Personal financial struggles are impacting the lives of so many Americans that corporations are starting to take note of the many ways it’s affecting their employees. As a result, some employers are working to take an active role in helping their employees build up emergency savings accounts. According to Bankrate, 60% of Americans don’t have enough money saved to cover a $1,000 emergency expense without going into debt. Considering that the median cost of an unexpected major expense is around $2,000, this is a real problem for the majority of households.
The following recording is from “Mornings with Kelli and Steve” on Moody Radio Indiana (97.9 FM). For more information on Moody Radio, go to moodyradio.org/indiana.
Q: What is the connection between employee money problems and their work that has companies so concerned?
Money problems have a drastic effect on almost every aspect of a person’s life. As it pertains to work, financial stress commonly leads to physical and mental struggles and more frequent use of sick days. Financially stressed employees are also less productive, less creative and more prone to accidents. All of these issues affect the value an employee can bring to their job, which affects the bottom line and is a big reason why employers are looking for solutions.
Outside of those issues, employers generally care about the well-being of their employees and want to invest in the health of their employees and their families. A happy employee is always better than the alternative.
Q: A recent article on this topic says there is a link between a lack of emergency savings and the ability to save for retirement. What is the connection between those two areas?
An emergency fund is designated to pay for unexpected expenses that are affecting you today and the retirement fund is expected to pay expenses down the road when you stop working. However, if you’re struggling to pay for things today, you no longer have the luxury of putting money away for tomorrow. You’re forced to deal with the situation that’s in your face.
For a lot of people, that means they need all their income to pay for their bills now, which doesn’t allow them to save for tomorrow. Sometimes the lack of savings forces people to access their retirement savings through loans and hardship withdrawals in order to get cash to pay for unexpected expenses, which was not the original plan.
To illustrate the extent of this problem, according to the Federal Reserve and the IRS, 30 to 40 cents of every dollar that goes into 401(k) accounts is coming back out to meet non-retirement needs. It’s such a problem that at least one retirement plan provider is combining retirement plans and emergency funds to try to help people save for both at the same time.
Regardless of whether the money is never being saved or it’s being taken out early to pay bills, employees are not building up the retirement savings they’re going to need someday.
Q: Is it not crossing a line for an employer to be involved in the personal financial lives of their employees?
Over the years, companies have worked to develop initiatives to improve the physical health of their employees because they see a direct correlation between physical health and the overall wellness of their employees. The same can be said for financial health as well. Financial stress is very destructive on an individual and companies that want to care for their employees can’t simply ignore this issue. Companies are starting to make big investments in their employees’ financial well-being through financial education courses and in some cases even contributing to their employees’ emergency funds.
I’ve even had conversations with a local fitness company that is considering offering financial education courses to their members because they see how it connects to their overall health and needs to be addressed.
Q: Can you give us an idea of what some companies are doing to help workers build emergency funds to get out of the paycheck to paycheck cycle?
In most cases, it involves some combination of education and enablement. The education addresses the fact that too many people lack a basic financial understanding of why it’s so important to save and how to go about it. Enablement helps them to easily set up and contribute to accounts removing the process barrier.
One large, American employer is offering their employees $1,000 if they complete an 8-part financial class and set up automatic contributions to an emergency savings account from their paycheck. They currently have about 80% of their employees participating in the program, so they’re having real success. Other companies are giving a financial incentive to save such as offering a matching contribution to the employee’s emergency fund account.
Q: Some skeptics of the concept that companies are encouraging emergency funds say companies could offer employees higher pay. What do you think?
There are some situations that more money won’t fix. I believe in large part that the lack of savings is one of those cases. The lack of savings in many middle and high income households is proof of a bigger problem that has nothing to do with the amount of income a person makes. We need to address the real problem at the individual level rather than throwing more money at it.
Q: If a person’s employer doesn’t offer this type of plan, what can they do to improve their situation on their own?
The biggest things needed are the education and the discipline to make it happen. Start by realizing your own need for an emergency fund and then set up an account designated only for emergency savings, preferably where you won’t be tempted to touch it. Next, set up a direct deposit from your paycheck so the money gets taken out before you ever see it and goes straight to that account. This develops a repetitive habit and over time you won’t miss the amount going to your savings account. Once you no longer miss the amount coming out of your paycheck, consider bumping up a little more and do that any time you get an increase in pay. Even if you’re only able to start with a small amount, eventually it will add up and make a big difference.
Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996. He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.