One way to spend less: spread out your paychecks

The rise of new personal finance technologies and the gig economy means workers can increasingly access their pay more frequently. Some fintech apps such as DailyPay, whose clients include big companies like Big Lots Inc.

-Allow you to get paid daily, although these apps often charge a fee for this service. Some gig-economy companies also offer workers the option of getting paid daily. Uber, for example, offers its employees the option of getting paid up to five times a day.

Early access to one’s salary and daily salary payments are often marketed to low-income people as a way to avoid late bill payments and bank overdraft fees.

According to the new research, receiving daily paychecks appears to encourage people to spend more money than those who get paid less frequently. “When people get paid more frequently, they tend to spend more on markups, perhaps buying a latte when they otherwise wouldn’t,” says Wendy De La Rosa, assistant professor at Wharton School of the University of Pennsylvania and co-author of the study. Professor De La Rosa adds that study participants said receiving daily paychecks made them feel wealthier and more secure in their ability to cover expenses.

On average, workers paid every day of the week spent about $18.56 more per month than workers paid once a week and $20.65 more than workers paid biweekly. Workers paid daily also had more expenses.

While the researchers found a correlation between frequent paychecks and increased spending, they were unable to disentangle causality from the data. So they did a series of lab experiments to better understand the relationship.

In one experiment, participants were either paid $140 per weekday or $1,400 every two weeks. All participants started with $875 in their checking accounts and were then asked to make 28 spending decisions, one for each day of the simulation. Throughout the experiment, participants could see the balance of their checking accounts.

Participants were asked to make decisions about covering basic expenses, such as: “Your heating bill is due. You owe $95. What are you doing?” They were also asked to make discretionary spending decisions, including, “You’ve had a tough few days. You can cook dinner at home or order takeout for $45 for the family. What do you do?” The authors found that participants paid daily spent more money than participants paid biweekly, at $2,919.58 versus $2,816.52.

After the experiment, the authors asked the participants if they felt like they had a lot of money during the experiment. People with daily paychecks subjectively felt wealthier, even though they often had lower daily balances in their checking accounts throughout the experiment.

The authors also found that people who were paid daily felt more confident that they had enough money to pass the simulation.

One of the main implications of the study is that workers need to be more aware of what it costs them to receive daily paychecks. Some workers pay fees to access their paychecks on a daily basis, which can further erode savings in combination with the observed tendency to also spend more. Daily payroll costs could in some cases exceed the interest rates charged on payday loans, says Professor De La Rosa.

Prof. De La Rosa plans to follow up on this article by studying whether daily-paid workers can be incentivized to save part of their salary. The idea, she says, is that since more frequent paychecks make people feel subjectively wealthier, they might be more willing to set aside a higher percentage of their paycheck than they would. other.

“Liquidity changes can really change people’s mindset,” she says.

Ms. Ward is a writer in Vermont. You can email him at [email protected]