Chattanooga economist: Financial wellness and mental health are benefits of preparing for financial hardship

Contributed photography / Dr. Bento Lobo

Financial well-being comes from the ability to absorb financial shocks and control day-to-day and month-to-month finances. It comes from being able to meet your financial goals and having the financial freedom to make the choices that allow you to enjoy life. However, financial well-being requires financial literacy, i.e. the skills, knowledge, tools and discipline that equip people to make individual financial decisions to attain their goals.

The financially literate do a better job planning and saving for retirement, are more likely to participate in financial markets, and show greater financial resilience in difficult economic times. Research in a leading journal in financial economics finds that financial education programs have positive effects on financial knowledge and downstream financial behaviors.

Adults with higher "debt literacy" are more likely to pay their credit cards in full and are less likely to be over-indebted. They also are more likely to be savvy about choosing mutual funds and diversifying their savings and demonstrate a much higher capacity to handle unexpected shocks.

Unfortunately, the Financial Industry Regulatory Authority estimates that about 66% of the American population is financially illiterate by standard testing methods. Women, poor adults and lower-educated respondents are more likely to suffer from gaps in financial knowledge.

This is true not only in developing countries but also in countries with well-developed financial markets. Troublingly, 75% of American teens say they lack confidence in their knowledge of personal finance.

The biennial the Federal Deposit Insurance Corporation survey showed that 4.5% of U.S. households were "unbanked" in 2021, meaning that no one in the household had a checking or savings account at a bank or credit union. A larger fraction of people was underbanked, i.e. had a bank account but also sought risky alternative financing services outside of their bank (such as payday and title loans) due to convenience, lack of minimum balances and credit history.

Low financial literacy levels exacerbate consumer and financial market risks as increasingly complex financial instruments enter the market. Consumers who fail to understand compound interest, for example, pay higher transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less.

A personal finance best practice is to store three to six months of expenses in liquid assets in case of an emergency. However, a study by Federal Reserve economists showed that more than half of U.S. families do not have at least three months of their non-discretionary expenses saved in an emergency fund.

Even among the top quartile of income earners, almost a quarter of families do not have three months of expenses in liquid savings. The same study showed that financial literacy has the same impact on savings as a 60% increase in income.

WebMD reports that stress from money problems tends to be chronic, or long-lasting. In fact, financial issues are the top source of stress for most people -- even more stressful than politics, family, and work.

Low financial wellness and literacy can lead to high financial stress, which in turn can cause you to become anxious, depressed and overwhelmed. Experts found that people in severe financial troubles are three times more likely to think about suicide.

Financial education programs generate positive effects similar to those realized by educational interventions in other domains such as math and reading. The effects of financial education on financial behaviors are comparable to those realized in behavior-change interventions in the health domain or behavior-change interventions aimed at fostering energy conserving behavior.

At the University of Tennessee at Chattanooga, the Department of Finance and Economics uses a multi-pronged approach to promoting financial literacy by recognizing that it is more than knowledge and skills, but that attitudes and behavioral factors are equally critical for individuals to engage successfully in sound financial decision-making. Recently, a personal finance course was introduced into the general education curriculum to enable all students across campus, regardless of major, to become financially literate and to learn the basics of personal finance. A minor in personal finance is also available to all who wish to add more rigor to the study of personal finance.

The curriculum includes creating a budget, understanding credit, savings and investment choices, banking, insurance and real estate, tax effects and much more. Classroom budgeting simulations show that UTC students increase emergency fund savings by over $1,100 and pay down over $2,000 in debt during the semester. Students routinely rave about the value of the course to them with comments such as:

  • "This is a class that I wish everyone could/would take.... This should be a general education or required course for all majors"
  • "It is extremely applicable to our real lives. It can make a huge impact in someone's life and change it forever."
  • "...Very interesting material that relates to real life experiences."
  • ".... It is almost impossible to not understand how each concept is relevant to our lives...."

Each April, the department hosts an annual financial literacy lecture to promote awareness of financial literacy on campus and in the community, and to spotlight cutting edge research in the area. In collaboration with the Probasco Chair of Free Enterprise Center for Economic Education, the department co-hosts periodic webinars on financial wellness for the campus. Additionally, an annual program geared toward high school students, and girls in particular, called Empower Your Future is designed to help students learn more about finance best practices and the scope of the disciplines of Finance and Economics.

Developing financial literacy and practicing good personal finance habits is an ongoing process and must be nurtured into financial "muscle memory." Preparing for financial hardship promotes financial wellness and mental health. Financial literacy matters.

Bento Lobo is the department head of Finance & Economics, Foundation Professor and First Tennessee Bank Distinguished Professor of Finance in the Gary W. Rollins College of Business at the University of Tennessee at Chattanooga. He holds a Doctorate degree in financial economics, Masters' degrees in economics and in management studies, and a Bachelor's degree in economics. His work on the economic impact of fiber optic infrastructure has garnered global attention and served to build the case for fiber deployment in Chattanooga. In 2009, he was a visiting scholar at the Federal Reserve Bank of Atlanta. His research has been published in reputed academic journals and presented at numerous domestic and international conferences. In 2013, Lobo was inducted into UTC's Council of Scholars, the university's highest recognition for those who research, publish and have national and international reputations in their fields.