This is largely because of the global financial crisis of 2008, which has resulted in a sustained increase in the cost of living, coupled with a fall in real earnings.
Increased diversity in financial services, constriction in consumer lending and a growing pensions crisis have also put new burdens on employees.
We have explored strengths and weaknesses in consumer financial capability and find that key areas relate to employees’ day-to-day money management and planning ahead. Younger people are particularly poor at money management and paying bills on time. A preference for living for today, common among, but not unique to, younger people also makes them poor at planning ahead.
People with low incomes and internet non-users often perform less well except, notably, those on low incomes who are among the best budgeters.
Although higher earners may be better at making ends meet and planning ahead, they are comparatively poor at keeping track of money. This, combined with over-reliance on consumer credit to maintain spending, is a recognised route to financial difficulty, particularly when combined with a drop in income.
Employees can help themselves
Getting into the habit of planning and tracking spending is important for employees, particularly in a climate of lower pay, part-time working and job insecurity.
They could consider using online tools, which are freely available. For example, the Money Advice Service offers a money health check and a budget planner along with information about pensions, savings and debt.
But one of the simplest things employees can do is join their workplace pension scheme. Joining early is key and making additional contributions where possible will increase the pension pot and help offset time spent out of work.
Employees should also consider building up rainy-day savings to provide a safety net in case of unexpected major expenses or any sudden income loss. Having savings equivalent to three months’ income is a useful principle, but starting by saving small, manageable sums each payday by regular standing order is great way to get into the saving habit. Staff who save as little as £5 a week will soon be able to cover an unexpected expense and reduce the need to borrow.
Workplace savings products such as cash-based individual savings accounts (Isas) can help employees to put savings at arm’s length but, crucially, the money can be accessed in an emergency.
Employees must avoid relying on consumer borrowing, particularly where it involves high-cost credit, being always overdrawn or unable to repay more than their credit card’s minimum payment. Those unable to do so and who find themselves getting into difficulty with debt or household bills should seek advice early, perhaps from free advice services such as nationaldebtline.org or stepchange.org.
Employer intervention is key
Early and timely employer intervention is key. As a minimum, at induction, new staff should be made aware of the benefits of workplace pensions and other schemes. Line managers, HR teams and staff counsellors should be equipped to signpost employees to money or debt advice where needed.
Employers can provide structured financial education in partnership with local advice services such as the Citizens Advice Bureau or directly through resources available from the Money Advice Service’s partnership team. Priority employee groups could include young, lower-income and lower-skilled staff, as well as those facing major life events, such as starting a family or redundancy.
Employers might also consider offering access to out-of-hours online resources to staff without regular internet access.
Building links with credit unions is another route for employers to consider, offering employees access to affordable credit and the potential to save affordable amounts automatically through payroll deductions. This could extend to a commitment by employees to save more with any future pay rise.
Andrea Finney is senior research fellow at the University of Bristol’s Personal Finance Research Centre
