This New Law Could Help Millions of Americans Build Their Emergency Funds

If you don't have an emergency fund yet, you definitely want to give this a read.

About one in three Americans wouldn't be able to cover a $400 emergency, according to a recent survey by the Federal Reserve. While that's a lower number than in years past, it's still far too high. Those without emergency savings have often had no choice but to take on debt or tap their retirement savings when an unexpected bill came up, but that could soon change.

A new law, passed at the end of 2022, could make coping with emergency expenses a little easier for some workers. Here's what you need to know.

Employers may soon have a new perk to offer employees

In an attempt to encourage people to save more, the SECURE 2.0 Act of 2022 gives employers the option of setting up emergency savings accounts on behalf of their employees. They can automatically opt employees into these accounts and defer up to 3% of their salary to it. Employees who don't wish to participate will still have the option to opt out.

These emergency accounts can contain up to $2,500, though employers may cap this at a lower limit. Once the account hits this threshold, you can't put any more money into it until it falls below the limit again. If you have automatic contributions set up, they'll switch to your Roth workplace retirement plan, if you have one, or they'll stop.

Employers aren't allowed to contribute money directly to these emergency accounts, but they can make matching contributions to employees' retirement accounts during the year. For example, if you defer $2,500 from your paycheck to your emergency savings account and your employer offers a dollar-for-dollar retirement match, it may contribute up to $2,500 to your retirement account for you.

The first four annual withdrawals from your emergency savings account are not subject to fees or penalties, unlike retirement account withdrawals. And if you later separate from your employer, you can either cash out your emergency savings account or roll it over into a Roth IRA.

What if my employer doesn't offer an emergency savings account?

Emergency savings accounts aren't something employers are required to offer, but it could be a useful job perk to help them attract new talent. But with the rule change having just gone into effect, it could take a little while before you see companies offering this to their employees.

You can always save for emergency expenses on your own if your employer doesn't offer an emergency savings account. You decide how much you're comfortable setting aside each month and then put that money in a high-yield savings account where it can earn interest for you. You don't need to stop at $2,500 either if you'd like to save more.

Sometimes, it's not financially feasible to save for emergencies even if you'd like to. If you can't find any extra cash by making changes to your budget, you might consider looking for ways to increase your income. Working overtime or getting a side hustle, even for a little while, could help you build your emergency savings. Then, you could return to your normal workload.

If you're expecting a raise or a tax refund, you could use this to build your emergency fund as well. Ideally, you should aim to keep at least three months of living expenses on hand. And if you feel like that's not enough, you can always save more.

Be sure to review your emergency fund at least annually to make sure it's still adequate for your needs. If your monthly expenses change significantly, you may want to consider updating your emergency fund as well. This shouldn't take a lot of time and it will help ensure you're ready for whatever comes your way.