Stress may appear to be a soft metric by which to predict the financial well-being of employees.
But beyond the intuition and empathy that HR leaders and corporate managers should bring to their job, research indicates that there’s a significant correlation between the two. During these economically uncertain times, employee stress is compounded by anxiety, changes in working life, and mass furloughs and layoffs. This year’s Inside the Wallets of Working Americans study found that 42% of respondents are “feeling financial stress.”
This stress affects not only employees, but their families, their work, and, by extension, their co-workers and employers. At no time in recent history has this reality been more stark than it is right now.
The survey findings suggest that people are more stressed by money than by any other aspect of life. And this stress produces measurably negative outcomes. As indicated in the study, the 42% under financial stress are 11 times more likely to have disturbed sleep than those who aren’t under similar stress. They are 10 times as likely not to finish daily work tasks, nine times more likely to have troubled relationships with their co-workers, and twice as likely to be looking for a new job. They also lose, on average, three hours a week to money worries and 1.6 days a year on financial stress-related sick days. The estimated aggregate effects of employee absenteeism, lack of retention and productivity loss from employee financial stress add up to a cost to employers of a staggering 13-18% of annual salary costs this year, up from 2019’s 11-14%. These datapoints indicate that conditions have worsened since we last ran this research—and they are doubtless now far worse still.
Financial stress in the American workplace is not an unfounded anxiety–it is based on the very real lack of financial well-being many U.S. workers feel. Here are some quick snapshots:
- Before the pandemic, those 42% under stress were also 17 times more likely not to have enough to cover their monthly housing and/or utility bills.
- Thirty-two percent of all working Americans had outstanding medical debt.
- Thirty-eight percent of survey respondents carried credit card debt balances over to the next month.
This financial insecurity often results in negative cycles of debt. Other data mirrors our findings. Pew Charitable Trusts reported in 2018 that about 10 million Americans regularly took out personal installment loans, eventually resulting in $10 billion a year in fees and interest alone. The average medical debt for 43 million Americans was $1,766. Bank overdraft fees in one year, 2017, totaled $34.3 billion. It’s easy to see that the untenable cycle of high-interest rate borrowing, while seemingly the only short-term option, harms both employees’ financials and their state of mind, which has a knock-on effect on the broader environment both at work and at home.
Compounding the issue is that while debt is rising, individual financial literacy and awareness remain low. While people know enough to be worried, they’re not readily equipped to lift themselves out of the negative debt cycle. Nor do they fully understand their own positions. Ninety-two percent of respondents claimed they knew their credit scores, but 62% of them actually missed by 50 points or more.
Indeed, these numbers aren’t just reflective of low wage earners. Looking at those earning over $100,000 a year, an income eight times above the U.S. poverty line, still more than 30% regularly ran out of money between paychecks. That’s only a slightly poorer performance than the 32% of Americans overall who do so. Rather than attributing this situation to widespread financial irresponsibility, the survey indicated that it is more a direct outcome of the rising costs of necessary expenditures such as housing, health care, child care and higher education. Middle-class salaries, which were previously able to stretch to meet college tuition, homeownership and so on, are unable to meet this generation’s financial goals.
Before COVID-19, we saw that 36% of employees were unhappy with their current level of savings—a key factor in overall and future financial well-being. Now, faced with reduced income and uncertain times ahead, many are living off savings meant for farther off into the future, and those with few other options will be turning more readily to high-interest personal debt to meet their daily needs.
So, we’ve identified the problem. Now let’s discuss a way to solve it.
Helping workers escape the debt cycle
New technologies certainly offer the promise of better managing our finances. This is evidenced by the emergence, in the last few years, of numerous personal financial tools and their growing universe of users. These apps generally don’t require engagement with a human facilitator, and their game-like approach further adds to their appeal, making it easier to save, for example. That said, there’s a huge and growing contingent of people who don’t have spare money to put away for a rainy day—or the next pandemic—and are trapped in cycles of debt.
A fun savings app is not going to be much help in their case. Instead of working with an external tool, then, what if workplaces, where salaries are earned in the first place, were to take on the role of financial de-stressor, a nerve center for savings and financial literacy?
The workplace already plays a part in reducing financial stress, for example, by providing health insurance. Out of the 3,000 subjects interviewed, 36% of employees who got their health insurance through their employers reported overall financial stress, compared with 51% of those without employer-provided health insurance. But we believe that employers can go beyond that. They can help create a financial environment—even after a shaky return to the post-pandemic workplace—where their employees can thrive, by putting in place employer-based financial health measures. In doing so, they may even have a part to play in disrupting the ugly business of predatory lending, and possibly helping to establish some relief from the current overload of financial stress.
In particular, as a way to break the cycle of perpetual debt, we should be looking at payroll-based tools. Currently, we have payroll-deducted benefits such as health insurance and other voluntary benefits like life or disability insurance. We can also introduce payroll-based borrowing. This comes with less risk of default due to the relative certainty of repayment. With lower risk, interest rates can be set far lower than payday loans.
Here, employers hold the key to helping their employees pay down existing loans, borrow at a lower rate, and build healthier financial futures. The case for these measures is strong even in less extreme economic times than those we are currently facing. Now more than ever, there is an imperative for employers to take a proactive role in protecting their employees with financial tools that give them the opportunity to break negative debt cycles.
Nick Frankland is managing director of Fintech at Legal & General, a U.K.-based financial services and insurance firm. He can be reached at Nick.Frankland@landg.com. Nigel Wilson is Group Chief Executive of Legal & General. He can be reached at Nigel.Wilson@group.landg.com. A version of this post first appeared on TLNT.