It has been suggested that economics is a branch of psychology. So it stands to reason that an individual’s attitude to financial wellbeing is rooted firmly in their mindset.
In 2002 I graduated with a degree in psychology. Although useful at times, never has it become more vital to my work than when looking at employee financial wellbeing.
According to the psychologist Dr Peter Collett, there is a lot of evidence that links people’s financial behaviours to their individual psychology. Research tells us that as an employee’s financial wellbeing declines, so does their ability to do their job, which, in turn, costs employers money through lower productivity, absence, and reduced engagement.
Most people find it difficult to save money. Millennials (almost half the workforce) are struggling financially, more than any other generation in the workforce. Young people are fighting to cover urgent expenses associated with rising rents and student loans, meaning future priorities like saving for retirement are falling by the wayside. According to Gallup, people tend to enjoy saving more than spending, so why are we still so bad at it? Author Sendhil Mullainathan and behavioural scientist Eldar Shafir say it is because of scarcity.
Scarcity
Scarcity is a new area of social psychology that says people place a higher value on something that is scarce, and a lower value on things that are not. Studies have shown that when people assess their financial wellbeing and this assessment highlights a below-average financial position, they pursue strategies to mitigate the sense of being ‘below average’. For most, this results in spending more money on goods and services unavailable to peers in the same position.
Scarcity prevents employees from seeing the bigger picture of what is important and instead focuses them on their present and pressing needs. In essence, the burden of having less money forces people to make worse financial decisions.
Small steps
Making better financial decisions does not require big gestures. Helping employees to make small steps towards securing their financial future is one of the best ways to improve their financial wellbeing. Having tangible goals is a good way of doing this; people get what is called ‘anticipatory happiness’ from having savings goals. Perhaps someone is saving for a holiday, so they think frequently about the reward that is about to come their way. Employers should consider financial wellbeing initiatives that encourage saving, particularly those that help them secure their future, such as pensions. One of the most popular ways of encouraging this behaviour is ‘nudge theory’.
Nudge theory
Nudge theory is a modern concept which focuses on creating choices for people in a way that will then encourage a particular decision. By presenting choices in a certain way, people make wiser decisions and, although the decision is still theirs, they get nudged one way or the other. Wearable devices, such as FitBits, operate using a similar principle; at the right time these will ‘remind’ you to exercise, so you now have a decision to make. Nudge theory can improve an employee’s financial wellbeing by giving them personalised information at the right time in their life.
The stress of debt
To maximise their happiness, an employee needs to get out of debt. Financial stress is overwhelming and in fact, debt is often cited as the number one thing that keeps us all awake at night.
There are new financial wellbeing initiatives aimed at reducing or clearing an employee’s credit card debt through payroll lending. This can help them press the reset button and focus on future potential, rather than historic debt.
Financial wellbeing means different things to different employees. For some, it is about securing their future, for others it is about solving an immediate need. However, no single solution will meet the needs of a diverse workforce and a combination of financial wellbeing initiatives is the best way to offer staff the personalised and timely help they need towards a more comfortable financial future.
Quotes/stats for pull-out box: - [Clarifying proper sources for these]
- 78% of large employers plan to increase focus on employees’ financial wellbeing – Willis Towers Watson, 2015
- 71% of employers feel responsible for employees’ financial wellbeing – Bank of America, 2015
- “We have proof that Financial Education works” – TIME Magazine, July 2015
Gethin Nadin is director of ecosystems at Capita Employee Benefits
