Why You Should Help Your Employees With Budgeting

If you offer your employees a 401(k) plan as a benefit, congratulations. You’re already doing something great to help them take control of their money. But did you know there’s another way you could be helping your team that has an even bigger impact on their financial wellness?

Long before enrolling in your 401(k), everyone on your team should be able to budget with the best. Here’s why.

Premature Investment Often Means Underinvestment

Proper budgeting is far more crucial to an employee’s retirement prospects than participation in a 401(k). And when employees invest in retirement too soon, it can create an illusion of financial wellness that can only be truly achieved with a healthy savings rate.

To see why, think about what motivates people to invest in the first place. No matter their age or where they are in their career, people want to contribute to a 401(k). Just by signing up they begin to feel confident about the future. And they’d usually like to have as much time as possible to help their investment grow. Many also have a mistaken belief that if they wait too long to begin investing, they’ll never have time to catch up in building an adequate nest egg down the road.

As a result, they start contributing as soon as possible, regardless of their day-to-day financial fitness. That sounds logical, but it overlooks several factors. First it misses the fact that the majority of Americans who are investing in a 401(k) contribute only 5.5%. That’s well below the 15% financial experts recommend to ensure a retirement can outpace inflation and afford a healthy retirement. And it’s also worth noting that delaying investment for a year or two to get out of debt and onto a budget allows employees to save a lot more money at a much higher frequency than otherwise. Conversely, those who are living paycheck to paycheck find it impossible to ramp up their contributions and their 401(k)s flounder forever.

Those With a Plan See the Biggest and Best Results

Which employees can truly afford to invest in your company’s retirement plan? Only those who have money left over after they’ve covered all of their monthly expenses. In other words, those who have a plan for their money that they’re consistently following.

Too often, Americans get this sequence backwards, devoting a chunk of their monthly paychecks to a 401(k) even while they’re deep in debt and living paycheck to paycheck. This is a tough way to live, and it very likely describes many of the people you employ. Seven out of ten Americans live paycheck to paycheck, the average American spends nearly a fourth of their paycheck on consumer debt payments, and nearly two-thirds would be unable to cover a $1,000 emergency without borrowing.

When that describes an employee’s daily finances, they’re in no shape to invest. In fact, doing so causes several problems that put their financial wellness at risk:

  • People who live paycheck to paycheck often borrow to cover emergencies or just to get by, including taking loans against the 401(k) they’re investing in.

  • These 401(k) loans defeat the purpose of the original investment, undermining retirement plans and preventing the massive gains that come from compound interest.

  • The fees and penalties involved in borrowing from a 401(k) could have been avoided if employees had begun with smarter budgeting for emergencies and debt reduction.

  • Haphazard investment without a plan will hurt savings rates, the leading factor in retirement success.

You might assume, as many employers and investors do, that any participation is better than none. In that line of thinking, the investor is hoping the quality of what they’re investing in will compensate for low or inconsistent contributions. But the American Society of Pension Professionals and Actuaries disagrees, reporting that savings rate is 45 times more important than choosing how to invest.

If savings rate is the key to retirement success, what can you do as an employer to get your workers moving in the right direction, contributing as much of their money as possible to the 401(k) you offer?

It’s all about helping them change behavior around budgeting.

Helping Them Budget Well

Here are a few of the benefit features most likely to bring about positive and lasting change in your employees’ finances, including their understanding of budgeting:

  • Great content that clearly explains the role of budgeting, saving and debt elimination in financial wellness.

  • Budgeting tools.

  • Online access that allows employees to view and review materials on demand.

  • Reporting that lets them track their progress with the benefit.

We all know budgeting is smart. And we all know it’s something we should do. But the stats above about debt, daily struggles and emergencies prove that knowing the facts about budgeting isn’t enough. The knowledge and tools must be combined with crystal clear education to cause real change.

As an employer, you have an opportunity to be the source of permanent financial change in the lives of your workers. When you provide a financial wellness benefit, including the brass tacks of budgeting, you set employees on track not only to invest for retirement but to do so with maximum impact.

Behavior is the key to success in every area of personal finance. It begins when employees see that they have the power to live differently than they have in the past. Instead of living in debt, barely getting by, and lacking a plan, they can get out of debt, become budgeters, and begin investing in the future.

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