Financial Wellness

The state of financial wellness — Part 3

Employees can’t become financially well until they can build savings.
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This is the third post in a series that explores the extent of financial stress among Americans, how that stress affects businesses, and what the path forward looks like. You can read part 1 here, and part 2 here.


In 2014, Sendhil Mullainathan and Eldar Shafir published their groundbreaking book, Scarcity: The New Science of Having Less and How it Defines Our Lives. The book explains that when someone is dealing with cash flow crisis, their brain begins to function differently. They focus on putting the biggest fire out first, be it paying rent, or putting gas in the car. In this type of crisis mode, people have fewer cognitive resources to spend on considering the long-term consequences of their decisions.

This helps explain, in part, why people take out costly payday loans, or borrow from their 401(k)s to deal with cash-flow emergencies. It’s a vicious cycle that millions of Americans are stuck in: They can’t make ends meet on a day-to-day basis, which means they can’t set themselves up for long-term financial stability.

Short-term savings lead to long-term stability

Only 47% of Americans say their monthly income and bills are “consistent and predictable.” That’s over half of the country that regularly experiences income fluctuations — the exact situation that the Aspen Institute says causes people to dip into their savings, deplete what’s there, and have to start all over again.

“If people can’t cover a very small, unexpected expense, how can we expect them to save for retirement?” — Anqi Chen, Assistant Director of Savings Research at Center for Retirement Research at Boston College

In fact, multiple research bodies such as the Aspen Institute and the Financial Health Network, have identified “reliable short-term savings” as the most important precursor to long-term financial stability. Similarly, the authors of Scarcity propose that the best way to protect people against the pitfalls of cash-flow crises is help them build short-term savings.

For many, saving money is difficult

Unfortunately, the solution isn’t as simple as people just buckling down and saving more money. So-called “unnecessary spending” on things like lattes and avocado toast is a popular scapegoat for Americans’ dwindling savings accounts. But the reality is, savings rates are falling despite Americans’ best efforts. Research from the U.S. Financial Diaries Savings Horizons shows that people are saving money — but it gets wiped out over and over again.

For example, the median household’s end-of-year savings balance is one third of the total amount deposited throughout the year. In other words: Americans are doing their best to save, but are forced — time and time again — to withdraw their savings to handle emergencies. Savings accounts experience so many withdrawals and deposits each month that they’re now starting to resemble checking accounts.

Approaching financial wellness with a focus on savings

The research clearly shows that saving money is easier said than done. To succeed, employees need more than just an instrument to save. They need solutions that enable and maximize savings, while simultaneously addressing the reasons saving is so difficult — as well as the reasons savings accounts get plundered in the first place.

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A financial wellness product will be successful if it helps employees save money more successfully than they would on their own. First, employees need to get on stable ground with a healthy and inexpensive solution to cash flow problems. Then they need features to help them keep track of bills, and spend smartly — which means avoiding lost wages due to penalties and fees.

“Positive cash flow is the most fundamental piece of short-term financial stability because when income exceeds needs, consumers have money left over to build savings cushions or invest in wealth- building activities.” — The Aspen Institute

This leads to positive cash flow: a point at which income exceeds expenses, allowing savings to grow to the point where they can absorb a cash flow problem without being decimated. Over time, savings balances continue to grow, which is an integral part of making progress towards financial health.

This is all backed up by data from the Financial Health Network which has done extensive research on what it means to be financially well:

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It’s true that there’s no shortage of apps and services to help people manage their money and grow savings. In our next post, we’ll do a deep dive into why the tools currently available to your employees aren’t helping — and might even be holding them back.


Ready to learn more? Download our newest e-book: A Guide to Financial Wellness: The Employer’s Handbook for Understanding On-Demand Pay and Financial Wellness Benefits.

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