Getting a handle on personal debt is one of the most important steps an individual can take on the pathway to cultivating financial wellness.
But confronting debt can be a deeply uncomfortable thing to take on if we haven’t done it before. One study from the American Psychological Association revealed that 65% of Americans experience significant money-related stress, with debt and relationship to debt being a top concern, especially amongst the younger generations, and generally for adults aged 18 - 57. But it’s a problem that we absolutely must face – according to Lending Tree, Americans are collectively burdened by a combined credit card debt of $986 billion dollars, the highest this number has ever been.
With these statistics in mind, helping employees to look at their debt and learn how to both control and pay it off needs to be a top priority of your organization’s employee financial support programming. But it’s important that your employees learn to do so sustainably, and in such a way that allows them to continue saving and meeting the financial demands of their day-to-day – ideally without accruing further debt. Let’s talk about how you can make this happen.
Financial capacity and relationship to debt will always be a highly individual thing, and it’s important that your employees each have a realistic idea of their personal responsibility and capability when it comes to addressing their own debt.
No two debt-elimination strategies will be exactly the same, so, before your workers develop their plan of attack, they need to answer a few questions that will help them to better understand what needs to happen, and how they can get there.
- What do you have in your savings? The general consensus is that individuals should have a minimum of three month’s worth of expenses saved up in case of emergency. This is in addition to other savings accounts like retirement, which often incur penalties for early withdrawal, and sink funds set aside for specific purposes. If an individual has savings on top of the three months, dipping into these liquid savings can be a great way to begin to chip away at their debt. At or less than three months, and it may be wise to find other sources.
The thought process here is that, if an individual were to drain their savings in order to pay off a credit card and then experience an emergency requiring significant spending, they would likely be put back into debt again and the cycle would continue. If your savings account is well-funded, however, routing money which would go into savings to help eliminate your debt can mean a higher savings yield in the future.
- What interest rates are you paying on your debt? High-interest credit cards accrue debt extremely rapidly, and it is often advantageous over the long-run to pay off that debt as quickly as possible to lower your overall expenditure. If this is the case, an individual should consider using their savings to quickly address this source of debt.
Low-interest debt accrues less over the long term and may not require an immediate address, in which case an individual should leave their savings alone and allocate a portion of their paycheck each month towards debt elimination.
- How consistent is your income? Salaried employees will have an easier time answering this question than hourly workers or freelance contractors with variable income.
If you have reliable, stable income, accessing your emergency savings to pay off debt poses less of a risk to your financial wellness and can be considered. If your income is variable, inconsistent, or in any way uncertain, the better advice is to make minimum payments to avoid fines and minimize interest buildup, but to avoid using savings to pay off your credit card.
How to pay off credit card debt
Once your workers have an individualized understanding of their debt:savings:income ratio, here are a few practices that can help them to eliminate and manage their credit card debt.
- Make a plan. Employees should feel encouraged to factor paying off their credit card into their monthly budget. It’s important to understand that debt elimination doesn’t need to be a now-or-never thing, and any remaining balance beyond what individuals are able to address with their savings can be paid off over time.
So, have your workers take a look at their debt, their monthly income, and their average expenses, and make a plan they can commit to that will end ultimately with pay-off.
- Use cash when you can. Eliminating debt also means managing debt intelligently over the long term. It’s important for individuals not to over-rely on credit cards, especially for unnecessary expenses, and avoid racking up added cost in interest. Committing to prioritizing the use of our liquid assets helps to set a convenient boundary around what an individual is spending, and reserves credit expenditure for its best use.
- Stick with it. It’s important to remain consistent with a repayment plan and keep track of progress. This will help individuals stay encouraged and engaged with the process of debt elimination as well as to allow for adjustment in strategy should their debt or income situations change.
Origin can help
Fostering financial wellness for your employee base can yield positive business results through improved retention, reduced absenteeism, and other positive trends as employees reduce financial stress and gain a greater sense of control over their bank accounts.
Debt elimination is one critical aspect of cultivating financial wellness, but employees must first have a solid understanding of their unique financial position before they can make this happen.
Origin is a comprehensive financial education and planning platform which takes a holistic perspective on employee finances and enables long-term stability through improved financial literacy. Employees can view all aspects of their financial reality, including debt, income, savings, and more, create a budget, manage their plan for debt elimination, and receive guidance from certified financial counselors, all from a single dashboard.
Sign up for a free demo today to learn more about what Origin can offer your company.