March 16, 2025
‘Emergency savings is the backbone of any good financial plan.’ Saving for emergencies soon may be easier.

‘Emergency savings is the backbone of any good financial plan.’ Saving for emergencies soon may be easier.

‘Emergency savings is the backbone of any good financial plan.’ Saving for emergencies soon may be easier. – MarketWatch

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Published: July 17, 2023 at 6:08 a.m. ET

Workers can save up to $2,500 in emergency savings accounts.

Getty Images/iStockphoto

[]Phew. Emergency expenses soon may become more manageable as many employers prepare to offer emergency savings options as part of corporate retirement savings plans.

[]Under the recent SECURE 2.0 legislation, employers can offer workers an emergency savings account up to $2,500 that can be used at any time. 

[]The contributions to the account will be after tax and subject to a company plan’s matching contributions. Employees may voluntarily contribute or may be automatically enrolled at up to 3% of their annual pay that’s capped at $2,500.

[]The boost to emergency savings efforts comes as research shows that most people are ill-equipped to handle a financial crisis – or even an unexpected hiccup. In fact, more than a third of U.S. adults couldn’t cover a hypothetical emergency expense of $400 using cash or its equivalent, like using a credit card they’d pay off in full the next month, according to the 2022 Economic Well-Being of US Households report released by the Federal Reserve. 

[]“Emergency savings is the backbone of any good financial plan,” said Maria Bruno, Head of U.S. Wealth Planning Research at Vanguard. “We know personal finance is a source of stress for any investor. It’s important from a financial standpoint and an emotional standpoint to have emergency savings you can turn to.”

[]People without emergency savings tend to have overdrafts on their checking account, raid their 401(k)s prematurely and use high-interest credit cards, Bruno said.

[]Experts vary on the amount of emergency savings people need to be financially secure – with some arguing for three-to-six months of expenses set aside, while others urge savers to amass as much as a year’s worth of expenses in emergency funds.

[]In comparison to such lofty goals, the $2,500 emergency savings amount may seem small. But that amount is actually in line with people’s behaviors since the most common loan from a 401(k) is $1,000, said Kate Goesel, a certified financial planner with Schwab Intelligent Portfolios Premium.

[]“You’d be surprised that people are one paycheck from disaster,” Goesel said. “This is a good starting point.”

[]According to Fidelity Investments research, workplace plan participants have indicated that building emergency savings is their top savings goal, other than saving for retirement: if given a $100 raise, nearly half of respondents said they would save it in a new emergency savings account (21%) or their retirement account (24%).

[]“It’s more important than ever for Americans to have an easier path to establishing a solid savings foundation that can help cover basic short-term expenses such as a medical emergency, a housing mishap or even an unexpected bill,” Fidelity said in a statement.

[]The $2,500 emergency savings won’t solve the most dire of situations. But it’s a start.

[]“It’s another tool in the tool kit. For those who are trying to navigate their finances and how to achieve some cushion, it’s a great avenue,” Bruno said. 

[]The goal to amass three or more months in emergency savings can seem overwhelming. 

[]Bruno recommends starting by saving half a month’s worth of expenses or $2,000 in cash. That amount can handle emergencies such as a car repair or a heating system failing. Over time, work toward having three to six months of expenses in liquid accounts, she said.

[]“It’s not all or nothing,” Bruno said.

[]Since the emergency-savings contributions can be automated and collected directly from your paycheck, it makes it easier to amass savings over time, Goesel said.

[]“If you don’t see the money, you’re less likely to tap into it,” Goesel said. “Emergency savings accounts are where every financial plan should start. Most people understand the need for it. They lack the discipline. It’s hard.”

[]Other provisions in the SECURE 2.0 legislation also addressed emergency savings. For example, the measure allows participants to self-attest that they meet the IRS hardship criteria for larger hardship withdrawals. Before, people had to provide documentation of their hardship, such as an eviction notice, to claim a hardship withdrawal. 

[]Another provision allows workers to withdraw up to $1,000 in a year from their retirement account to pay for an emergency. Of course, they must repay the $1,000 within three years and they may repay the account through ordinary paycheck deferrals. 

[]“The government is helping financial planning,” Goesel said.

Beating the 4% rule in retirement has become even easier

[]The potential of a ladder of individual TIPS

[]Jessica Hall is a retirement reporter for MarketWatch.

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