You’ve heard of employer-sponsored retirement funds and employer-sponsored benefits plans, but have you heard of employer-sponsored emergency funds? That’s right. Some employers offer their employees emergency savings accounts (ESAs).
Find out how an emergency savings account works and how it can come in handy.
What Is an Emergency Savings Account?
An emergency savings account is an employer-sponsored emergency fund. By signing onto this plan, your employer agrees to deduct a portion of your paycheck and deposit that amount into a savings account.
Your plan may have limitations on how much you can contribute to your account per month. It’s designed to build up savings at a slow and steady pace.
However, much like a 401(k) plan, your employer may offer matching contributions to encourage you to participate in the plan. Opting into this benefit will help your emergency savings grow much faster.
How Can You Use It?
Once you’ve saved up a significant amount in your ESA, you can treat it as a safety net. Whenever there’s an urgent, unplanned expense, you can use the funds from your ESA to pay for it and move forward.
Unlike a 401(k), your ESA will not have early withdrawal penalties. You’re free to withdraw from the account whenever you need to.
The only issue that comes with making a withdrawal is that your pool of savings will be smaller — or worse, the account will be empty. It will take time to replenish the account with your paycheck contributions. Until then, you may not be able to rely on this safety net when another emergency expense occurs.
What If You Can’t Get an ESA?
Unfortunately, not every employer offers emergency savings accounts to their employees. If your workplace doesn’t seem to provide this plan, you will have to find another way to collect savings for urgent, unplanned expenses.
The best way to do this is to build your own personal emergency fund. An emergency fund is almost exactly like an ESA — you just have to open the standard savings account, calculate the contributions and automate the money transfers all on your own. Once you’ve started this process, your emergency savings will steadily grow month by month.
When an unplanned, urgent expense crops up, you can withdraw the necessary savings from your personal account right away. And when the problem is resolved, you can direct your energy toward replenishing the account.
What If You Don’t Have Enough Savings?
The amount in your ESA or personal emergency fund might not be enough to cover an urgent, unplanned expense. In this case, you could charge the expense to your credit card and then pay down your balance through the upcoming billing cycle. You should only do this when you have plenty of available credit on your card. If the balance is too close to the limit, you shouldn’t add another charge—you could accidentally max out your card.
Another option when you don’t have enough savings is a loan. Go to a website like CreditFresh to see whether you meet all of the qualifications for a personal loan. If you do, you can send in your application online and wait for a response on your approval status. With an approved loan, you can use borrowed funds to cover an emergency expense in a short amount of time. Then, you can focus on the loan repayment process.
If your employer offers an ESA, it’s time to sign up for it. If it doesn’t, it’s time to make your own safety net!