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WSJ Your Money Briefing
How Getting Paid Daily Can Change Your Spending Habits
00:12:20
More people are getting paid daily rather than every other week. Does that change the way they spend and manage their money? A study by the University of Pennsylvania’s Wharton School looked into that question. Prof. Wendy De La Rosa joins host J.R. Whalen to discuss the study's findings.
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A
Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP, Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.
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B
Here's your money briefing for Wednesday, February 16th. I'm J.R. whalen for the Wall Street Journal. If like most people in the US you get paid every two weeks, you probably schedule everything from bill payments to food shopping around payday. But what if you got paid more frequently? How would that change the way you think about your money?
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C
Should I order a takeout today or kind of suck it up and cook at home or you know, it's a friend's birthday? What type of gift do I give that person or colleague invited me out for drinks after work? Do I say no or do I go home? Do I buy an expensive pair of sneakers or a cheap pair of sneakers?
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B
On today's show, we'll be talking about a recent study looking at the spending habits of people who get paid more often than every other week. What lessons about money can we all learn from the results? We'll hear from one of the study's co authors after the break.
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A
Deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d eel.com WSJ.
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B
For many workers, payday comes every two weeks. But what if you were paid your salary in smaller increments like on a daily basis? Would it change the way you view and manage your money? Would you spend differently? Well, researchers at the University of Pennsylvania set out to study the effects of more frequent pay on people's personal finances. Wendy De la Rosa is an assistant professor at the Wharton School there and co author of the study and she joins me now. Wendy, thank you so much for being with us.
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C
JR thanks for having me. It's a pleasure.
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B
So Wendy, what was behind the need to study this topic? Has the idea of paying workers more frequently, has that become a trend?
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C
JR this is such a good question because I get it all the time. In short, the motivation for this research came from my family. I had cousins who were part of the gig economy and were really ecstatic about the fact that they were able to get paid every day, sometimes up to five times a day. And that got my gears turning thinking about, well, how does it impact their spending behavior? And the more that I started to research this, the more that I realized that there's been this boom in payroll technology where you have startups like DailyPay and PayActiv that have really sort of infused themselves within Fortune 500 companies so that hourly workers can now get paid on a daily basis if they wanted to. And even payroll providers like adp, our largest payroll provider, now allows all of their clients to pay their employees on a daily basis, is really being pushed by these advances because it costs us less to send money around.
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B
Now you mentioned gig workers, but who else is in the mix here? Who else is getting paid more frequently? And has technology helped to push this trend forward?
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C
We've always had daily laborers, so this is not a new trend. We've always had people in the service industry who get a significant portion of their paycheck on a daily basis, whether it's tips, etc. But really we're talking about this increase for hourly workers. So Walmart, for example, our largest employer, now allows all of their hourly workers to get paid up to every day. And that's been sort of a trend, not just in the gig economy, but really for employers of hourly workers. The thesis is, you know, there's something that doesn't sit right with us where you have a low income worker essentially giving a 0% loan to their employer. Why should I wait the 14 days to get my money? I work today. You reap the benefits of my labor, I should get rewarded. And now that we're in this era of pro labor, that has really pushed the narrative and enticed a lot of employers of low income workers to increase their payment frequency. It's becoming something that's so prolific in our world, but it's been sadly under underexplored. And what I'm hoping to show is that these advances in technology, you know, they come with benefits and they also come with costs.
- [04:51]
B
Okay, so let's talk about the study. You are aiming to learn more about how the spending habits of people who are paid on a frequent basis differs from people who are paid less often, as well as their overall feelings about money. Tell us about how you went about that.
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C
In our real world data set where we had 30,000 consumers, we had a wide variance of income spectrums. One of the things that we found was that the association between payment frequency and spending was essentially lower for higher income consumers. And that makes sense, right? If I never have to worry about whether or not I'm going to make it through the month, or if I have such high levels of subjective wealth, I'm feeling pretty good. But the effect really mattered for lower income populations. Now, in our studies, we essentially focused on that population. We focused on consumers who were on online platforms working to get a couple dollars per survey, because that's the population that, based on our real world data analysis, seem to be the most impacted.
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B
Okay, and so for your study, there were about 400 people who fit that category. And the participants were presented with different types of scenarios and simulations involving money. Can you tell us more about that?
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C
What we did was we created a life simulation. We really created the life simulation to be as realistic as possible thinking about spending decisions that people make every day. We had participants essentially go through a whole month of, of life. They had to work, they incur the earned income, they incurred expenses, they had to pay bills, sometimes they incurred unexpected expenses. And throughout that period, they also had to make spending decisions like, yeah, I'm really tired. Should I order a takeout today? Or kind of suck it up and cook at home? Or, you know, it's, it's a friend's birthday. What type of gift do I give that person or colleague invited me out for drinks after work? Do I say no, or do I go home? Do I buy an expensive pair of sneakers or cheap pair of sneakers? And then what we did was that we varied the payment frequency of participants. So participants were randomly assigned into one of two conditions. A high payment frequency condition where they were paid every day, Monday through Friday, and a low payment frequency condition where they were paid every week or sometimes every two weeks, depending on the study.
