Saving is one of the most important yet challenging things you can do with your money. If you find it hard to save your money before you spend it on something frivolous, an Emergency Savings Account is there to help. This employer-sponsored savings account helps you send money into savings with each paycheck, so you never miss a contribution.
What is an Emergency Savings Account?
An emergency savings account (ESA) is a dedicated emergency fund tied to your salary. If you enroll in this plan, your employer will deduct a predetermined amount of money from each paycheck.
Your employer will send this money straight to a savings account without depositing it in your checking account first. This direct pipeline to savings protects your money. Since it won’t enter the same account, you use to pay bills and order takeout, it makes your savings harder to spend on the wrong things.
Some of the biggest companies in the U.S. have started to offer these ESAs to their employers:
Why Should You Invest in an ESA?
Emergency savings are there to help you when life hands out lemons — expensive lemons, to be exact. If you can’t afford to fix your car or see a doctor with the money you have on hand, you can dip into your emergency fund for help.
Unfortunately, many Americans don’t have adequate savings — some 40% would have to borrow small personal loans to cover an unexpected $400 expense.
If you fall short of what you need in an emergency, you can check out a website like MoneyKey to learn more about how a small personal loan works. While it stands in for savings in a pinch, a personal loan is not a permanent replacement for savings.
Enrolling with an ESA can help you commit to your savings goals, so you never miss a contribution. Consistent contributions may help you generate enough savings that you can rely on them in emergencies without borrowing personal loans online.
Don’t Confuse an ESA with a 401(k)
Some employers may match your deductions with their own contributions, making an ESA similar to your 401(k). But that’s where the similarities end.
Unlike your 401(k), your ESA:
does not come with the guarantee of employer-matched contributions
is not a tax-advantaged retirement account
skims money off your net income, meaning it comes out after taxes
does not come with withdrawal penalties
Due to the reasons listed above, your ESA should not replace your retirement savings.
Talk to HR about whether an ESA is something your employer offers. But before you enroll, check in with your budget. Skimming savings off the top of each paycheck will leave you with less cash to spend during the month. You’ll have to reduce your spending on non-essentials to make sure you can handle this change in spending.
While it might take some sacrifice, it might be worth it, as an ESA guarantees you’re squirreling away cash for emergencies.