What are the Benefits of Emergency Savings Accounts - Rest Nova Site

What are the Benefits of Emergency Savings Accounts

What are the Benefits of Emergency Savings Accounts

An Emergency Savings Account is an employer-sponsored emergency fund. Employers often set up ESAs by opening depository accounts through a bank or credit union. Employees that then sign up for ESAs agree to deduct portions of their paychecks after taxes and transfer them into those depository accounts. Over time, these contributions should create safety nets that they can rely on in emergencies.

The main benefit of ESAs is helping employees manage urgent, unplanned expenses right away. But that’s not the only benefit. These are five more benefits that come with the specialized savings plan:

1. Skipping Non-Emergency Savings

An emergency savings account can dissuade employees from using other types of savings to pay for urgent and unplanned expenses outside of their budgets.

Without an emergency savings account, they might be tempted to tap into a retirement savings account, like a 401(k) plan, to access funds to cover the expense in a hurry. If they haven’t reached the age of 59 ½, they will be penalized for making an early withdrawal from their retirement plan. The IRS will charge them an early withdrawal penalty of 10%. Then, they will have to set aside 20% of the withdrawal (or more) for income tax purposes. They will automatically lose 30% of that withdrawal. That’s a significant loss.

Or, without an emergency savings account, they might be tempted to access the savings they placed in a certificate of deposit. If that certificate of deposit hasn’t completely matured, they will face an early withdrawal penalty. The size of the penalty depends on the term of the certificate of deposit. It could be 3 months’ worth of interest, 12 months’ worth of interest or more.

Facing early withdrawal penalties isn’t the biggest issue. Whenever someone taps into non-emergency savings plans for emergency expenses, they undermine their own savings goals. They will diminish the funds they collected for their retirement, their wedding, their kid’s college tuition, etc.

2. Avoiding Credit

Many Americans admit that they cannot afford to use liquid savings to cover small emergency expenses. They can’t afford a $400 emergency expense, and they certainly can’t afford one that’s more than $400.

Americans in this situation aren’t completely at a loss in these scenarios. They can turn to certain alternative payment methods to recover from an emergency expense in a short amount of time. They can charge the expense to their credit card, as long as they have enough available credit leftover. They can apply for a personal line of credit online —as long as they met all of the eligibility requirements. If they are approved for a personal line of credit online, they can request a withdrawal within their credit limit and use the funds to cover the expense. Afterward, they can direct their focus to a repayment plan.

While there is nothing wrong with using credit for emergencies, it does come with more risk than an emergency fund. Credit is borrowed and it needs to be repaid. You will have to follow a billing cycle to properly pay down the borrowed funds in a timely manner. If you don’t, your debt will grow with fees and interest. The more you ignore the bills, the more you’ll owe.

Emergency savings don’t come with this risk. You do not need to repay what you withdrew. The only reason you should replenish your emergency fund is to prepare yourself for additional emergency expenses in the future. You can do this at your own pace.

Credit is best left as a last resort when you don’t have enough savings available. It shouldn’t be thought of as your only safety net.

3. Waived Fees

Employers may cover any fees and charges related to your Emergency Savings Account. These fees and charges could include initial deposits, monthly maintenance fees and minimum balance fees. If you decide to build your own emergency fund outside of the workplace, you will be responsible for paying all of the account fees and charges.

4. Contribution Matching

Some employers will offer matching contributions to their employees that sign up for ESAs. Matching contributions will automatically boost the savings employees collect in their accounts, helping them reach their savings goals in a shorter amount of time.

When you sign up for an ESA, ask your employer about their policy on matching contributions. They will let you know whether they offer this benefit or not. If they offer it, they should tell you the dollar or percentage limit of their contributions.

5. Employee Ownership

You may be wondering, what happens if you leave the company? What if you move across the country and get another job? What if you retire? Where do your emergency savings go? Those savings don’t disappear. You get to take them with you — after all, they are your earnings.

An ESA is similar to a 401(k). You should be able to access the funds you saved up, even after you leave your employer. You may have to transfer the funds into a different account, like a personal savings account.

The only problem with leaving an employer that offers an ESA is that will no longer access features like waived fees and contribution matching.

Do you have a chance to set up an ESA through your workplace? This might be a sign to do it. You could reap all of these benefits if you do.