Flawed finances: Can employee debt sabotage your bottom line?

How much do you know about your employees’ finances?

You know what you pay them, of course, but do you have any idea how they manage their money – or, more importantly, if they are managing? Many employers hold the belief that their employees’ personal finances are none of their business, but what if an employee has money worries that begin to affect their work? Does it then become your business?

Debt, poor cash flow, lack of disposable income, insufficient savings and retirement funds, and fear of being hit by a costly emergency are all common causes of financial stress. According to one study, 53% of full-time employees are suffering from it and nearly one in three say that this is a regular distraction from their work. As a result, their productivity falls and the business suffers. 

According to one study, 53% of full-time employees are suffering from financial stress and nearly one in three say that this is a regular distraction from their work.

How staff with money worries impact on your business

Around half of those who reported distraction at work due to money worries said they spend three hours or more each week thinking about or dealing with their financial issues. Add that up over time and you’re losing a huge number of hours per week.

In addition to the time they spend actively thinking about their money worries, they will suffer a general loss of concentration. A survey this year from the Chartered Institute of Personnel and Development (CIPD) found that one in 10 employees find it hard to concentrate or make decisions due to money concerns. That figure rises to nearly one in five among 25–34 year-olds. Not only does this lack of concentration slow down productivity, it can also lead to costly mistakes.

Financial stress is something people tend to keep to themselves. No-one likes to be seen to be struggling for money, especially when in full-time employment. The harbouring of money worries can have a profound effect on an individual’s mood, making them sad, apathetic and even depressed. The adage ‘happy workers are productive workers’ may sound like something out of Snow White but there has been significant research to back it up. In 2014, economists at The University of Warwick carried out a series of experiments that showed happy workers to be around 12% more productive than their discontented peers.

In extreme cases, money worries can lead to severe physical and mental health problems. A 2013 study by the University of Southampton found that people in debt are three times more likely to have a mental illness than those with financial stability. Stress, anxiety and depression lead to time off work. People with money worries are also less inclined to look after themselves physically. A study published in the American Journal of Health Promotion in 2014 found a positive correlation between low incomes and unhealthy lifestyle habits, such as poor diet, smoking and lack of exercise. Another study, published in the Journal of Health and Social Behavior, found that people in debt are most likely to avoid seeking medical help for fear of the cost.

The result is more time off work. 

How to spot employees with money worries

There is no single type that is more likely to be suffering with financial stress. The simple truth is that it can affect anybody – from your lowest-paid employee to the CEO. Education is no barrier to money worries either. While many UAE professionals are educated to an extremely high standard, it would be wrong to assume that they all have their finances under control. In fact, in 2012 Ohio State University investigated the prevalence of debt among US citizens prior to the 2008 financial crash and found that college or university educated individuals were more likely to amass debt than those educated to high school level. Mortgage and credit card debt, commonplace among highly educated management level employees, can be a major source of financial stress. Therefore, you need to make your financial advice available to all before trying to pinpoint the problem cases.

A particular cause for concern for employers in the UAE is that residents here have been shown to have a lower level of financial literacy than the rest of the world. A 2013 study in the International Journal of Economics and Finance found that the average financial literacy score in this region is just 0.433 — significantly lower than the global average of 0.50. What that means is that a high number of workers in the UAE need personal finance education.

A particular cause for concern for employers in the UAE is that residents here have been shown to have a lower level of financial literacy than the rest of the world.

As the CIPD survey found, 25–34 year-olds are particularly prone to losing concentration due to financial stress, but the worries don’t disappear with age. In fact, older employees will worry more about having sufficient funds for raising a family, educating their children, medical emergencies and retirement.

How to give your staff the financial support they need

Clearly there is a strong case for businesses to take an active interest in their employees’ financial situation? Without appearing to pry, employers and HR professionals can help staff to better understand their finances and thus worry about them less.

There are a number of ways in which you can provide the support your employees need.

Budgeting and planning: Business owners will be accustomed to the techniques of planning their finances and setting budgets, but not every employee will have been taught the same skills. For most people, financial education amounts to balancing income versus expenditure and anything more complex than that, such as investing or budgeting for a rainy day, has to be learned through experience. You can save your staff a lot of worry and mistakes by teaching them how to plan and budget early on in their career.

A lot of money worries are imagined, due to individuals not being aware of the details of their financial situation and being too afraid to check. Having a budget plan encourages a more thorough knowledge of how one stands at any given time and that knowledge alleviates the stress, which often comes from assuming things are worse than they really are.

Saving for a rainy day: Everyone wants to know that, should an emergency arise, they have the means to deal with it without ruining themselves. And yet there are some who don’t ever save for those unexpected blows and bury their head in the sand. As employers, we can (and should) offer advice on how to manage savings and plan for future costs. That means communicating with staff about the importance of putting money aside, as well as carrying out practical sessions, such as workshops, on how to divide a budget to allow money for savings as well as day-to-day living expenses. It’s also important to distinguish between saving for something specific, such as a new house or car, and saving for unforeseen emergencies. You don’t want one eating into the other.

Access to reliable money lending: In emergency situations, when a staff member does not already have the funds in place, there needs to be yet another option. That can mean borrowing, which exposes the individual to further financial pressure, particularly if the lender is disreputable. A small percentage of workers reported to the CIPD that they would like access to a trustworthy lender, so giving your staff a place where they can borrow money at a reasonable rate, or even just advising them on this matter, could make a significant difference.

Access to a financial planner: It’s hard to know where to turn when you need personal finance support and, as I’ve mentioned, there is a tendency to keep financial troubles to yourself. This only increases the struggle. The resistance to seeking financial help can be broken down by bringing in external support. The CIPD research found that 53% of workers are comfortable talking to an independent financial adviser, whereas only 10% would be comfortable talking to someone from HR. Many international and local companies in the UAE offer employees access to financial planners through preferred partners. They promote this as a financial wellness campaign and run it every 3 to 6 months with the help of the respective HR departments. Giving your employees access to a professional financial adviser can help them not only get on top of their current situation but also to build a long-term plan that gives them long-term peace of mind.

Understanding their spending vices: There are many ways in which people can put a strain on their personal finances, such as expensive meals out, or shopping. As the financial pressure builds, it’s common for individuals to increase their spending in an attempt to relieve the stress. A financial planner could help to nip this behaviour in the bud, but a certain amount of counselling may also be required.

As the financial pressure builds, it’s common for individuals to increase their spending in an attempt to relieve the stress.

Protect your staff, protect your business

There is substantial evidence to show that the financial education and wellbeing of a workforce affects the business as a whole. Absenteeism, poor decision-making, lack of concentration and low productivity can have a crippling effect on the bottom line. Providing support in the shape of professional financial advice is not just good for staff morale and wellbeing, it is a sound business investment.

Paying your staff a fair wage for a fair day’s work is just the start; ensuring that you get the best from them means taking positive steps to safeguard their happiness. By turning a blind eye to their financial security, you may be exposing your business to a big financial problem of its own.