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Building an Emergency Fund

Overview - Key Points

  1. An emergency fund is a savings account you have with money set aside to cover unexpected expenses.
  2. An emergency fund should be able to cover 3 to 6 months of regular expenses.
  3. There are many ways for a company to help its employees access and maintain an emergency savings reserve.
Client Centered

In a perfect world, companies support and invest in their employees. In turn, these employees contribute to creating and maintaining a sustainable business through their increased commitment, engagement, and productivity. However, this ideal has been threatened by the current COVID-19 pandemic and the pervasive anxiousness and unpredictability it has generated.

Fortunately, there is one area in which companies have both the potential and ability to support their employees – financial preparedness. Many companies find themselves uniquely positioned to provide the resources, tools, and oversight to help their employees plan for the future and bolster their economic well-being. This begs the question:

How can companies best utilize the tools and strategies at their disposal to support employees in their efforts to become better prepared to face financial uncertainties?

How serious is the problem?

Lack of financial preparedness is a serious issue, and the current pandemic has shown many Americans that they are not as prepared for unforeseen emergencies as they had hoped. Far too many Americans currently face substantial financial concerns in the wake of COVID-19. Some of the negative effects of the pandemic include the following:

  • 56% of Americans are worried about the long-term economic security implications of the pandemic.*
  • 32% faced reduced hours or lower pay, which negatively impacted employees' overall level of income.*
  • Many people believe that the pandemic-induced recession has damaged their retirement prospects.

The extreme employment and financial ramifications of the pandemic have highlighted the necessity of emergency savings. Financial experts have long pointed to emergency savings as one of the most important aspects of a solid financial plan. Still, the COVID-19 pandemic has proved that the ability to face financial unknowns with confidence is needed more than ever.

Despite the known importance of establishing an emergency savings plan, many Americans are woefully unprepared to face potential unexpected financial emergencies. The following statistics* illustrate this:

  • 23% of employees lack any semblance of an emergency fund.
  • Of those who do have an emergency fund, 56% do not currently have enough saved to cover six months of living expenses.

This lack of emergency savings (or, in some cases, the inability of said savings to cover necessary expenses for six months) is troubling. More than ever, today’s employees stand to benefit immensely from workplace-supported plans and initiatives that encourage financial preparedness and well-being.

Workplace Support

An increasing number of employers have recognized the importance of encouraging their employees to achieve higher standards of financial well-being, with about 2 out of 3 employers indicating that they would like to provide their employees access to emergency savings funds.*

There are many ways for a company to help its employees access and maintain an emergency savings reserve. Among the most common of these strategies are the following:


Payroll Deductions

Typically offered during the benefits enrollment process, payroll deductions are a common savings strategy. Employees may choose to deduct a specified percentage of each paycheck, directing those earnings to a dedicated account. The deducted funds can be pulled from the account at any time, although retrieved funds may be subject to penalties and fees depending on the particular deduction plan or account type. In-plan options and sidecar solutions are just two of many deduction plans a company may offer, but they are attractive options for building up a reserve of emergency savings.



In-Plan Options

In-plan options discourage individuals from pulling from their retirement savings to cover for financial emergencies. These emergency savings plans are offered as part of an existing retirement plan, encouraging employees to regularly move a portion of their retirement contributions (which is automatically deducted from their paycheck) to a dedicated emergency savings fund.



Sidecar Solution

Sidecar solutions are similar to in-plan options in that they also allow employees to deduct a portion of their earnings to an emergency savings account. However, unlike in-plan options, sidecar solutions are independent deduction plans. Rather than being first deducted into a retirement savings account and then distributed to an emergency savings fund, as is the case with in-plan options, sidecar solutions are deduction plans in their own right. If an employee enrolls in a sidecar solution, a specified portion of their paycheck is sent directly to the sidecar plan’s account independent of the funds received by their retirement account. This provides an extra buffer between an individual’s emergency savings and retirement fund, further reducing the temptation to pull from their retirement fund to cover for a financial emergency.



Insurance

Whole life insurance policies may accumulate cash value over time, which employees can utilize in a financial emergency. Companies providing such policy plans should make an effort to educate employees regarding this value accumulation and provide best practices for how much and how often individuals should pull from the policy’s cash value.



Online

A wide array of apps and resources dedicated to helping individuals establish healthy financial habits (including saving for a rainy day) are readily accessible. Employers can encourage the use of these tools, potentially even offering complimentary access to interested employees.


*Information from LIMRA research

Frequently Asked Questions

Have questions about building an emergency fund? Review these answers to some of our most frequently asked questions for more insight.

Where to keep the emergency fund?

Online savings accounts, money market accounts, and short-term CDs typically offer higher interest rates than traditional banks, allowing for maximized returns. They are easy to access yet distanced enough to reduce the temptation to use emergency funds for everyday purchases. Funds can also be moved between account types to maintain a favorable interest rate.

How to build an emergency fund?

Estimate the amount needed to cover 3-6 months of living expenses. Working from this amount, determine how much should be saved from each paycheck to build up the needed balance. Payroll deductions can automatically put away a portion of each paycheck into savings (the exact percentage can be adjusted as needed). You might also consider adding any unexpected income, tax returns, or other earnings to their savings account. Once you reach their savings goal, you should continue to maintain your savings habits and also consider longer-term investments with higher yields in order to maximize returns.

How to save for emergency funds?

Estimate how much you need to cover 3-6 months of living expenses. Using this amount, determine how much you should save each paycheck. You should set up your savings so that these savings are automatically put into your savings account. Consider putting any additional unexpected income (tax refund, gifts, etc.) into your emergency fund.

 

Still have questions? Contact our team and let’s discuss!


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