Earned Wage Access & Financial Wellness

On-demand pay: What’s savings got to do with it? — Part 1

This is the first post in a series that explores why any tool to improve employee financial resilience must include proven ways to save.
various pie charts making a pattern

Savings is a critical part of the story

Everyone understands the importance of savings, whether it’s to take care of unexpected expenses due before payday, or to achieve long-term goals like home ownership. But despite the proliferation of budgeting apps and financial education programs, behavioral psychologists and economists agree: Saving is still hard. The good news is that we now have proven strategies that work to increase savings. And we know that employers are uniquely positioned to help implement those strategies in tandem with on-demand pay.

The importance of saving

Research shows that people from all kinds of backgrounds say they want to save more money, and enjoy doing so. American culture reinforces these norms: Children grow up with piggy banks, young people save for down payments on homes, new parents and grandparents save for their children’s education. Over half of Americans participate in a 401(k) or pension plan to save for retirement.

These are all important things to save for, but not everyone is in a position where saving for a home or college is a priority or even realistic. For some, the more immediate concern is building up short-term savings: money that can cushion the blow of an unexpected expense, or a lost job. Experts point to short-term savings as the bedrock of longer-term financial stability. “The ability to absorb a financial shock” is part of the Consumer Financial Protection Bureau (CFPB)’s definition of financial well-being. Similarly, the Financial Health Network identifies “saving” as one of the four pillars of financial wellness.

When someone has cash savings to fall back on, day-to-day financial decisions are easier, they have less anxiety, and they have more freedom to make choices that allow them to enjoy life. Having even a small amount of savings, anything from a couple hundred to a couple thousand dollars, has been shown to help people launch themselves into longer-term financial stability, largely because they’re able to avoid pitfalls associated with predatory financial “solutions.”

“When I had a savings account with my bank it didn’t work out so well. Since I’ve been doing the Even app I’ve actually been saving money. It’s been easy. I had to pay car insurance and I was $30 short, so I thought ‘I’ll use my Even savings.”

- Joyce, Even Member

For example, one common occurrence when people run out of money before payday — and don’t have savings to fall back on — is that they’ll overdraft their checking account. These fees have skyrocketed in the past decade; in 2000, the average overdraft fee was $20. Today, it’s $30. In 2017 alone, Americans paid $34 billion in overdraft fees. Credit cards are also an option for some, yet they come with their own set of risk to consumers when terms, rates, or personal circumstances are not favorable. For example, low introductory rates can be a tempting lure for those in need of emergency coverage, but once that rate ends, some people may find themselves in a financial lurch. An introductory interest rate of 0% can quickly jump to 23.99%, creating the cyclical debt for those that are unable to pay off the balance before the introductory period ends.

Read the full version of our saving guide to learn the challenges behind building savings and how as an employer you can help.