Leonore Riitsalu is passionate about behavioural insights and financial well-being. As a researcher, she leads several international research teams which focus on financial well-being, and lectures on behavioural insights in policymaking at the University of Tartu, Estonia. As a founder of Nügila and a consultant, she advises policymakers and financial sector institutions on applying behavioural insights to improve well-being in Europe. She has worked as a consultant for the OECD and as an advisory board member for the Saudi Arabian Central Bank. Her research is published in high-level academic journals such as Nature Human Behaviour, Journal of International Marketing and Journal of Economic Psychology.

Leonore was the Project Lead of our unique financial well-being research project »Human-centred approach for increasing financial well-being of individuals and societies« , conducted in partnership with ERSTE Foundation and the University of Tartu, with support from Erste Group. She sits on the advisory boards for FLiP, Open Future Lab, and Nadace České spořitelny.

ERSTE Foundation What is financial well-being and why did you partner up with us to do research on it?

Leonore Riitsalu At first glance, it appears that the question »what is financial well-being?« is rather silly. Isn’t it obvious? It is about having a lot of assets or the lack of debt and financial problems. But that is not all there is to it. When I started working for the Estonian Financial Supervision Authority in 2008, the OECD was only just setting sail for their financial education policy guidance. It was the year that they created the International Network on Financial Education (INFE).

Then, the assumption was that improved financial literacy would automatically lead to higher financial well-being. It was merely a few years ago that researchers started to doubt that assumption, and at the end of last year, the OECD published the first policy note on financial well-being. It is evident that the initial assumption was naïve.

In my first academic article on financial well-being, published in 2019, I found that subjective financial knowledge – the confidence in the sufficiency of one’s financial knowledge – is a far more significant predictor than actual knowledge of financial affairs. It is my most cited academic paper with nearly 250 citations by now. That led to digging deeper into the definitions, measures, and antecedents of financial well-being. After completing a research project for the ING bank and Think Forward Initiative where we analysed financial well-being in 16 countries, I understood that still way too little was known about what financial well-being really is and what influences it.

In that moment, while I was contemplating these gaps in knowledge, I realised that there is a need for a paradigm shift, not a simply one more survey. But I had no idea how such a huge endeavour could actually happen. I was attending the European Forum Alpbach for the first time in 2021 as a participant and speaker in the financial literacy retreat. In Alpbach, Philip List, the Director of Erste Financial Life Park (FLiP) introduced me to Boris Marte, CEO of ERSTE Foundation.

Before I could express my thoughts on financial well-being conundrums, he passionately explained the gaps he sees in understanding the nature of financial well-being and finding ways to improve it. It was a magical moment – to hear someone else talk about the same issues I had been struggling with in my mind, only from the perspective of the financial sector. The outcome – we agreed to join forces and start a unique research project.

Finally, to answer the question and briefly put, financial well-being is about having peace of mind. It is about being able to enjoy life today and in the future. But it is not about being wealthy. People can find enjoyment in different things, and that diversity must be respected. Lifestyle choices, life stages, values, and many other non-financial aspects influence financial well-being.

What we see after interviewing 630 people in seven European countries is that the common thread for all is that we need to have security, freedom, and pleasure – the three dimensions of financial well-being. The proportions and balances of these differ for people; there is no single score or diagnosis that is best for all.

EF How can people and society benefit from the findings of your study?

LR Although we partnered to conduct academic research, not applied research or consultancy work for the banks, we did create one practical tool that is useful for people and builds on our research findings. It is a digital tool that prompts the user to reflect on their financial well-being through a three-dimensional lens. The user is invited to think about aspects of their lives and choices that go far beyond finances from the perspective of security, freedom, and pleasure.

The outcome is not a verdict or score but an overview of the things the user considered having positive, neutral, or negative effect on the financial well-being elements. Additionally, we do not leave the user with just that information. The tool provides tips on what the user may want to consider changing, and gives them a chance to set future goals.

For the stakeholders of the financial well-being ecosystem, such as banks, policymakers, NGOs, and academia, we have provided a long list of evidence-based suggestions for improving the three dimensions of financial well-being. Financial well-being needs to be understood from the human perspective, instead of the top-down approach that aims to say what people should be like and what they should value. Second, the assumptions held so far (e.g. that financial literacy automatically improves financial well-being) need to be challenged and rigorously tested.

We highlight that instead of aiming to translate the world of finances to people via financial education, human worlds in their diversity need to be translated to the financial well-being stakeholders. Only then can effective interventions be launched. Third, the things that affect financial well-being go beyond money. For example, in one of our experiments, we found that using the Headspace app and watching mindfulness practices TED Talks has a positive effect on financial well-being. As said earlier, it is about having peace of mind.

EF As we look at the rapidly changing world around us, what should we not lose sight of amidst this turmoil?

LR We should keep in mind that humans are humans, no matter how educated or wealthy they are. Life can throw all sorts of shocks at us, in our personal lives, by changes in economic or political circumstances, pandemics, etc. Therefore, assuming that financial well-being interventions are needed mainly for those who are underprivileged, have lower education, or are in a vulnerable state is misleading.

All of us can benefit from thinking about security, freedom, and pleasure in our lives, and consider whether we wish to change something, and in a perfect world, be able to find personalised support when needed. I had the misfortune of experiencing recently how easily one can go from high financial well-being into a moment where support is badly needed to avoid falling into economic difficulties. We also see from our study how life changes can totally disrupt financial well-being.

On the other hand, what should be kept in mind is that not everyone wants their financial well-being to be improved. Quite many people in our study were satisfied with the way things are in their lives and we did not want anyone to educate or nudge them in any way in that regard. Therefore, it is important to carefully target the financial well-being initiatives only to those who need them and in those moments where they really need them. This, of course, is a huge challenge for the stakeholders. Easier said than done.

Do you want to dive deeper into the research? Then read more in the report »Beyond Money – Exploring Financial Well-Being through a Human Lens«.

Cover image: Merike Tamm