Accidents happen, and, unfortunately, they’re usually expensive, which is why your employees need emergency funds.
How expensive? Well, in 2020, the average unexpected expense was a whopping $3,500, says a Bankrate report. How many Americans could cover that? Bankrate gives a pretty bleak answer: fewer than 4 out of 10 people have enough saved for an unexpected $1000 emergency.
Yes, you read that right: Only a fourth of Americans could cover an unexpected emergency that’s $2,500 less than the average unexpected expense ($3,500). If that’s not bad enough, the Federal Reserve puts the cherry on top: 30% of Americans don’t have enough to cover even something as low as a $400 emergency.
Data and numbers can seem cold, but here they tell a clear story: most people are just one emergency away from a financial catastrophe.
It’s why employers across the country have taken an interest in helping employees build emergency funds: A financial disaster for them means less engaged, less focused, and less productive employees for you.
Should you help your employees with their emergency funds, and, if so, how can you? Let’s break it all down and find out.
What is an Emergency Fund?
An emergency fund is a savings account of liquid cash that can cover unexpected emergencies. The emphasis here is on liquid: this money isn’t wrapped up in a certificate of deposit (CD), annuity, or retirement account. It’s accessible, and if your employees needed that money today, they could withdraw it with no penalties.
Do Emergency Funds Help Employee Productivity?
Yes. A growing number of companies, including Suntrust, Kroger, and Levi & Strauss, have witnessed firsthand how increasing emergency funds can reduce distractions and increase performances. Here’s how.
1. Emergency funds reduce stress.
Most employees are already stressed enough, and over half admit financial stress distracts them from work. When employees are prepared for emergencies, however, they’re more confident they can get through financial hardships. In fact, a study by Enrich puts this intuition into numbers: on a stress rating from 1 to 5, employees without emergency funds were on average at a 3.52. And those with emergency funds? 2.69.
2. Emergency funds help employees stay focused on retirement.
When employees have an emergency reservoir of liquid cash, they’re less likely to draw hardship loans from their 401(k)s. What’s more—an emergency fund allows them to keep setting money aside for retirement without the need to stop for an unexpected expense.
3. Emergency funds help employees get the medical help they need.
Many Americans are deferring medical treatment simply because they can’t afford it. Not only does this eat into employee’s productivity, since unhealthy employees won’t work as efficiently as their healthier counterparts, but it also leads to higher rates of absenteeism, as untreated employees will take more unplanned sick time.
How Much Should Employees Have?
Financial experts differ, but most agree the sweet spot is around 3 – 6 months of expenses. So, if an employee typically spends $5,000 per month (the average American household spends $5,102), their ideal emergency fund would be between $15,000 and $30,000.
That’s great, expect most Americans could never dream of having a lump sum of $30,000 sitting in a savings account. What’s even more sobering—it takes the average family earning $70,000 to $80,000 seven to eight months to save one month of expenses. Yes—one. And if your income is lower? Upward to two years.
That’s why employers across the country are taking an interest in emergency funds: employees need help, and many employers are in the position to help them.
How Can You Help Employees Build Emergency Funds?
While solutions are still being perfected, here are five of the most effective ways to help your employees put money aside for emergencies.
1. Emergency Savings Accounts (ESA)
Often the hardest part about building an emergency fund is just getting started. One way employers are getting the momentum going is to open emergency savings accounts for employees, usually with a payroll deduction option.
It works similar to a 401(k): your employees choose a certain amount to be deducted from their periodic paychecks, which are then put into a separate savings account. Your employees can access these funds with a debit card or they can do a direct transfer into another account. Unlike a 401(k), these funds would be after-tax dollars, and they’re accessible without penalties.
ESAs cost employers very little to set up and manage. And if you want to be a super employer: you can even match what your employees put in, too.
If you don’t feel comfortable opening savings accounts for your employees, there is another option: split deposits. Encourage employees to open their own emergency funds. Then, have them split their direct deposit between their checking account and their emergency fund.
2. Salary-Linked Loans
For employees facing a major expense, they need a major emergency fund. And, in the absence of one, they’ll turn to the next best thing: borrowing.
The problem? Most people are really bad at borrowing. High-interest credit cards, loans with APRs in the triple digits (they exist), and even 401(k) loans seem like salient options when you need a lot of money fast.
The lack of healthy loan options is one reason employers are offering salary-linked loans. These loans (also called income-advance loans) are linked to an employee’s paycheck, which not only keeps the employee on a consistent pay schedule, since you can deduct their payments from their salary, but also keeps interest rates low, since there’s more certainly the lender will get repaid. Salary-linked loans can have a high impact on employee engagement. Rhino Foods, for example, found that after implementing an income-advance loan to their employees, annual retention increased from 65 to 85 percent. Not only that, but 401(k) hardship withdrawals dropped significantly: before the loan, employees were taking an average offour to five 401(k) withdrawals per year. After the loan? Employees were taking
3. Employee Crisis Fund (EAF)
An employee crisis fund (also called employee assistance fund or employee relief fund) is basically a program that helps employees pay for basic necessities should they experience a financial crisis.
Unlike an ESA, an emergency crisis fund isn’t funded by your employees. Rather it’s funded by a nonprofit organization, like a charity or a private foundation. And because emergency relief funds come from a nonprofit, employees won’t have to pay taxes on the money they receive.
One limitation with EAFs is that not all financial hardships qualify. To get relief money, employees typically have to submit an application proving not only that they’ve experienced a financial disaster but also that they have no other means of covering it (income, insurance, or other social services).
4. Crowd-Sourced Emergency Funds
A crowd-sourced emergency fund works similar to an insurance product: your employees each put in a little of their paychecks into one central account. Then, when someone has an emergency, that person can withdraw from the larger pool of funds.
This option has the added benefit of making people feel they’re helping one another. Of course, you’ll want to set up restrictions on withdrawals: only true emergencies qualify. You may want to create a committee that oversees the funds, as well as reviews withdrawal applications from employees.
5. Financial Wellness Programs
Though they’re not savings programs per se, financial wellness programs do deserve some mention. These programs teach sound financial principles, helping your employees change their behavior toward money and clean up their financial situations.
Financial Wellness programs may also encourage group discussions, which can help struggling employees learn how other employees are building their emergency funds.
For Big Emergencies, Stately Credit Can Help
With discipline, a little help from you, and a whole lot of grit, employees can build an emergency fund that keeps their finances steady when a $3,500 emergency hits.
But what about emergencies that are more than $3,500? (the average cost for a hospital stay is, after all, $5,220). Or worse—what happens if an emergency expense depletes their funds and a second emergency expense hits before they can rebuild their savings?
When it rains, it pours, as they say, and when it pours a lot, Stately Credit can help.
We offer low-interest salary-linked loans with no hidden fees and simple payment structures. Our loans are designed to help employees deal with the big emergencies when they happen, helping them stay in control of their finances and feel less stressed at work.
Stately loans come at no extra cost to you. And better yet—it’s a financial benefit you can implement today.
Find out more about our financial products, and let’s give your employees a safety net they’ll never break.