If you’re a business leader looking for ways to help employees financially, you’re not alone. While the topic of “financial wellness” had already been gaining traction in recent years, the economic fallout of COVID-19 has highlighted something urgent: Employees need more help from employers to stay on their feet. Several of the nation’s most admired companies have taken action, and many more are looking for ways they can do the same. But the term “financial wellness” can be confusing at best. Here’s some information that should help you get started.
Let’s start by defining what “financial wellness” actually means. The concept is broad and can go by a few different names. For example, the Consumer Financial Protection Bureau (CFPB) defines financial well-being as having four parts:
Similarly, the Financial Health Network identifies the main elements of financial health as spending, saving, borrowing, and planning. The Financial Health Network also notes that there are key indicators associated with these elements; these include paying bills on time, having sufficient liquid savings, having a manageable debt load, and planning ahead for expenses. When people are making progress in all these areas, they’re on the path to better financial health.
Since financial wellness is a broad concept that encompasses many things — building savings, planning for the future, spending within means, and healthy borrowing — that means there are lots of programs and solutions to address all the different components.
Finances can be complicated, so it would stand to reason that teaching people the best practices around spending and saving would be useful. Unfortunately, research shows that training, classes, and counseling are rarely effective. One-size-fits-all approaches, containing highly complex concepts like compound interest and mortgage rates, don’t help someone who doesn’t have $200 in the bank for an emergency. Philip Fernbach, co-director of the Center for Research on Consumer Financial Decision-Making at the University of Colorado’s business school, has said that with these programs, “there was almost no benefit. Those participating in financial education were essentially no better off.”
Retirement programs are an important way to help employees plan for the future, and one we encourage any employer to consider. However, keep in mind that 401(k)s won’t benefit all employees equally. Many of your workers might be struggling to make ends meet right now, leaving them unable to even consider saving for retirement. For these employees, it’s important to also consider earlier interventions that help address current needs so they can make progress towards the ability to save for the future.
Data shows that most employees do need help building savings, so this is a great area to explore. But it’s also an area to be careful in, because changing behavior is extremely hard. Most savings programs tend to be overly complex, poorly designed, and focused on the wrong things — meaning change doesn’t take place, because employees don’t have the time or energy to figure them out. It’s important to choose a tool or program that’s based on research and has proven to be effective, so employees can get real value from it.
Earned wage access (EWA) can be of great assistance to employees who are struggling to make ends meet. EWA gives workers access to the money they’ve already earned before payday comes, so they don’t need to resort to predatory payday loans, 401(k) loans, or expensive overdraft fees or credit cards. Not all EWA providers are created equal, though. So employers researching this type of solution will want to validate how the product helps employees truly build financial wellness.
For many companies, the goal is to fix a problem that’s directly affecting the business’ bottom line: financially stressed employees. Data shows that when employees are struggling with their finances, businesses can lose millions of dollars. This is something the biggest corporations are starting to address due to the scale of the problem: PwC reports that 35% of employees are distracted at work, 49% spend company time dealing with personal finances, and 31% have reduced productivity. All because they’re stressed about money.
The good news is that you don’t have to guess about where you should start. The toolkit for measuring financial health will help you understand where your employees are struggling most. Given that the majority of Americans live paycheck to paycheck, including ones making $100k or even $150k, you might find that many of your employees need help just making ends meet. For these workers, it’s important to meet them where they are: at the beginning of their financial wellness journey.
The CFPB and Financial Health Network agree that for your employees to build stronger financial futures, they need healthy ways to spend, save, and plan. But for the employees who sometimes run out of money before payday arrives, there’s a bigger question at play: How can they borrow, or access liquidity, in a way that doesn’t make their situation worse, and get on the path to progress?
One way to do this is with a benefit that offers help across the spectrum of financial wellness. This kind of solution should include ways for employees to access funds in emergencies, track spending, plan ahead, and build savings — the exact elements that the CFPB and Financial Health Network say will lead to long-term financial resilience.
If the first step is healthier “borrowing,” then EWA can put employees on the road to financial wellness — but only if it’s actively helping them make progress. A financial wellness product that lets employees manage cash flow emergencies and includes features built according to the experts’ shared definition of financial wellness is one that’s most likely to make a positive impact on your employees and your business.