When we started exploring the topic of financial health about a year ago, many people asked how financial health differs from financial capability. It was like déjà vu to a few years before, when we started exploring the topic of financial capability and received questions about how the concept differs from financial literacy.
Consider this metaphor: if financial literacy is knowing you need to brush your teeth, then financial capability is actually brushing your teeth, and financial health is the oral hygiene that you have as a result. Put another way, financial literacy is having the knowledge you need to make good decisions, financial capability is behavior, and financial health is the outcome in your life.
The three concepts, however, do not necessarily build on one another. Behavioral economists emphasize that customers do not necessarily need to be financially literate in a conventional sense in order to take positive steps toward a healthier financial portfolio, and that opens the way to interventions that focus on action. A simple text message reminder or other behavioral nudge could be just as—or even more—effective as training about planning for the future.
The Center for Financial Services Innovation (CFSI) has promoted the concept of financial health in the United States, defining it in this way: Financial health comes about when your daily systems help you build resilience and pursue opportunities.
People pursue financial health through a variety of different financial strategies. One person who wants to make an eventual significant capital investment into their business might pay a savings collector to help with the discipline to save. Another might join a savings and credit cooperative or “chama” to save a significant amount that can leverage access to a future large loan. Still another may make an investment in an income-earning asset like a dairy cow.
We’re currently working with CFSI to develop a framework to adapt the financial health concept to the realities of the base of the pyramid in the developing world. We are still in the midst of this project;, we already know that financial health is a uniquely important concept in the lives of individuals and families, beyond the financial capability and financial literacy that financial institutions are already pursuing.
Pursuing Financial Health
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What do literacy and capability have to do with it?
FI2020 Week Roundup
Explore CFI's Landscape Study -
A Change in Behavior: Innovations in Financial Capability
The report, funded by JP Morgan Chase, assesses the global landscape of financial capability innovations, with special focus on India and Mexico. Beyond a comprehensive review of industry trends, a Catalogue of Innovations captures dozens of organizations, and deep dives in Mexico and India give a market-level view. Click the report photo to dive in.