll be hard-pressed to find someone who says, “No.” But is there an accurate way to define what is financially healthy? How is it measured? Who is doing the measuring? And what can be done to improve financial health when it’s lacking? This is where it becomes a little murky. There has been a lot of work done in this area, but is the leading tool for measuring financial health accurate?
The Financial Health Network (FHN) is known to have the most established methodology to measure financial health. They’ve even built a financial health tool kit, complete with a survey and methodology for scoring answers to questions on their eight key indicators of financial health. Many organizations may have a financial health survey as part of their existing benefits, or Employee Assistance Program (EAP) program. Most use this exact survey, or a method that’s based on it. The indicators fall into four categories: spend, save, borrow and plan.
Spend
1. Spend less than income
2. Pay bills on time
Save
3. Have sufficient liquid savings
4. Have sufficient long-term savings
Borrow
5. Have manageable debt
6. Have a prime credit score
Plan
7. Have appropriate insurance
8. Plan ahead financially
This seems like a logical approach. The problem is, humans aren’t logical. Their scoring system assigns points based on the answer selected in a survey. Unfortunately, the questions are mostly confidence-based and, as humans are known to be overconfident, the results can be heavily skewed, making financial health look more rosy than it is.
Example question: Think about your household’s longer term financial goals, such as saving for a vacation, education, retirement, starting a business, buying or paying off a home, or making retirement funds last. How confident are you that your household is currently doing what is needed to meet your long-term goals?
The answer options for the question above are:
- Very confident
- Moderately confident
- Somewhat confident
- Slightly confident
- Not at all confident
This question doesn’t give the survey respondent any objective measures to help them answer accurately. A better question might be: How much retirement income are you on track to receive? The options could be a percentage of pre-retirement spending per month. While some of the questions are a little more objective, they are still easily impacted by other tendencies, like social desirability bias. This means that even when surveyed anonymously, humans tend to pick answers that make them seem smarter or better.
Social desirability bias is a response bias that happens when survey respondents answer even anonymous questions inline with what they believe to be more socially acceptable. This is extremely likely to happen when someone is taking any sort of self-reporting questionnaire.
One of the questions on debt asks the survey respondent if they have no debt, a manageable amount of debt, a bit more than a manageable amount, or far more debt than is manageable. What does that even mean? Debt is an amount. It’s numerical. Instead, asking how debt totals relate to other aspects of our finances, like income, would be a more effective way to get an objective measurement. Someone up to their ears in credit card debt may still technically feel it’s “manageable.” The phrasing of this question provides a very inaccurate read of anyone’s financial health.
Some time ago, CacheFlo was able to examine health scores based on this methodology, and compare those self-reported scores against individual Winton profiles. We saw people who ranked their spend management capability as high, despite carrying credit card debt that was more than 20% of their income. We also saw people who scored themselves as low on planning, though they actually had retirement savings equal to 10x their current income, and still had many more years to save.
Confidence scores only measure confidence, which may or may not be related to reality. If we’re to measure financial health in an effective way, we need to ensure it’s based on data, and that those figures are measured against other financial factors. One person carrying $500,000 of debt could find it perfectly manageable compared to their resources. For someone else, this could cause financial distress.
Assessing employee financial health is a key part of any financial wellness effort. Employers have to walk a fine line when it comes to asking employees about their money matters. It’s not a good idea for employers to make up their own assessment tools, nor should they have access to individual answers or results. Employees need to know that it’s safe to be honest and their employers will not be accessing any of their personal financial information, including confidence scores.
Employers should have access to aggregate insights to help them make decisions about the program, but any assessments should be done by your program provider. If you’re already using a financial wellness provider, you should ask for a copy of their assessment questions to see if they are objective or really only measuring employee financial confidence. If you’re considering bringing in a program, review any financial health questionnaires as part of your assessment process.
Spend
1. Spend less than income
- Employees are saving every month towards their goals and aren't growing their debt.
- Employees can identify monthly free cash flow, and they've committed to funding their short- and long-term goals with that money found.
2. Pay bills on time
- Employee’s day-to-day spending is a limited amount automatically transferred to a separate account weekly. They have free cash flow each month, indicating it’s possible to spend less than their income and cover their bills on time.
Save
3. Have sufficient liquid savings
- Employees have emergency savings available that is approximately 4-6x their monthly expenses.
4. Have sufficient long-term savings
- Employee’s retirement income needs are based on their projected retirement expenses, and existing or future assets are on track to cover those expenses until at least age 90.
Borrow
5. Have manageable debt
- Employee’s debt payments are below 50% of their monthly bills.
6. Have a prime credit score
- Employee’s credit score is above 760, which is considered excellent by Equifax.
Plan
7. Have appropriate insurance
- Employee’s insurance amount is equal to 100% of their outstanding debt plus their income, as well as their annual expenses for a determined number of years.
8. Plan ahead financially
- Employees have a written financial plan (modular or full), including a written cash flow plan, and are managing their spendable account.
Not sure how to more accurately measure employee financial health? Check out our upcoming webinar, The Cost of Employee Financial Stress, to learn more.
It’s impossible to solve a problem you can’t effectively measure. We need to insist that any tools, surveys or programs measure employee financial health objectively, so that any efforts made to support employees in improving their finances meet their needs. This is also a crucial factor in measuring the efficacy of any employee financial wellness program.
About CacheFlo
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Financial Capability Program (FCP)
The FCP combines quick and practical lessons with tools, including Winton, which helps people make financial changes they can stick to. Users can apply what they've learned to their financial situation, thus bridging the knowing-doing gap. The goal of the FCP is to help people get more life from their money.
