Gethin Nadin, director, global partnerships, Benefex
Almost two years ago, we were told that rents were rising, mortgages were getting more expensive, consumer debt was increasing and that there was a real need for financial wellbeing in the workplace.
So, what has changed? Not a lot, in my opinion. Debt continues to rise, and consumer confidence remains low while uncertainty around Brexit looms. New research by Neyber reveals that 33% of the workforce is still worried by financial concerns. So, it seems that current financial wellbeing strategies aren’t having a great impact.
The state of the nation
On average, our finances are improving as a nation, but the recent election and looming uncertainty around Brexit have all led to a lack of consumer confidence, which ultimately leads to a worsening economy. Unfortunately, the statistics don’t make for comfortable reading:
- Average UK household debt is £13,000
- Average student debt is £44,000
- One in four families have less than £95 in savings
- Cost of running a home is now half of UK income
So, are we educating employees on saving and getting out of debt in the right way? I think we need to get back to basics to help employees understand how to improve their financial wellbeing.
How many employers have advised their employees on the benefits of compound interest? Probably not many. If you’re unsure, this is essentially the principle of gaining interest on your original savings amount, plus interest on your interest. It’s a fascinating concept, and one that some have referred to as “man’s greatest invention”. Getting our employees (especially the youngest ones) to understand this could be key to securing their own financial future.
Compound interest means that Person A could put £3,000 into a savings account each year for 10 years from their early 20s to early 30s, contributing a total of £30,000. By the time they’re 65, that account could have accumulated £642,560, completely in interest.
Person B could pay £3,000 into their savings account every year from their early 30s until they’re 65, contributing a total of £102,000, but still only accumulating £513,950 including interest.
So, with compound interest, it’s ((money + interest) x interest) x TIME, which is the important factor in accumulating savings, and that’s why it’s so important for younger employees. Starting to save at the earliest opportunity really pays off.
Let’s take a step back
Rather than focus on all the tools that are out there, and let’s focus on what finance experts and psychologists tell us about financial wellbeing…
The Big Five causes of debt
I’ve reviewed a lot of research, opinion, thought leadership and financial advice to come up with the five main principles of good financial wellbeing. In order to do this, I needed to look at the things people do to get themselves into financial difficulty in the first place:
Paying for things late – Not only does this affect your credit score, but just one missed or late payment can take 6+ months to recover from. It also leads to ‘burying your head in the sand’.
Failing to budget – I’m terrible at budgeting. But setting a clear budget and sticking to it is what will keep you living within your means and not overspending.
Not tracking expenses – This is the old ‘coffee-a-day’ scenario. Someone drinking a Starbucks latte on the way to work each day is spending around £655 per year on coffee. People need to keep a track of what they are spending to identify areas of waste.
Using credit cards for everyday purchases – Credit cards should only be considered ‘emergency money’. Using them every day is a slippery slope.
Taking out payday loans – Most people who do this already know it’s a bad idea, but in times of need, it might be the only option. Borrowing just £250 for four months could see you pay back £650 in interest alone.
Are employers ensuring that their financial wellbeing strategies are tackling these five main areas? Many focus heavily on pensions or debt, which leaves those employees who are trying to save money without any support. Trying to prevent an employee falling into poor financial wellbeing is as important as tackling those who already have a problem.
The Big Five ways to solve this
If you’re ever in doubt about how to improve your financial wellbeing, just think about Pepsi. One of the first lessons I was taught when sitting my financial planning exams was PEPSI:
Protection – everyone should ensure that their lives are protected. If the worst should happen, will the family be looked after, and will the mortgage be paid? Life assurance is a benefit that most employees have available to them, but probably don’t understand the impact having it can have on their lives.
Earnings – protect your income. Having insurances in place to keep your income in the event of long-term disability is vital. Income protection is a benefit that many employers offer, but many employees don’t understand. Could it be an addition to your benefits scheme?
Pension – protect your retirement. As an industry, we have really come a long way in making sure employees understand their pension and are encouraged to take one out. However, I don’t think we are doing enough to warn employees of the dangers of retirement without enough money. Do you tell your employees to work out how much they need for retirement, so that they can figure out how much to pay in now?
Savings – according to the most basic advice, only once employees have all the above sorted should they consider saving money. Many employees still carry credit card balances as well as savings accounts. Paying off debt that is gaining the most interest should be a priority before employees think about savings. Debt is slowly making the situation worse, so shortening the life of that debt will pay off more in the long term.
Investments – the last thing people should think about, but something that employees may need help with without any notice. An inheritance or a house sale could immediately put an employee into a debt-free situation. If this happens, employers need to be able to offer support to them so that this money can be invested wisely.
An outcome, not a product
Following our shift in positioning to becoming an employee experience provider, we’ve spoken a lot about how employee engagement is an outcome, not a product or a process. It’s the same with financial wellbeing. Many people claim to be ‘financial wellbeing’ providers when in fact, they are just money-lenders. While debt consolidation is a great idea and can really benefit an employee, I think it needs to come hand-in-hand with more education. Employees need to understand the impact of consolidating debt, and education helps to ensure that once they are debt-free, they don’t fall back into the same habits.
Financial wellbeing must be viewed in the same light as any other type of wellbeing. A flash diet might take off a couple of lbs in the short-term, but overall what’s really required for a healthy body is education about diet and nutrition, and a full upheaval of your attitude towards food and exercise. Further, we’re not all able to just go out and run a marathon tomorrow; our exercise regime must be something we can realistically achieve. Our finances must be treated in the same way; start with education, and a better understanding of our finances will affect our spending and saving habits.
We need to make sure we’re helping employees make better decisions, reduce their worries about their finances, make the most of their income and, most importantly, develop their financial confidence. The more confidence an employee has about their financial situation, the less they worry, and the less impact it’ll have on their ability to do their job.
A joined-up experience
Your wellbeing, financial wellness, and benefits strategies while different, need to be aligned to avoid a series of confused and chaotic series messages to your employees. Consistency also enables employees to become comfortable with the approach of you as an employer having an interest beyond the task at hand, but in the individual.
Considering the broader context
Plenty of financial wellbeing programmes are focused heavily on getting people to understand pensions, benefits and specific things like childcare, when in fact, research shows that most people’s financial stress is caused by factors outside of work. Things like buying a car, getting married, and looking after older dependants. So, we consulted MoneyDashboard to help us find some data as a starting point:
- On average, of money leaving a current account, 91% is spend, 8% is repaying credit, and 1% is savings
- 47% of our users have an overdraft facility, with almost £5,000 credit line on average
- Average credit card balance is -£3,500
- Only 67% of users repay their balance in full each month
- 50% of our users have a negative balance each month
- This is data where the average age is 32 and average income is around £33,000
With all of that in mind, we further developed our financial wellbeing ecosystem into OneHub. We have integrated more than 10 providers that we think can help employees improve their financial wellbeing. Our consultative approach means we only integrate what is most useful to your employees at that time and where the biggest impact will be seen.
This also means that rather than kicking a can down the street, we can implement technologies together. Therefore, applying something like payroll lending can only take place after we have done some initial awareness work, so you as an employer can be confident that we are offering a considered route to employees who have already given thought to their next move.
We not only think this is the best way to improve an employee’s financial wellbeing, we also think it’s the right way.