Financial pressure is building up for many employees. More people are borrowing regularly to get by, as prices and interest rates continue to climb. Not only is the slow build up of credit card debt a problem, but it increases the chances that people may need to refinance their homes to keep the cost of carrying that debt from becoming debilitating.
According to the BDO Affordability Index, 78% of Canadians say their finances have worsened due to inflation. Further, 84% of respondents cited the rising cost of essential goods as the main contributor to an increase in household debt. This type of debt, created from the slow bleed of having to spend more on necessary household costs, tends to live on credit cards at first. But as those card balances build, borrowers will have to make changes to their debt structure. Otherwise, payments become unmanageable or the debt becomes too large to refinance.
Debt decisions have a lasting impact 🗓️
When employees run out of credit, they can also run out of options and may be forced to make changes to their debt structure. While borrowing for the day-to-day overages isn’t likely to cause frequent remortgaging, debt build up from constantly running out of money before the end of the month is sure to lead to more employees refinancing.
Debt decisions can often trap employees for years, and some refinancing options can cause irreparable damage that will affect them for life. They need to understand important facts about how their mortgage works, or the cost of a debt vs. interest rate beforehand. But once they’ve refinanced, they are often stuck for at least five years.
Even worse, employees who aren’t homeowners with equity available to borrow against, or whose credit has been damaged will have few options to manage their debt. They can end up backed into a corner with even worse options to choose from, like constant refinancing, payday loans, and alternative or predatory loan products.
Expensive debt begets expensive debt 💰
Expensive types of debt can lead an employee to be in a position where their only way to get enough cash flow to keep on top of their expensive debt is to take on even more expensive types of debts. Using credit cards to compensate for monthly cash flow gaps can put employees at risk of being unable to keep up with even minimum payments. Making payments late, failing to pay at least the minimum, carrying a balance of over 80% of the limit, or going over the limit can all have detrimental consequences on employee credit scores. These types of issues can also allow credit card companies to increase their already high rate of interest by 5% or more for a borrower who is paying late, or failing to make minimum payments.
Once employees end up in this cycle, they may be highly susceptible to considering alternatives, like payday loans, or other ultra-high-cost, short-term debt. This makes the problem even worse. Around they go, in a vicious cycle until all of their energy is consumed by the crushing weight of their debt. Payday loans can appear far less expensive than they actually are. Once someone uses one of these loans, it can be hard to stay away from them. It’s common to end up having to take out payday loans many times a year, or even every payday, for months on end. The interest is often expressed as a fee in their marketing materials. But according to the Better Business Bureau, a $15 fee to borrow $100 is essentially the same as an annual percentage rate (APR) of nearly 400%.
There are major gaps in debt knowledge 🧐
The crucial tools your employees need to make good debt decisions are usually not available. While financial institutions provide lending products, and are a good place to go to create debt, the support they provide to show people how to pay it off efficiently is lacking in many cases, and non-existent in others. Employees need debt tools and cash flow management strategies to truly help them make the most of their debt options.
Beware of programs or guest speakers that lecture employees on the evils of debts, or insinuate that taking on debt is bad in general. Making people feel bad typically doesn’t help them make better decisions. While carrying too much debt can be dangerous, expecting employees to avoid debt altogether is ridiculous and short-sighted. Yet, many so-called financial experts insinuate that people ought to know better, and leave employees feeling like carrying debt makes them stupid or doomed. This attitude can make for an amusing presentation, but can damage your employees’ chances of making real changes.
What employees really need are programs that help them understand how various types of debts work, common situations debt is good for, and how people can use these products in a safe way. They also need tools to help them figure out how much debt is reasonable for their age, stage of life and homeownership status. Then they need programs that help them understand sustainable ways they can find more cash flow to put towards debt-repayment strategies. Ultimately, employees need ongoing cash flow management education to maximize the cash flow they can put towards debt repayment. This way, they can use debt to their advantage and avoid any overly negative consequences.
