One Way to Spend Less: Spread Out Your Paychecks

The rise of new personal-finance technology and the gig economy have meant that workers increasingly can access their wages more frequently. Some fintech apps such as DailyPay—whose customers include large corporations like Big Lots Inc. —make it possible to get paid daily, though such apps often charge fees for this service. Some gig-economy companies also give workers the option to be paid daily. Uber, for instance, gives its workers the option of being paid up to five times a day.

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

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

On average, workers who were paid every weekday spent about $18.56 more per month than workers getting paid once a week, and $20.65 more than workers who were paid biweekly. Workers paid daily also had more expenditures.

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

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

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

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

The authors also found that those paid daily said they felt more certain that they would have enough money to get through the simulation.

One of the key 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 daily, which can further erode savings in combination with the observed tendency to also spend more. Daily-paycheck fees in some cases could surpass interest rates charged on payday loans, Prof. De La Rosa says.

Prof. De La Rosa plans to follow up on this paper by studying if workers paid daily can be induced to save a portion of their paycheck. The idea, she says, is that since more frequent paychecks cause people to feel subjectively wealthier, they might be more open to setting aside a higher percentage of their wages than they otherwise might.

“Changes in liquidity can really change people’s psyche,” she says.

Ms. Ward is a writer in Vermont. You can email her at reports@wsj.com