The importance of personal finance acumen can not be overstated. Many people learn the hard way how to manage their personal finances. Being a finance person by trade, I constantly think of ways to teach others about finance as well as developing the tools needed to be successful. The idea I have here is to break down finance into smaller pieces. This would require changes both on how income is generated and expenses are aggregated.
Changes needed to earnings:
Overview. Generally, hourly workers are paid weekly and salaried workers semi-monthly. This creates a disconnect when workers are trying to pay bills like rent or mortgage payments that are monthly. This disconnect becomes difficult to handle and workers use credit cards to bridge the gaps between days getting paid and expenses becoming due.
Changes: To correct this advancements need to be made on the payroll processing side to allow for daily payments. Employers would also need to enhance their processes to allow for this change. They, the employers, can easily do this for the salaried employees as their pay rate does not vary from day to day. For the hourly employees, I would suggest a 1 day delay for the manager to confirm the hours worked by the employee
Changes needed to expenses:
Changes. Now this will take some explaining. We would need the monthly lenders, such as Mortgage/Rent or auto loans to allow for payment to be processed daily. As they are receiving the revenue, I would think they would be in agreement. They would need to update their systems to allow for management of those payments.
For all other expenses that are variable (meaning they change month to month), we would need financial institutions (banks/credit unions/credit card companies) to take expenses and roll them over a 30-day window.
For example, supposed you went to the local 7-Eleven to purchase a couple of Mountain Dew’s and the cost was $3.00. As that would need to amortized/paid over the subsequent 30 days, the next day $0.10 is deducted from the persons account. For larger purchases, such as furniture or smartphones, an arrangement could be made for the purchase to be paid for over a longer time period. The fundamental concept still remains, which is helping individuals understand how much money they have each day to spend, and to spend it wisely.
How the math and process would work:
Income. Suppose a worker was salaried at a rate of $73,200 per year. The calendar year 2020 has 366 days, and so the worker would get paid a gross amount of $200/day (that is calendar day, not workday). Lets suppose the deductions for Federal/State Taxes was $40 per and the worked had an additional $10 per day withheld for Health Insurance and 401k contributions. This would result in a payment to the person of $150 per day.
Expenses. Suppose the mortgage/rent for our example worker was $1,220 per month. That would mean that the person has expense of $40/day. Next the person had car payments of $457.50 causing a need of $15/day of
Daily Overview:
Income:
$150
Expenses:
Rent: $40
Car Loan: $15
Other: $75
Total: $130
Net:
$20/Day
Results:
The result of this would be a change in the way a person thinks about their money. The would be working with understanding the spread and the amount of income there are receiving daily and the amount of spend going out each day.
The positive affects of this is that a person at all time can see how much or little their spread is. A change in their mindset would hopefully help them better understand how to keep their expense under their income….in a nice simple format.
Where to start:
I feel the easiest path to start is on the expense side of the ledger. Leveraging a technology company like Apple with a card, like they do with their Apple Card is the perfect starting point. The next phase would be for Apple to offer a Checking/Savings account for the person to have their income deposited. Additionally, Apple could work with Mortgage/Auto Companies to have the mortgage payment made through Apple to the lender. Apple would collect the daily payment and remit the total to the lender on the due date.
On the income side of the ledger we again need the financial institutions to get involved. As ultimately the payment of payroll is done from the Employers bank, the employers can submit electronically the information needed each day to the bank for processing. The beauty of this is, that once the process is setup, submitting an electronic file daily will become significantly easier each day until it has become automated.
When there are bonus’s paid, the employer could determine over what time frame the payment would be made. This would make it easier from a cash disbursements perspective for the employer as well.
For commissioned employees, this works well because the commissions earned in March, could be paid out over following month of April.
Government work also needs to be done. Simplification of forms, both federal and state, and electronic ways of transmitting the data need to be built so that businesses are not making mistakes. Additionally, by having the financial institutions processing the payrolls, they are able to insure that the amounts due to the government are remitted timely, which will eliminate IRS penalties.
Making these changes will enhance the efficiency of payroll processing and reduce the expense for IRS compliance.