What Is On-Demand Pay, and How Might It Hurt Your Retirement Savings?

Key Points

• Taking an advance on your next paycheck may sometimes be necessary, but doing so can cut into the amount you have to save and invest.

• Once you've received a smaller-than-usual paycheck, it's easy to fall behind on financial obligations.

• Finding ways to contribute even a modest amount each month to a 401(k) plan can benefit you in the future.

• The $23,760 Social Security bonus most retirees completely overlook ›

Apps like DailyPay, FlexWage, and Tapcheck make it easy for workers to request money from their paychecks in advance. The funds are automatically deducted from the employee's next paycheck, leaving them with less money to pay bills. The practice is called "on-demand pay."

While there's nothing inherently wrong with borrowing against your next paycheck, it may have the unintended consequence of leaving you short in retirement. Here's how on-demand pay can negatively impact your 401(k).

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One reduced check can lead to another

On-demand pay, sometimes referred to as earned wage access (EWA), is sold as a great way to help employees manage cash-flow issues and meet immediate financial needs. What's less discussed is what happens when an employee comes to depend on receiving a portion of their check early.

Imagine your "regular" net pay is $1,000, but you request $300 in advance to pay for your child's soccer league. Since the on-demand system you work with is not employer-sponsored, your employer doesn't pay the associated fees (though some employer-sponsored programs offer the service fee-free). Still, it's worth it since the average employee-paid fee is a little over $3. You could consider it akin to the fee you pay when withdrawing money from an ATM unaffiliated with your bank.

When your next paycheck arrives, it's short $300, plus the cost of the fee. There's no harm, as long as the remaining amount is enough to cover expenses until your next paycheck arrives. However, if borrowing against your paycheck leaves you with too little money, you'll likely need to request another on-demand payment.

Through no fault of your own, you may find yourself in the habit of frequently borrowing against your next paycheck.

The impact of living paycheck to paycheck on retirement

Given the uncertainty of tariffs and the generally high cost of living, it's no surprise that LendEdu's 2025 Personal Finance Survey found that 53% of Americans are living paycheck to paycheck. If you habitually find yourself borrowing against your next check, chances are, you're living paycheck to paycheck as well.

In addition to being stressful, living from one payday to the next can:

• Make it challenging to build an emergency account -- funds you can draw from when a surprise expense arises.
• Lead you to put everyday expenses on credit cards, a habit that can cost you dearly in interest payments.
• Cause you to scale back on 401(k) contributions or even postpone saving for retirement.

Investing even a modest amount can help

Investing or saving for retirement may seem downright ridiculous when you have trouble paying everyday financial obligations. After all, you have immediate concerns to address. However, failing to invest can be expensive, even if you don't plan to retire for 20 or 30 years.

Let's say you're 40 and plan to retire at 68. If you were to invest $200 per month in a 401(k) with an average annual return of 7%, you'd have nearly $194,000 by age 68. As time passes, you may find that you can contribute more, further building your retirement account.

There's nothing wrong with requesting an advance on your pay if it's an occasional event. In fact, there's nothing to worry about if you're still able to pay your bills and save for the future when a smaller-than-usual check arrives. However, if taking advantage of on-demand pay cuts into your ability to save for retirement, you may have an issue that needs addressing.

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