Let's use Broke Betty as an example. Increasing income and cutting expenses will help Betty get to positive Financial Fuel, however change will not happen overnight. On the way, life happens. Bills happen. Birthdays happen. Holidays happen. Emergencies happen. When they do, it’s critical that Betty doesn’t go deeper into debt. So, what are her alternatives to eliminate short and long-term dependence on credit?
- Cashing in the PTO: In the short term, Betty needs cash, not PTO. Don’t overthink this. Allow her to get the cash she needs to avoid more dangerous traps.
- 401(k) / 403(b) loans: In a perfect world, employees would not borrow from their retirement savings, but Betty’s world is not perfect. She’s going deeper into debt each month, and her options are often limited. Retirement plan loans allow Betty to borrow from herself. These loans are the cheapest sources of cash and, while conventional wisdom discourages borrowing, they’re far better than the alternatives. Employers providing limited retirement plan loans, coupled with the tools above, give Betty a lifeline during her “broke” years.
- Purchase programs: Betty will need (and want) various consumer products along her journey. If she’s cash poor and has poor credit, she will lean on predatory debt to fulfill her needs. She won’t talk about it, but it’s happening. Purchasing programs such as Purchasing Power allow Betty to use payroll deduct instead of revolving credit. On average, products are priced 30% higher to offset the risk. Still, using these programs is a better stopgap for Betty if she can’t pay cash or avoid the expense. The keys for employers implementing these programs is to ensure responsible limits, be clear on the tradeoffs (e.g., pricing) and encourage Betty to get positive fuel, so she has better options.
- Early access to pay: Earnin, PayActiv, Salary Finance, and FlexWage are among a new set of tools that give employees early access to earned wages. These tools allow Betty to avoid expensive payday loans, title loans, overdraft fees, and a range of predatory financing. That’s positive. At the same time, these tools alone don’t change Betty’s financial picture. She’ll still struggle with building financial fuel unless she’s simultaneously increasing income and cutting expenses. With that in mind, employers should set limits on payday advances while providing tools to help Betty graduate from needing early access.
- Hardship funds: Great companies have great cultures. Employees want to help one another. They empathize with Betty’s situation and chip in to help her tackle financial challenges. Hardship programs, sometimes called “pass the hat,” send a powerful message to contributors and recipients that the company is a true family. Employers should continue these programs and, when Betty needs a few extra dollars, attach a note to the funds that says, “Financial independence is well within your grasp. Hope this small contribution helps you through the rough times.”