Many Americans are financially unprepared to handle unexpected expenses. A study conducted by the Federal Reserve found that many households would find it difficult to pay an unexpected $400 expense. Among those adults faced with such an expense, 37% would pay using a credit card and carry over a balance (as well as interest). A full 12% of adults would be unable to pay the $400 at all.
Uncertainty relating to the COVID-19 pandemic has put a spotlight on the need for emergency savings. Americans have historically save 7-8% of their income annually. The challenges of the pandemic have caused individuals to save at a historically high rate. According to the Bureau of Economic Analysis, in April 2020, the personal savings rate exploded to over 33%.
The increased urgency to save has become apparent to employers as well. Many large companies, including UPS, are offering programs that allow workers to automatically set aside cash for unexpected expenses. Cash is saved via payroll deductions and employers can match contributions (if they chose to do so) into the emergency fund account. These programs have proven to be extremely effective in encouraging employees to save. Research from Commonwealth has shown that people with emergency savings were less likely to spend their retirement savings during the pandemic.
Government regulators have made it easier for employers to directly enroll their employees in emergency savings programs (with the employees’ consent). There are several different ways to run these programs. UPS, for example, allows their employees to contribute after-tax money into a savings account as part of their employer-sponsored retirement program. Other programs that are not tied to retirement savings, allow employees to link their savings accounts and decide how much they want to save. The SaverLife program, a financial technology non-profit, is designed for users to deposit monthly into the account and requires employers to match any savings above a certain dollar amount.
Recent research has shown that even modest contribution amounts (especially for low to moderate income families) are more effective in encouraging saving than employees independently preparing to have enough to cover the traditional three to six months’ worth of living expenses. Regular, smaller deposits are less daunting for savers and are designed to be replenished when used. Research from the Urban Institute has suggested that a reserve of just $250 could significantly help households manage unexpected expenses.
Employers that encourage or provide emergency savings funds can help employees improve their financial health, and consequently, promote a less stressful work environment. Talk to your employer to see if they offer an automatic savings program that can be used for your emergency savings.
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