That’s good news for people who need to build up cash reserves.
Most important points
- Many Americans are ill-equipped to cover a financial emergency.
- A new bill could help workers build a limited but useful amount of cash reserves.
Life has a tendency to throw people into unwanted financial surprises. You can wake up in the middle of winter and discover that your heating has stopped working, or you can try to start your car one morning and discover that it is stuck in your driveway and won’t go anywhere. And let’s not rule out the possibility of job losses — something more people will face in 2023 when a recession hits the economy.
That is why it is so important to have money in your pocket savings account for unexpected financial events. But many people have a serious lack of money for emergencies. And so when unscheduled bills crop up, they are immediately forced into debt.
However, a new bill could make it easier for workers to build an emergency fund. And that could change the situation of many people for the better.
Need help with emergency savings
On December 23, the House passed a major spending bill of $1.7 trillion that includes a number of different provisions, including money for defense spending, aid for Ukraine and funding for disaster relief. Included in that spending bill is a provision that allows employers to step up and help employees build emergency savings.
Specifically, employers offering retirement plans will be able to automatically enroll employees to set aside up to $2,500 in after-tax money for emergency savings. At this point, many companies are set up to enroll employees in 401(k) plans for retirement. But 401(k)s cannot be tapped for emergencies, and recording a person before age 59 1/2 generally results in a costly 10% fine (the same rule applies to IRA accountswhich are a popular alternative to 401(k) plans).
The new bill allows employees to have a separate set of funds earmarked for emergencies — funds that can be tapped without penalty if used in a pinch, regardless of age. And like 401(k) contributions, emergency fund contributions of up to $2,500 would automatically happen at the payroll level. That’s important, because automating the process could make it easier for employees to stay on track.
In addition to allowing employers to enroll employees in automatic emergency funds, the new law allows employees to withdraw up to $1,000 from a pension scheme to cover emergency costs without incurring the aforementioned 10% penalty.
A step in the right direction
As a general rule, it’s a good idea to have enough savings to cover at least three full months of essential living expenses. These include things like rent or mortgage paymentsfood, energy bills, medicines and healthcare costs.
For many people, $2,500 won’t be enough to cover three months of essential expenses. But a $2,500 emergency fund is much better than no emergency fund at all. So if employees can save that much through automatic payroll deductions, it could put many people in a much stronger financial position — and help many avoid debt when unforeseen bills inevitably arise.
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