Put yourself in *Sarah’s shoes for a minute…
Sarah’s financial journey has been a rollercoaster. Growing up with strict parents, she’d always been a saver with set foundations. But university turned her world upside down. Loans, grants, and part-time jobs couldn’t keep pace with her cost of living. In addition, graduation brought a false sense of security, quickly shattered by the reality of a low-paying job.
To get through the month, Sarah started to make more and more use of her overdraft. She ended up in a relentless cycle: dip into her overdraft to get through the month, use payday to clear the overdraft. Repeat. Until one day, she realised that she’d gone so deep into her overdraft that her monthly pay was no longer enough to even get her out.
Eventually, with the support of her partner, she clawed her way out of the overdraft hole. But the fear of falling back to old habits never truly left…
Sarah’s story is unfortunately a common one. Many people find themselves trapped in a cycle of debt, often relying on overdrafts to make ends meet. While overdrafts have historically been the go-to financial lifeline, a new player has entered the arena: salary advances.
What's in this blog?
Is salary advance the modern day overdraft?
On the surface, salary advance schemes might seem like a helpful offering from employers. After all, they provide access to a portion of your earned income before payday. But, much like overdrafts, the ease of access can be a double-edged sword. When used responsibly for genuine emergencies, they can be a helpful tool. However, the risk lies in their potential to become a crutch for regular expenses, creating a new form of financial dependence.
Many of us in this situation use early wage access just like Sarah did with her overdraft – as a way to get through the month when payday seems too far away.
While it might sound like the answer to your immediate problems, are these schemes too good to be true? In this article we’ll dive in and take a look at it from both sides.
The positives of salary advance schemes
Salary advance or early access schemes are still relatively new in the UK and do as they say on the tin. They simply let you access some of your already earned salary in advance, effectively allowing you to be “paid as you earn”.
Generally speaking, there are two advantages to a salary advance scheme:
- These advances are not viewed as a loan so there is no interest and no impact on your credit score. However, most firms will charge a transaction fee of £1-£2 for each time you access the service.
- Some salary advance schemes even offer a “rainy day pot” where part of your salary can be put aside automatically, making it easier to save without dipping in and building up a cushion ahead of the unexpected.
In Sarah’s case, as she made the transition from weekly wages to monthly paychecks, the option of using her overdraft helped her get through tough times as an immediate form of relief.
What are the downsides of early pay days?
We also learnt from Sarah’s story that while having access to money upfront to solve for a rainy day, can quickly create a cycle of playing catch-up when it comes to savings and debts.
Like most good things, there are T&Cs attached, and here are two to be aware of with salary advance schemes:
- Most schemes are limited to accessing no more than 50% of what you’ve earned already. Bearing this in mind, they are not likely to cover a significant emergency, so you’ll still need either savings or access to credit with a healthy credit score for those bigger situations.
- The biggest drawback is that once you’ve accessed salary early, the remainder of that month’s pay will have to stretch a little further and you can find yourself running short once again. And so begins a cycle of playing financial catch up, not dissimilar to Sarah’s reality of trying to pay back her overdraft on an already stretched salary.
Don’t fall into the trap
Salary advance schemes can be a great way to overcome an occasional financial challenge. But when it becomes a regularity you may find yourself in a cycle of playing catch up with the additional challenges of managing a monthly budget with less than a month’s salary. This can make starting a regular saving habit feel even more unachievable.
While these schemes can be a saviour, they’re not a long-term solution. Overuse can lead to a cycle of debt, even without interest. Building genuine savings remains crucial.
In the wise words of Sarah
If you are thinking about accessing your wages early, make sure you think through the following:
- While salary advance schemes can serve well as a short term solution to address emergencies, they are not the long term answer to building financial stability
- Focus your efforts and priorities on building a savings pot
- If you’re struggling to get through the month on your current salary, start with creating a budget and/or taking advantage of a financial coach through a platform like Maji.
Sarah’s journey is a testament to the power of perseverance. But it also highlights the importance of financial literacy and planning. By understanding options like salary advances and their potential pitfalls, we can better navigate our financial lives and work towards a more secure future.
* The name Sarah has been used to protect an existing Maji user’s identity. This is their testimony of how accessing money between pay days impacted them, and how they wished they’d had access to a financial wellbeing platform so that they could have avoided getting into this situation.
