Your car conks out or your dog needs emergency surgery. How would you pay for it?
A recent survey shows that 61 percent of Americans said they would either run out of emergency savings by the end of 2020 or had already depleted their savings. Only a little over 18 percent said they'd have enough in emergency savings to get through the year.
For those who are employed, there's a way to build that emergency account relatively painlessly.
It's called an emergency savings account, or an ESA. Consumer advocate groups such as AARP are urging employers to offer these accounts to their employees.
ESAs operate similarly to 401(k)s. Money is automatically transferred from an employee’s paycheck into a savings account the employee can tap into when they need emergency funds.
There's a significant difference between 401(k)s and ESAs. Money placed in your ESA account is taxed as income, so it does not serve as a tax break. But because of this, the deposits do not have to remain in the account long-term and can be accessed at any time.
Because this withdrawal takes place before you see your paycheck, similar to your health insurance costs, you never see the money so you can’t spend it without accessing it directly. This can be an excellent way for some people to let their emergency savings grow.
Even a small amount of savings can add up. Put $20 into an ESA each week and you have your $1,000 (plus a bit extra) in your emergency savings a year later.
ESAs provide other benefits. People with emergency savings accounts are 2.5 times more likely to be confident about their long-term financial goals. Knowing they've got a financial cushion beneath them can provide important peace of mind.
What's in it for employers? Automatic deductions to cover financial emergencies can help employees feel less stressed and therefore more productive. Research has shown that more than 40 percent of Americans report that financial stress makes it difficult to concentrate at work. This loss of productivity, coupled with stress-related absenteeism, has been estimated to cost mid-sized employers about $1 million a year.
Of course, ESAs are not the only way to build up an emergency savings account. You can set up direct deposit from your payroll check so that a certain amount of money goes directly to your emergency savings account. You can also set up an automatic transfer of funds from your checking account to your emergency savings account on a regular basis. Hanscom Federal Credit Union's CU Thrive automated savings program is a terrific way to build up emergency savings. It lets you save as little as $5 to as much as $500 a month automatically from your checking account and it even offers an amazing rate. Learn more about CU Thrive here.
Saving automatically requires no planning, no extra effort, and, perhaps most crucially, no discipline beyond the original sign-up. Sound intriguing? Be sure to check with your employer to see if they can offer ESAs to employees. If they don't, consider setting up your own automated savings plan, even if you can only start with a small amount.
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