People are sold on rate not cost 😬
One major area of debt education that employees need to learn about is the difference between rate and cost. We are practically brainwashed to believe that rate is the main factor we should care about when borrowing. Look at the marketing from any lending institution, and you’ll see their rates in 20-foot font on the side of their buildings, but you don’t see any marketing emphasis placed on the cost of repaying debts. I suppose a campaign declaring, “Borrow $250,000 at 5.5% over 25 years and pay back over $210,000 in interest,” wouldn’t be as enticing. But it would be the truth. In that example, the total cost of repayment is more than $460,000 and, if rates went up, the total cost of repayment would be even higher.
In addition to interest rate, amortization (i.e., how long the debt is financed over in total) and the amount borrowed have a massive influence on the cost of debt, too. Boiling debt decisions down to interest alone is dangerous, and potentially expensive. You can’t count on lenders to point that out. Employees need ways to understand these things so they can make better decisions going forward.
Cash flow behaviour is a crucial factor 🤨
Dealing with debt isn’t solved just by learning about debt alone. Cash flow behaviour has a significant impact on both debt creation, and debt elimination. Learning about managing spending behaviour can avoid or reduce the creation of new debts, and it can help employees find the money to pay debts off more quickly. Paying off debt faster reduces amortization, which is the only way to truly protect from fluctuations in interest rates.
Avoid programs or guest speakers that boil spending management down to spending too much on daily coffee, and lecture employees about delayed gratification. People don’t tend to take any advice that sounds like a harsh judgment. Instead, look for programs that give employees ways to figure out how much is safe for them to spend on the things that matter to them day-to-day, and give them the freedom to decide what those items are. Everyone is different, and will have varying priorities. Financial wellness programs need to provide frameworks people can apply to their own lives. This way, they can make changes that are easy to stick to behaviourally, and that align with their own value system.
Savings can prevent bad debt decisions 🦺
Pay yourself first is a great cliche that seems like sound advice. But saving without a change in spending habits does not result in true financial flexibility. However, managing cash flow alongside creating savings can leave employees with a lot of good options when faced with an emergency.
If a well-meaning employee has been working hard to pay down debt but has neglected to create savings, the second they have an emergency, they’ll have no choice but to create new debt. This can be devastating to the employee, and result in them giving up altogether. Just like debt education is made stronger when it’s combined with cash flow education, they both benefit from ensuring savings is part of the mix.
Throwing money at the problem 💸
When thinking about the burden of employee debt, some employers consider offering benefits like student loan repayment assistance programs. But money alone isn’t a great solution. Instead, tie monetary benefits and incentives to financial education and behaviour change goals. Assisting employees in paying off student loans can be a great idea, but it’s even better to have employees qualify for the program by completing some debt management courses. This can help them see where to redirect the funds they were using to repay their student loans that are now subsidized by the employer contribution. This is an important way to help them build up more financial flexibility from those funds, not just create a temporary benefit.
Repetition is key 🔂
Employees don’t just need to hear about the financial wellness program once, or once in a while because the information won’t stick. You need to weave the wellness program into regular employee communication and, ideally, into their total compensation package. Don’t limit how many times employees can access or attend a financial subject. They need to hear and see examples over and over again, as they move through life tackling different debt decisions.
Financial wellness can seem like a non-urgent, or nice-to-have benefit. You may feel you’ve got time to add it when things aren’t so busy. But waiting too long could leave employees in financial situations they cannot undo. Then you go from having employees under financial stress, to employees in crisis, and that gets really painful for everyone. The good news? You can avoid this by treating financial wellness like the priority it should be, right now.
Learn more about employee financial wellness. Watch: The Cost of Employee Financial Stress.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Financial Capability Program (FCP)
The FCP combines quick and practical lessons with tools, including Winton, which helps people make financial changes they can stick to. Users can apply what they've learned to their financial situation, thus bridging the knowing-doing gap. The goal of the FCP is to help people get more life from their money.