How earned wage access can help build financial wellbeing

Managing money is one of the biggest challenges for employees and many are caught short as the end of the pay cycle draws near. 3 in 4 employees say that when they experience a financial shortfall it has a significant impact on their overall health and wellbeing.¹  

This happens across a range of incomes. Four in 10 people earning US$10,000 a year regularly encounter financial shortfalls, while 3 in 10 people earning US$100,000 a year also regularly encounter financial shortfalls.¹

Unfortunately, employers know that financial stress costs both their business and their employees, but often feel stuck in terms of finding a solution. When offered at no cost to employees, one potential solution is on-demand pay.

Here are 5 ways early wage access helps people make the most of the money they earn and become more financially secure – ultimately improving financial wellbeing.

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1. Earned wage access creates a clear link between earning and spending

Earned wage access helps employees keep a closer eye on their finances and offers a clear picture of daily earnings. The OECD says that financial awareness is one of the key elements of financial knowledge.² When employees have an accurate gauge of how much is coming in each day they’re able to better match their daily spending and can also catch times when they’re overspending much earlier.

Reducing this uncertainty and stress can have a major impact across a company’s workforce. Employees say financial stress is their leading cause of stress³ and it’s been shown to cost employers in terms of reducing retention, attendance and productivity. EY estimates this cost to be almost US$300bn.¹

2. Earned wage access provides freedom to budget

Research shows that being paid in one lump sum every month (or every fortnight) makes it harder for people to make their money last.⁴ A recent study found almost 6 in 10 people regret the impulse spending decisions they make after pay day, with 1 in 2 people running out of money completely or having to take money from their savings to make ends meet before they’re paid again.⁵

Everyone is different in the way they manage their money, so giving people the flexibility to access their pay in a way that suits them can be a major help. For some, regular drawdowns like a daily or weekly wage can reduce the temptation to overspend and make it easier for them to get their money to last – they can also be sure they’re only spending money they have earned. After all, on-demand has become a part of our life through companies like Uber and Netflix. It’s no surprise that employees would begin to expect it from their employer.

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3. Earned wage access reduces stress and reliance on credit

When a financial shortfall occurs employees often have to rely on costly credit to make ends meet – this can be in the form of an overdraft, loan, credit card or payday loan. But it doesn’t end there. Research from EY found that when people borrow to cover a financial shortfall, 7 in 10 pay interest for an extended period of time and a similar proportion pay late fees or charges.¹ 

Interest and late fees further compound the stress and cost of a financial shortfall, putting people in an even worse position. But having money on hand that has already been earned means people can avoid the extra costs of credit. If access to earned income means people avoid late payments, it can then also have a positive impact on their credit scores.

4. Earned wage access helps clear debts faster (and cheaper)

Interest on credit cards accrues daily. So, when employees are able break up the amount they repay and spread it over more frequent instalments, they have less interest to pay over time.

For example, let's say an employee has a balance of $2,000 on the first day of a credit card billing cycle and they know they’ll be able to pay off a total of $600 that month. If they were to repay that $600 at the end of the month, the average balance they’ll be charged interest on is $1,980. However, if they make 3 repayments (on days 7, 14 and 21) of $200, then the average balance they’ll be charged interest on is $1,660. That’s a reduction of almost 20%, without making any changes to the repayment amount.

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5. Earned wage access can build a sustainable savings habit and maximise interest

Similar to repaying debt, regular contributions to savings can make a big difference over time.

Firstly, smaller and consistent contributions help people turn saving into a habit. Secondly, regular contributions enable people to earn the maximum amount possible in interest and ultimately reach their financial goals faster. And in a low interest rate environment, maximising the amount of interest earned is essential.

For example, an employee on a salary of $60,000 saving $6,000 a year could either contribute $16.40 a day or $500 at the end of the month. If they have a savings account earning interest daily at a rate of 1.5% p.a., making daily contributions would increase the amount of interest they earn in a year by 11%.

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So, why are people still being paid every 30 days?

When the payroll function was established for businesses, the world was a very different place. However, even though technology has advanced significantly, the frequency at which people are paid hasn’t changed.

Monthly pay cycles used to suit businesses, but it’s hard to argue that they ever suited employees whose expenses occur on a daily basis. Now monthly pay cycles aren’t the only option for businesses, why are employees still being held back?

What next?

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