Why Your Emergency Savings Should Look Like a Sub Account
Americans have a hard time saving money: 44 percent of Americans said they couldn’t come up with $ 400 to cover their downfall in 2016. According to a brief from the Aspen Institute , the nonprofit policy is “one-third of Americans are fighting income volatility,” and 60 percent of Americans experienced large unexpected expenses in the past year, half of which did not pay off financially six months later.
Aside from the toxic combination of rising cost of living and falling wages, this is in part because we do not have good options for short-term savings in emergencies. Most of the available investment, which we use for purposes such as the purchase of housing, college and retirement, are long-term instruments such as accounts 401 (the k) s , 529 , etc. D. and pensions paid most attention:. Aspen Institute notes that employers contribute to our retirement plans, financial institutions serve them (advising and managing assets), and there is a whole industry out there giving you advice on how to make the most of them.
There is nothing remotely comparable to short-term savings, which means that we often treat our retirement accounts like emergency funds ( this Wall Street Journal article notes that people automatically enrolled in 401 (k) s can even take on more debts) by clicking into them when we have an unexpected bill for medical care or home renovations and we incur fines.
Some policy advisors see surplus accounts as a way to bridge the gap between short-term and long-term savings. Here’s what you need to know about this particular savings machine.
How satellite accounts can fill the short-term savings gap
Before 401 (k) became the preferred retirement plan for employers, they offered a so-called savings plan. Savings plans were savings accounts that employees deposited into an account after taxes, so that withdrawals were tax-free and employers attached them to long-term savings plans. This is where the term stroller comes in: it’s a dual system of savings.
What sets these accounts apart from what we think of as a regular savings account is how they are funded. One option is for employers to sponsor them and the money is automatically deposited, just like your retirement account is now. Once you reach a certain threshold, contributions will be redirected to a long-term retirement account, and if you use some of the extra money, it will be replenished before you continue to make contributions to the retirement fund. This is supposed to increase the liquidity of your money so you have it when you need it, but it is constantly putting something aside.
In addition to the advantage of more liquid savings, the Aspen Institute writes that the wheelchair is a system that behavioral economists like Nobel laureate Richard Thaler love because it can help depositors better account for their money in their minds and resist the temptation to take advantage of it. your pension fund.
A report that is more psychologically related to short-term needs can help clarify which accounting is for which needs, ”the note says. “Subtle differences in how each account is configured (for example, what the account is called, how they are split, or how easy it is to view the actual balance) can be important when using mental accounting lessons to nudge consumers to take action.
Of course, there are also disadvantages. If it’s tied to your employer or a defined contribution plan, then this type of plan will do little to help the growing number of freelancers and workers in the economy who are already at a disadvantage when it comes to savings. It also raises the question of how best to transfer it from employer to employer and what role, if any, the government should play.
How to save more now, with or without a stroller
Nevertheless, creating a better system of short-term savings will help improve the financial situation of Americans. As the Aspen Institute points out, apps like Digit and Qapital , which you can use to automatically transfer money to a savings account separate from your traditional account, act as satellite accounts (although they don’t have a link to your retirement plan). It also could be modeled on a sample program myRA Ministry of Finance .
Partitioning is key, as noted above. While you may not have an additional account, you can open separate savings accounts in different apps or online banks, which allow you to alias your accounts and automate the saving of a portion of each paycheck. Regardless of how you set up your emergency fund savings, the bottom line is that accessing a retirement account to cover expenses – and paying hefty fines – should be the last resort, not someone’s savings strategy.