Family Finances

How to Save for an Emergency

December 1, 2017  • Financial Security Program

For decades, those who help low- and moderate-income Americans build wealth have focused on long-term investments: home ownership, higher education, and retirement. But those tools are meaningful only if families can first manage their day-to-day needs. Too many people struggle to meet expenses, especially those triggered by unforeseen events like car repairs and hospital visits, because they have no liquid savings. That’s why the Financial Security Program is exploring a new idea: link a short-term savings, or “sidecar,” account to a traditional retirement account. Workers would fund a short-term account that could be used for emergencies, and, once a sufficient buffer was built up, automatically divert additional contributions to a traditional retirement account. To ensure a constant buffer, the short-term account would be automatically replenished. Because so few tools are widely available for short-term saving, many Americans resort to raiding their 401(k)s for quick cash. By formalizing the dual role the retirement system currently plays, savers would be able to better distinguish between what is available now and what is locked away for retirement. The proposal has been well received, and many are now pilot-testing sidecar models. Of course, if designed poorly, the sidecar could be yet another complicated structure in a sea of complex savings plans. But if done right, the sidecar could improve Americans’ financial well-being and security.