If you were hoping that good global news would soon be on its way, you are in for a disappointment. In the latest installment of ‘what else could go wrong, the US looks set for a recession. Not that this should surprise anyone. With the impact of inflation, Russia’s invasion of Ukraine, and the aftereffects of the pandemic, a financial crash has long been on the horizon.
The good news is that there are lawmakers trying to learn from previous crises. One of the lessons being taken into account is that most people simply do not have emergency funds. While employers provide a 401(k) plan to their employees, this is only helpful decades down the line. When a crisis strikes, that money is unavailable, at least without paying large penalties.
For this reason, Congress has tabled a proposal to change retirement plans.
What is the new plan?
The new plan would allow employees to automatically save for both retirement and emergencies at the same time. Similar to a retirement plan, a small percentage of your paycheck would go into an emergency account. Your employer would be able to choose to match those funds, just like with a 401(k).
This emergency savings account would be useful, but only to a certain extent. The plan is designed to cap savings at $2,500. In other words, it would provide necessary funds in a crisis but would be unlikely to keep you going for more than a month if you lost your source of income.
Surveys have shown that the majority of Americans would struggle to afford an unplanned $500 expense at any given time. This is in spite of the fact that, even with insurance, health bills can require you to pay significantly more out-of-pocket for deductions and copays. A $2,500 emergency savings account can make a huge difference by keeping you from debt when an isolated incident costs you money.
Will the new plan help me survive a recession?
It is in the context of a potential recession that this plan has been introduced by Congress. However, it will only make a difference in case of smaller crises. For someone who loses their job because their employer shuts down or needs to impose mass layoffs, this type of emergency fund will fall well short.
It also does not help that we seem to be hurtling towards a recession, and any savings plan started now will only be able to help you much further down the line.
How do I prepare for a recession?
The difficult reality is that, if you have not yet prepared for a recession, there is little you can do if worse comes to worst in the near future. Those who are best prepared have been saving for years in an emergency savings account with a relatively high yield. Individuals who are savvy investors have found ways to grow their emergency money so effectively that it has become a source of passive side income.
Unfortunately, while everyone should aspire to save money when times are good, it is easier said than done. Some people are earning enough money to cover their monthly costs and keep some aside. Many, however, are barely earning enough to get through the month. Saving is a privilege that they cannot afford, and are thus ill-prepared for a minor crisis, let alone a national or global recession.
In the future, a proposal like the one tabled by Congress will help these individuals with specific crises, by creating a savings account for them and using their income to ensure they have emergency funds. Theoretically, similar plans may be implemented to help individuals earn money to find financial stability. This makes the most of the idea that the best way to help someone is by activating their own resources.
A recession is looming. If you are not prepared for it, there is not much you can do at the last minute. However, if we continue learning lessons from these crises, we may be able to weather them better in the future. Finding ways to save without compromising the funds needed to get through the month is crucial for low- to middle-income earning Americans.