What is an Emergency Savings Account?
Emergency savings have been discovered to be a fundamental way for people to build financial stability. Having savings to fall back on in the event of a financial crisis gives a person the opportunity to bounce back quickly, relying on money put aside specifically for that event as opposed to pulling from other saving goals or taking on high-interest debt to cover their costs.
However, the widespread economic effects of the pandemic and significant increases in the cost of living are putting pressure on people all across North America. According to a survey by Banknote, 51% of Americans have less than three months of their expenses saved to help them cover their needs in the event of a financial crisis. This figure includes an astonishing 1 in 4 (25%) who have no emergency savings whatsoever.
Knowing this, there’s a type of employee benefit that’s rapidly growing in popularity you should be familiar with: the emergency savings account. Emergency savings accounts address the financial needs of today’s employees by responding to the problems many are facing in today’s economy. Here’s some more information that’ll help you get to know this financial wellness benefit better.
What is an emergency savings account?
An emergency savings account (ESA) is a saving plan that helps employees put money aside specifically for financial emergencies they’ll face in the future. As a benefit, the idea behind them is similar to that of employer-sponsored contribution matching in an employee’s retirement fund. As employees save money for emergencies, their employer boosts their savings by chipping in with a contribution of their own. While a retirement plan asks employees to put savings away for their future needs, an ESA helps employees manage financial emergencies in the present more effectively.
How do emergency savings accounts work?
In an emergency savings account, an employee contributes a small percentage of their paycheck to a designated bank account for emergencies (the ESA). These contributions are made automatically on the employee’s behalf. Funds accumulate in the ESA, with or without matched contributions from their employer depending on the nature of their benefits plan.
When employees need to access their funds in the event of an emergency, they’re able to withdraw the money quickly and without penalty. Easier access is an essential part of an ESA. When a financial crisis arises, employees need to be able to obtain what they’ve saved as soon as possible so that they aren’t forced to rely on high-interest debt to cover their needs in the meantime.
As an example, QUBER’s emergency savings accounts help employees build their short-term savings over time. Employees move money from their personal bank accounts to their QUBER Vault, a secure account just out of their arm’s reach that’ll influence them to keep their money saved as long as they can. To further encourage the development of saving habits, their employer matches a portion of what the employee contributes. The employer’s sponsored incentives can be vested or unvested and are automatically provided to the employee per the plan design. When employees need to access their savings to cover an immediate need, they can cash out part or all of what they’ve saved and receive it penalty-free in their bank account within a couple business days.
How does an emergency savings account help employees?
Emergency savings accounts create value for employees in a number of ways. First, having an ESA helps employees achieve better retirement outcomes. Research by Commonwealth suggests that employees who have a source of emergency savings were 70% more likely to contribute to their retirement funds. Employees don’t need to pull from their retirement savings if they can manage their present-day needs and financial emergencies without issue. They’ll also be more likely to put money away for retirement if they feel confident they won’t need to call it back in the near future.
ESA’s also offer employees a way to access liquid funds quickly without any penalties. Employees can pull from their retirement savings if they need to as well, but will be taxed for doing so if they’re saving in a registered retirement plan like a 401k or an RRSP. They also might not receive their funds in a prompt manner, and may be on the hook for extra fees for premature withdrawals depending on the nature of their plan.
Emergency savings accounts have also gained even more relevance with this year’s spike in inflation rates, as the associated rise in the cost of living has left many employees with less to cover their needs. About one-third of adults have admitted to contributing less to their emergency savings this year in order to keep up with their daily expenses. Saving for retirement is important too, but it’s not something that employees can truly focus on if they’re struggling to pay their bills today.
Finally, employer-sponsored contribution matching in an ESA encourages employees to develop the habit of consistent saving. Saving money is an extremely important habit and is essential for those seeking financial stability. If the process is incentivized, employees who aren’t regular savers will be more likely to participate and feel the sense of security created as they grow their savings. In results from our case study from our pilot program with Levi’s employees, 87% of employees agreed that they’d never have saved as much money own their own as they did participating in Levi’s custom Saving Challenge with QUBER.
Who do emergency savings accounts help the most?
The simple answer is: all kinds of employees! People from all backgrounds have a use for an additional source of liquid cash and stand to benefit from developing the habit of consistently saving money. Emergency savings accounts make both possible for employees across demographic backgrounds.
ESA’s are also useful to employees who need to improve their personal financial habits. Those who regularly spend everything they earn each pay period are likely to be left in jeopardy when a financial emergency arises, leaving themselves in a position where they’ll need to rely on credit cards to get by. This category of employees can be found at any income level: it’s possible to live paycheck-to-paycheck even if you’re earning six figures.
Final thoughts on emergency savings accounts
With a growing number of benefits available to offer your employees, take note of emergency savings accounts. ESA’s are a valuable, effective and inclusive wellness benefit that offer employees extra financial support in a way they really need. Your organization stands to gain immensely from offering your employees the emergency assistance and financial literacy boost that ESA’s can create for them - your business will end up stronger for it!