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The month of April has many facets but it has become notorious, predominantly, for two things – income tax deadlines and financial literacy initiatives. Officially dubbed Financial Literacy Month by the U.S. Senate in 2003, April shines a light on the myriad ways in which basic financial knowledge can be a life-changing tool for millions of Americans – or is it? A recent report published by Kiplinger argues that financial health is not only a matter of knowledge but a mindset. Moreover, it suggests that many financial literacy initiatives dismiss the emotional aspects of human behavior as it relates to money. For instance, money can indeed be a source of security if accessible and well-managed, but it can also be a source of stress, anxiety, fear and shame, which can prevent people from making healthy financial decisions₁.

It is here, in the mindset problem, that financial capability differentiates itself from financial literacy. According to a 2010 study published by the University of Missouri – St. Louis Center for Social Development, financial capability requires both the ability and opportunity to act upon and manage financial resources effectively₂. If overall financial well-being were the top floor at the end of a staircase, financial literacy and awareness would be the first few stairs and capability would be second to the last. Indeed, Financial Literacy Month has pushed awareness into progress, with several states, including Michigan, now having passed legislation making finance courses part of required curriculum. Moreover, insights from the 2021 National Financial Capability Study published by the FINRA Foundation indicate that Americans are saving more now than they were 12 years ago. To illustrate, 53% of respondents in 2021 stated they had developed an emergency fund capable of sustaining their household for at least three months, up from just 35% of respondents in 2009. That said, the same study revealed that the overwhelming majority of 2021 respondents under the age of 60 felt anxiety when thinking about their personal finances₃. 

So, what does it all mean? While the positive impacts of financial awareness and financial literacy campaigns are becoming more visible, it is important for those campaigns to evolve to include the four components of financial capability. According to University of Wisconsin (UW) Assistant Professor of Finance J. Michael Collins, those four components are:

• Knowledge. People with knowledge of money management concepts (financial literacy) understand the importance of good financial decision-making.
• Influences. Things that influence how one might apply their knowledge of financial concepts can be either internal or external. Procrastination, for example, or bad TikTok advice, can become a barrier for applying financial knowledge and skills to sound financial management.
• Access. This component addresses one’s ability to access financial products and services that are beneficial to long-term financial health. For example, the frequent use of pay-day loans vs. low-interest bank loans, high-interest vs. low-interest credit cards, etc.
• Action. Finally, actions demonstrate what one does with the financial information they possess. When considering action within this context, it illustrates the unpredictable nature of behavior, specifically as it relates to financial decision-making. In short, knowledge alone is not enough to rewrite financial behavior or improve overall financial well-being₄.   

As another Financial Literacy Month kicks off, it is important to recognize that budgeting tutorials and savings tips are not a holistic approach to improving financial health. Incorporating financial capability concepts into our financial literacy initiatives, however, can help individuals, advisors, thought leaders and institutions better target the barriers to financial well-being.

Stay tuned for more information from the MICPA and our Financial Literacy Task Force throughout the month of April. 

1. Weiss, Brent. “Why Financial Literacy Alone Will Always Fail.” Kiplinger. 24 Apr. 2022. Accessed 23 Mar. 2023.
2. Sherraden, Margaret S. “Financial Capability: What Is It, and How Can It Be Created?” Center for Social Development Research. 27 May. 2010. Accessed 23 Mar. 2023.
3. “2021 National Financial Capability Study.” FINRA Foundation. 2021. Accessed 23 Mar. 2023.
4. Collins, J. Michael. “Analyzing the Financial Capability of People in Wisconsin.” University of Wisconsin – Extension Cooperative. 2013. Accessed 23 Mar. 2023.