As a result of the COVID-19 pandemic and its reverberating effects on the economy, even your employees who are still making a steady income may have seen their personal circumstances change over the past year in ways that significantly impact their financial wellbeing. A lack of emergency savings is one area that our recent research, summarized in our report, Inside the Wallets of Working Americans, made clear. And we believe it's time employers had better tools to help employees build up and maintain a savings buffer -- not just for the long-term, but for the unexpected expenses or income disruptions that are all too common in today's uncertain world.
The current state of savings
The good news? Some people were actually able to save more money in the past year, with less opportunities to spend disposable income on things like travel and other leisure activities, as well as favorable interest rates and accommodations from lenders. But a large segment of the population was forced to dip into or completely deplete what savings they had in order to make ends meet.
Comparing our annual survey results from 2020 to 2021 reveals this troubling gap. In our research conducted in late 2019, a little less than half (48%) of working Americans reported having no money set aside for emergencies. This year, that increased to 67%. Similarly, the number of employees who don't consistently save money went from 14% to 28%. Unsurprisingly, people who don't save money are more likely to be financially stressed, even those who do save some money but do it inconsistently (i.e. not putting aside some amount from every paycheck). And, as we've learned through our research, employees who are financially stressed are at best distracted - and at worst disruptive - to the workplace.
Even among those who do have some money set aside, 46% of employees said that, if they were to lose their income, they could only go a maximum of two months without having to borrow money. That number goes up when looking just at women (51%), Black or African American people (55%), Hispanic or Latino people (57%), people who identify as LGBTQ+ (55%), and people with disabilities (57%).
A lack of savings often makes people rely on high-cost borrowing options, like payday loans or high-interest credit cards, which can lead to a treadmill of seemingly never-ending debt repayments. It can also lead to retirement plan leakage: a recent survey from the Defined Contribution Institutional Investment Association (DCIIA) and Commonwealth, a nonprofit focused on financial security for vulnerable populations, found that people with less than $2,000 in liquid savings are about twice as likely to have taken a 401(k) loan or hardship withdrawal as a result of the COVID-19 pandemic.
The power of automatic savings…and getting rewarded
Once employees start to put aside even a small amount from each paycheck into a dedicated savings account, a powerful habit is created. While it's psychologically important for employees to feel comfortable tapping into those savings when needed (especially to avoid taking out high-cost debt), it's beneficial for the money saved to be harder to access than if it were in their primary spending account. Having a savings account that's linked, but separate, allows for peace of mind that they could easily transfer funds in an emergency, but not have those same funds commingled with the money coming out for routine bills or daily purchases.
Monetary incentives to start saving can also increase the likelihood of actually sustaining a savings habit longer-term. Research from both Commonwealth and Financial Health Network has shown that offering a monetary incentive or linking the amount of money saved to a monetary prize can be effective in encouraging people to save money. When people have a goal they're working toward and the potential benefit of a reward, they're more likely to sustain the habit they've started. Most importantly, employees want this type of benefit: 61% of employees expressed interest in an emergency savings benefit in another recent survey.
With this employer need and employee desire in mind, Salary Finance is launching a savings benefit that helps employees easily set up direct deposit and get rewarded for saving, with no cost or administration for HR on the back-end. Our goal is to help working Americans build up to at least $500 in emergency savings, knowing that even that amount of buffer can help them absorb unexpected income shocks, and avoid some of the financial hardship people experienced during the pandemic.