- [07:21]
B
Okay, so what did the research tell you about the spending habits of people who were paid more frequently as opposed to someone paid, let's say, every two weeks?
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C
What we found was that for every additional paycheck you receive in a month, you spent a little bit more and you made more purchases. So every additional paycheck in our sample essentially led to three additional purchases. That's really meaningful when you consider that 40% of Americans don't have $400 in savings. That's a type of spending that I think we need to look at. And when we look at the expenditures, it's really expenditures on the margin. Am I going to buy that extra coffee today? Am I going to eat out today?
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B
And going a little deeper, what did the study reveal about how these people feel about money?
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C
Well, to understand why we're seeing this increase in spending, we went back to the lab and we went back to our life simulations and we asked people A number of questions about their subjective wealth perceptions. Do you feel like you have a lot of money? Did you feel like you had a little bit of money? You could be a millionaire and feel very financially constrained, or you can have very few resources and feel rich. What we found was that when people got paid more frequently, they had higher subjective wealth perceptions. They felt a little bit richer. And part of the reason for that is, is because they had greater certainty about their ability to make it through the month. They weren't as worried, they weren't as anxious. It was easier and essentially more certain for them to predict whether or not they were going to make it through the month compared to someone who got paid less frequently.
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B
Now, a moment ago, you talked about savings and how, you know, a very real concern in this country is that a lot of families don't have enough adequate savings. So people who were paid more often, you said that they felt wealthier and they spent more, but were they inclined to save more?
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C
You know, because we were looking really at people's transaction data, we couldn't look at their savings behavior. That's actually a research project that's undergoing right now where we realized that because you feel a little bit richer when you get paid more frequently, when you're asked how much you want to save, you want to save a little bit more than you would otherwise. The problem is, in our society, oftentimes, people are not asking us every day whether or not we want to save. People are asking us every day whether or not we want to spend. And because we feel a little bit richer, we always say yes to that question. And so what we're researching right now is can we create interventions so that that feeling, that extra feeling of fridge, those higher subjective wealth perceptions, could actually be formed into an intervention to help people save more. But in our real world data set, what we do find is that those who were paid more frequently, again controlling for the amount of income they earned, were more likely to pay bank fees and were more likely to overdraft. And so that tells me that these are not the folks who are saving more, even though we couldn't measure it directly.
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B
So, Wendy, what are the lessons from the study? You know, what sorts of learning curves that people have about money did it reveal?
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C
Well, the first thing that we all have to realize is that $100 is not $100 is not $100. Right. The timing of that income really matters. And it matters because it changes our perceptions of our financial resources, and these perceptions ultimately change our behavior. We have to recognize that we're beautiful and perfect humans. You know, we're not walking around with advocacies all the time. We're making decisions based on our perceptions. And sometimes our perceptions can be a little bit flawed, and that's okay. The second point that I want us to take away is that a lot of these apps that we talked about going back to the technology point, like Daily Pay, they charge consumers every time they want to access their funds early. Sometimes it's $2.99, sometimes it's $3.99. And when you work out the math, that interest rate, if someone chose to access their paycheck every day, Monday through Thursday and then get their regular check on Friday, that interest rate will work out to be almost like a payday loan. Accessing. If you don't have free access to your money on a frequent basis, not only are you going to spend more because of that increase in subjective wealth perceptions, but you're also going to spend more in fees. It's not always, but a lot of these new startups, that's the fee structure that they have in place. So it's not the employer bearing the expense, it's the employee.
- [12:02]
B
Yeah, it sounds like there's some due diligence on the part of the employee who decides if given the option to go down the road of being paid frequently.
- [12:09]
C
You know, I think we have to realize that every company is getting smarter, faster and better at helping us part with our money. And it's unfair, I think realistically to expect a flawed human being to act rational across all of these decisions. What we have to change and as a society, what we have to do is we have to look at these environments and say, is this really something that we want low income workers to, to pay? Like, should I be paying 299 every time I want to access the money that I've already worked for? And that is a question that again takes the individual out of the equation because oftentimes we expect the superhuman from the human and really puts it back on the system where it should be.
- [12:56]
B
All right, that's Wendy De la Rosa from the University of Pennsylvania's Wharton School. Wendy, thank you so much for being with us.
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C
J.R. thanks so much for having me.
- [13:03]
B
And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.
- [13:08]
A
Still running global payroll like a relay race deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs. Into what you already use. Workday SAP Netsuite operate like a local everywhere visit d e l.com WSJ that's d e e l.com WSJ.