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Today, 78% of Americans live paycheck to paycheck. When unexpected costs arise, they end up caught in a debt cycle. How do we fix this as a culture?
Naturally, most Americans want higher wages – but the reality is that many companies are not in the position to offer raises. Right now, during this COVID-19 crisis, companies are forced to do the opposite. So, how are people who live paycheck to paycheck expected to get by?
Most companies pay either biweekly, weekly, or monthly – but that doesn’t always work for people who live paycheck to paycheck. Even if you set a strict monthly budget, unplanned expenses are going to pop up over time. Whether it’s a surprising medical bill, a speeding ticket, or an abnormally high electric bill, it’s hard to keep your budget the same every month.
People will either skip certain bills, which leaves them with late fees, or they’ll pay the bill anyway and end up with overdraft fees on their accounts. They can’t win.
What if there was a way to get a payday advance without having to take out a high interest payday loan?
Well, there is.
The solution to the paycheck-to-paycheck cycle is early wage access or on-demand pay.
When asked for thoughts on receiving daily pay, James Stuart from FrugalStu said, “Sometimes there is bad timing where many bills stack up in the same week, and getting paid daily would alleviate that problem.”
However, paying daily complicates things for employers and their HR/payroll teams. That’s where on-demand pay vendors like Rain come in.
You may wonder why there needs to be an app like Rain in the first place. Why don’t you just click a button and let your employees get paid every day?
Well for starters, those who understand the payroll process will know that processing payroll is not usually as simple as pressing a button. Since it can be such a time-intensive process, even weekly pay can be too much for some employers.
Plus, there are tax repercussions that come with daily pay. One HR Manager, Nate Masterson at Maple Holistics, says, “Because there is such a stringency placed on payroll taxes, employers aren’t generally so inclined to want to make frequent changes to the system in place, so as not to cause any accounting red flags,” and “employees [with daily pay] would now have (seemingly) more money, but [may] be responsible for their own quarterly taxes.”
With an app like Rain Instant Pay, taxes are not a problem because there is a cap placed on how much an employee can withdraw. For example, Rain recommends a cap of 50%. This means that if you normally pay your employees on Friday but an employee wants to withdraw their earned wages on Tuesday, they can only take out 50% of what they’ve earned. The remaining 50% will appear in their normal paycheck on Friday, less any owed taxes.
Additionally, using an external vendor means you don’t have to change anything about your current payroll processes. That means no tax or accounting hassle and no extra work for your payroll and HR teams. Just an added benefit!
A lot of people ask whether including an on-demand pay benefit would simply result in employees taking out their earned wages and immediately spending it, resulting in zero funds left on payday. However, we’ve seen the opposite to be true with our Rain app.
Katie Holmes from OutwitTrade shared that “the less frequently [she] was paid, the more [she] splurged on payday.” Katie said that when she was paid monthly, she would splurge more often, because she would see such a large deposit in her account on payday. She believes that more frequent pay would help her stop spending money on things she doesn’t need.
Anna Baker from LogicalDollar also sees how more frequent access to pay can be quite effective for budgeting, stating, “if you receive a pay check every week, your first one each month could go towards your repayment obligations, your second one could go straight to your savings, leaving the last two for your daily expenses.” The ability to control when you collect your wages can help people create a budgeting strategy that works for them.
Meanwhile, another interviewee discussed using on-demand pay for necessities, only. EJ Mitchell from MyPerfectResume says, “Above all it would give the quick turnaround time to not have to wait to make purchases that are needed here and now. Groceries and healthcare items come to mind as the biggest priorities.”
Plus, most early wage access providers (Rain included) do charge a small fee for early withdrawals. Having to pay a few dollars may prevent people from withdrawing funds just so that they can go see a movie or purchase things they don’t need. The app is intended for unplanned expenses and for when bill due dates just don’t line up with payday.
Anna Baker from LogicalDollar summarized it perfectly when she said, “Of course, this shouldn’t be a replacement for people taking control of their finances and avoiding having to even consider a pay day loan. But for those who are still working towards that or who may just be having a bad run, this could be a great solution.”
It may sound like an administrative headache to have to offer on-demand pay, but it’s not. Vendors like Rain make it easy (and free).
The Rain Instant Pay app includes on-demand pay, checking accounts with overdraft protection, and alerts when the user has a bill due and is at risk of overdrafting, so that they can withdraw or move money around. Rain can plug into an employer’s existing payroll and timekeeping structure to not cause any disturbance or require any additional work.
Lewis Keegan from Skill Scouter says, “Knowing that I will be receiving my paycheck at the end of each day would increase my productivity in the sense that it will serve as my “reward” after spending long hours at work.”
Kuba Koziej from Zety.com also stated that “daily or weekly wages would [provide] an instant gratification for employees’ work.” The desire for instant gratification can lead to employees taking on more shifts or being more willing to work overtime. There’s something about being able to see the numbers rise that can encourage someone to put more hours in.
You may not even realize how much your employees are struggling financially, but if 78% of Americans are living paycheck to paycheck, at least some of your employees must be feeling financial stress.
Brian Dechesare from Mergers and Inquisitions shared that “Finances can be a major source of stress which can be a distraction at work. By reducing the stress of employees it can improve their professional productivity.”
Employees who know that they’ll be able to buy themselves dinner after a shift because they can log in and withdraw their earned wages are more likely to be happier overall.
One thing that became apparent when we conducted these interviews was that while many people had heard of early wage access (CNBC rated it the #1 most buzzworthy employee benefit of 2020), there are still thousands of employers out there who have not.
That means that including on-demand pay in your benefits package will make you stand out among the crowd and likely result in more job applications for your open positions and higher employee retention rates.
Here at Rain, we’ve seen a huge increase in the number of companies turning on this benefit NOW, while we’re all dealing with the effects of COVID-19.
One of the people we interviewed, Isaac Hammelburger from Search Pros, is considering adding this benefit now and said, “Our team needs all the support they could get and receiving their pay on a daily basis could greatly help them in times like this. This could also motivate them to work and be productive since they have one thing less to worry about…”
There’s not a right or wrong time to add this benefit to your arsenal, but if you choose a free on-demand pay vendor like Rain, it won’t take you much time or effort. There’s no reason not to add it at this point.