Importance of managing debt correctly, and its effect on financial well-being in the workplace

What exactly is debt, and what effect does it have on both employers and employees, asks Gary Fisher, head of Member Education Services at Alexander Forbes Retail.

Debt is spending money that you have not yet earned. Examples of debt include long-term debt such as your mortgage loan - this is a form of secured debt or “good debt” because over time the asset (your house) appreciates in value and, should you default on the debt, the house can always be sold to pay off the loan. Short-term debt on the other hand is usually unsecured debt and examples of this include credit cards and overdraft accounts, where there is no underlying asset and for most part the funds are used to finance day-to-day living expenses. The drawback here is that you cannot “sell” your accumulated assets to pay back the loan as was the case with your long-term debt. The short-term debt is usually what gets us into trouble further down the line as it is easily accessible and adds to over-indebtedness, even with regulations in place set out by the National Credit Regulator, we battle to pay off the ever increasing repayments at the end of the month.

The workplace is rife with ordinary citizens that are over indebted, and in many cases there is very little disposable income left in their bank accounts after debit orders for various debt agreements have been deducted.

Financial education is a long-term process and research shows that it does have a positive outcome on the financial well-being of people in the work place. A study by Adam Smiley Poswolsky of “The Quarter-Life Breakthrough” suggests that millennials, while struggling with debt among other things, will account for 75% of the workforce in 2025. Furthermore, 50% of millennials would take a pay cut to find work that matches their values and adds to their overall well-being. This suggests that it is not just always about the money when looking for a new job but rather about the well-being of the individual.

The future of work lies in empowering our millennial talent and millennials want to work with a purpose and they want their workplaces to be aligned with their values.

Employers have increasingly to deal with the effect that over-indebtedness has on their workforce. The effect of unhealthy finances for employers can be felt on many fronts and includes the following:

i. Absenteeism: Unhealthy finances are a root cause of employees staying away from their places of work. Research carried out by Alexander Forbes into the absenteeism rates on one corporate client found that, on average, absenteeism cost the organisation around R51 million each year. Even with a very large payroll, this amount represents a substantial knock to the company bottom line.

ii. Ill-health due to financial distress: Research suggests that there is a relationship between health and personal finances, therefore it is safe to assume that unhealthy finances may give rise to unhealthy employees, which not only impacts the employer but also the well-being of the immediate family as they are impacted too by the negative effects of the unhealthy employee.

iii. Low productivity: Absenteeism combined with poor performance can negatively influence the level of productivity within an organisation. Consequently, this impacts on the organisations ability to meet its commitments towards its stakeholders and ultimately inhibits growth to the bottom line.

Employers can help their employees with over-indebtedness by going straight to the root of the problem and addressing and providing solutions to the following issues:

• Poor financial planning and providing dedicated access to a professional financial planner.
• Understanding debt and the responsibility that comes with it and the triggers that cause over-indebtedness
• Consumers spending more than they earn and what the triggers are that cause overspending and the need for well-placed education that guides and instils the right financial behaviour.

Ultimately, the financial well-being of both parties suffers a setback as a result of employee over-indebtedness and over time it becomes very difficult to regain the status quo given the significance of such implications, there is an urgent need to focus on enhancing the relationship between employer and employee to deliver meaningful engagement around financial well-being in order to banish the negative effects brought about by unhealthy finances.