Why is the most powerful tool to improve employee financial wellbeing being completely ignored?

As a keen advocate of financial wellbeing in the workplace, for many years I’ve been working together with employers to help improve their employees’ financial wellbeing. During this time, I have not found many who have implemented a solution to help employees create an emergency fund.

An emergency fund is an account set aside for personal financial emergencies, which helps provide financial certainty. It is used as a safety net that can be instantly accessed to help avoid the temptation of using high interest debt solutions. How much is required can vary, but it’s usually somewhere between three and six months of net salary.

An emergency fund is crucial to support employees’ financial wellbeing, as it helps them in a number of ways:

• they become more resilient and less anxious about their finances;
• it helps prevent the temptation of high interest solutions such as credit cards or payday lenders;
• not having an emergency fund could be the very thing that triggers a downward spiral of debt and consequently mental health problems; and
• without an emergency fund, it can be very difficult for an individual to focus on their medium and long-term financial planning, which is a vital element for good financial wellbeing.

Sometimes an employee may already have a significant amount of debt.  If this is the case, the most logical solution would be paying down the debt before saving up for an emergency fund which, from a financial standpoint, makes sense. However, we don’t always make decisions based on logic and more often our decisions are based on our emotions at the time. So, if a financial emergency occurs when an individual is paying down their debt and they don’t have an emergency fund, there is a chance of going back into further debt to solve the problem. This can be damaging from a psychological perspective as it can feel like they are going backwards. However, if there were some instantly accessible emergency fund to use instead, although the net financial position is the same, the high interest debt is less likely to be an option, resulting in a less negative impact on the employee.

As an employer, an employee emergency fund should be one of the first interventions in any financial wellbeing strategy. Providing the facility to create an emergency fund, for example a monthly salary deductible amount into an instant access savings account, could be a step forward to help solve the problem. However, in order to change employees’ behaviour, they need to be convinced that it’s a good idea. In other words, they need to be sold on the concept and this can come from a good financial education strategy.

If you do succeed in rolling out and communicating the importance of an emergency fund to your employees, you may well have just given them the greatest financial gift they will ever receive – a positive behavioural change.  And once they achieve their emergency fund goal, they can start applying the same behaviour to their ISAs and pension pot.

As your employees start to feel more secure and resilient as their financial position improve, this new behaviour could become a habit; a habit of a lifetime that could set them on the right path towards financial certainty and wellbeing.

That is why encouraging, educating and even persuading employees to save up an emergency fund is probably one of the most powerful financial wellbeing interventions an employer could facilitate.

 

The Workplace Financial Wellbeing LinkedIn Group’s events are facilitated by Secondsight.