The 7 biggest mistakes employees make with their emergency savings

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Devin Miller
August 1, 2023

We’ve explained before why an emergency savings account (ESA) is a critical part of any financial wellness plan, and why employers should include a workplace ESA to help support diversity, equity, and inclusion in their companies.

CNBC reported in May that more than half of Americans don’t have an emergency fund at all. It’s safe to say that the first and biggest mistake most people make when it comes to emergency savings is not doing it at all — but failing to start saving for an emergency is not the only mistake employees can make.

Some of the decisions that your staff might make around their emergency savings can undermine the effectiveness of those accounts. The phenomenon of “presenteeism,” which describes how stress can affect employee performance at work, costs businesses a collective $1.5 trillion every year (as of 2020). A large portion of presenteeism is caused by financial stress, so in order to make your workplace ESA as effective as possible — for both your company and your employees — it’s best to make sure that your employees have quality financial guidance, including outlining the most frequent mistakes people make around emergency savings.

1. Relying solely on credit to tackle emergencies

How do most people pay for emergency expenses if they don’t have a savings account specifically dedicated to that purpose? Most people who wouldn’t use an ESA to pay for the expense would turn to a credit card, according to a Bankrate survey.

This isn’t necessarily the best option, however, especially if there’s no way to pay off the card entirely before the next billing cycle. Credit cards tend to be high-interest ways to borrow money, and the longer it takes a borrower to clear that balance, the deeper in debt they’ll be and the more they’ll end up spending on the emergency in the long run.

When an employee has emergency savings of any type, it means they can potentially avoid falling into a debt cycle when an unexpected expense emerges for them.

2. Insufficient contributions

How much does a person really need to save for emergencies? This question depends heavily on the household’s expenses and income, lifestyle variables (such as how much the household relies on outside care), health and disability status, and other factors.

So what’s “enough” for one household in an ESA might be too little in another. But saving too little to cover emergencies is one mistake almost anyone can make. Some emergencies might run into thousands of dollars, especially if they involve problems like health issues or a major home repair. This means even people who have emergency savings might end up putting debt on a high-interest credit card or using another way to manage the emergency expense.

It’s important to help your employees understand how much they should have saved up for an emergency and provide them the tools they need to set their own realistic and useful savings goals. Then, regularly contributing to the account — especially if there are  incentives offered to supplement the savings — is critical for weaving an adequate safety net.

3. Neglecting to replenish the account

An ESA is meant to be used in case of an emergency, and emergencies do happen — that’s why you need an account! But after something depletes an ESA, the account-holder should focus on rebuilding that account to help accommodate the next problem.

If savers understand what their benchmark for emergency savings should be, then keeping the account filled with at least that amount of money is a good goal to set. When the account dips below the ideal amount, it should be a priority to replenish those funds and maintain the peace of mind that’s been won through the ESA in the first place.

4. Using the account for non-emergencies

Unlike a 401(k) or another long-term savings account, one big benefit of using an ESA is that it is easy to access — as good as liquid cash. If savers aren’t careful, that nest egg can become a tempting solution to help reach other savings goals for non-essential expenses, such as saving up for a vacation or a new car.

This can make it difficult or even impossible to reach savings goals that provide a comfortable emergency cushion for workers. If ESAs are consistently tapped to help pay for non-emergency wants or needs, then what happens when an emergency finally does arise? There might not be anything left in the account (or enough left) to handle it.

Every saver’s life is different, and so what constitutes an emergency for one household might not qualify in another. Anyone with an ESA should think carefully about their own potential emergencies and try to leave those accounts intact, only to be tapped in the event of a rainy day.

5. Not adjusting for changing circumstances

One of the only constants in life is change, and that’s true for financial circumstances just as much as it is for anything else. Savers should revisit their ESA contributions periodically and ask themselves if anything has changed that might warrant funneling more (or, occasionally, less!) into emergency savings, including:

  • Changing or evolving financial obligations
  • Lifestyle changes (marriage, children, homeownership, and so on)
  • Increased or decreased income
  • Higher-than-normal inflation
  • Past account use

If you’re providing a workplace ESA to staff, it could be helpful to send out periodic reminders (even annually is better than nothing) to adjust emergency savings contributions according to any changes in circumstances.

6. Overlooking high-yield savings options

A high-yield savings account is one that will accrue interest for the saver. The rate of interest is going to vary depending on a number of variables; as of July 2023, the best high-yield savings accounts were offering interest rates between 4.05% and 4.95%, according to Nerdwallet.

These accounts help the saver’s money stretch further. By contrast, money put in a low-interest or non-interest-bearing account might not generate enough interest to keep up with inflation rates (which is typically about 2% every year — though sometimes, it’s much higher).

The biggest drawback to some high-yield savings accounts when it comes to using one for an ESA is that the money in them is not always readily accessible in the event of an emergency. And some accounts charge fees for every withdrawal made beyond a minimum number within a certain time period. So while it’s important to consider a high-yield savings account for an ESA, it’s also critical to ensure that the account structure supports the basic needs of the emergency savers using it.

7. Failing to regularly monitor and maintain the account

It’s not the most egregious mistake on the list, but when savers stop paying attention to their ESAs, it can cause problems if and when an emergency does arise — or just in case of life changes.

Account-holders should regularly review account statements, adjust contributions as needed, and keep all account information updated. When they fail to track account activity, they might overlook fees or fail to realize that they should be saving more due to new circumstances that might require a bigger cushion.

One advantage of providing a workplace ESA through a platform like SecureSave is that you as the employer can keep track of how much employees are saving and how often they use those accounts. And you can gently nudge account-holders to check their balances and remind them about any matching incentives you’re providing to them.

Make sure employees are educated about ESA best practices

Financial wellness for all workers should be a priority for any organization, but simply providing tools to employees and expecting them to know how to use those resources is not sufficient for eliminating financial stress and presenteeism at work. 

Providing a workplace ESA to create or supplement emergency savings for staff is a great first step, and to extract the maximum benefit, employers should also be providing financial education to those savers. This can help them avoid the biggest mistakes and pitfalls that might emerge in their savings journey, so they can save more money more quickly, reaching their goal of financial stability that much faster.

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Devin Miller

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