New Spending Bill Could Make It Easier to Build a $2,500 Emergency Fund

That's good news for people who need to build cash reserves.

Life has a way of throwing unwanted financial surprises at people. You could wake up in the middle of winter to find that your heat is no longer working, or try starting your car one morning only to find that it's stuck in your driveway and not going anywhere. And let's not discount the possibility of job loss -- something more people might have to grapple with in 2023 if a recession hits the economy.

That's why it's so important to have money in your savings account for unexpected financial events. But many people sorely lack funds for emergencies. And so when unplanned bills arise, they're instantly forced to go into debt.

A new bill, however, could make it easier for workers to build an emergency fund. And that could change a lot of people's situations for the better.

Much needed-help with emergency savings

On Dec. 23, the House passed a major $1.7 trillion spending bill that includes a number of different provisions, including money for defense spending, aid for Ukraine, and disaster relief funding. Included in that spending bill is a provision that allows employers to step up and help workers build emergency savings.

Specifically, employers that offer retirement plans will be able to automatically enroll workers to set aside up to $2,500 of post-tax money for emergency savings purposes. Right now, many companies are set up to enroll workers in 401(k) plans for retirement. But 401(k)s can't be tapped for emergency purposes, and taking withdrawals from one prior to age 59 1/2 generally results in a costly 10% penalty (the same rule applies for IRA accounts, which are a popular alternative to 401(k) plans).

The new bill allows workers to have a separate set of funds earmarked for emergencies -- funds that can be tapped without penalty if accessed in a pinch, no matter what age that happens at. And like 401(k) contributions, emergency fund contributions of up to $2,500 would happen automatically at the payroll level. That's important, because automating the process could make it easier for workers to stay on track.

In addition to letting employers enroll workers in automatic emergency fund savings, the new bill allows workers to withdraw up to $1,000 from a retirement plan to cover emergency expenses without incurring the aforementioned 10% penalty.

A step in the right direction

As a general rule, it's a good idea to have enough money in emergency savings to cover a minimum of three full months of essential living expenses. These include things like rent or mortgage payments, food, utility bills, medications, and healthcare costs.

For many people, $2,500 won't be enough to cover a full three months of essential expenses. But a $2,500 emergency fund is far better than no emergency fund at all. So if workers are able to save that much through automatic payroll deductions, it could put a lot of people in a much stronger financial position -- and help many avoid debt when unplanned bills inevitably arise.